One month of the Israel-Hezbollah war, four keywords "diagnosing the pulse" damage to the global economy

(Source: China Development and Reform)

One Month of the US, UK, and Iran War

Using four keywords “diagnosing the pulse” of the damaged global economy

The US, UK, and Iran war has been delayed by one month, with over 105k civilian facilities damaged in Iran. Instead of easing, the war has continued to escalate, and talks between the US and Iran are caught in a “Rashomon” dilemma. If the conflict evolves into ground operations, the intensity and casualties will rise to a “completely different level.”

Meanwhile, supply chain crises arising from various commodity production and distribution in the Gulf region are expanding layer by layer like a butterfly effect, exposing fragility. Dependence on a single shipping route makes it difficult to find alternatives in the short term, and any disruption in a link of the industrial chain will amplify the impact.

On March 4, in Tehran, Iran, a man rides past building ruins. Xinhua News Agency

Recently, Iranian officials announced a clear ban on ships from the US and countries imposing unilateral sanctions on Iran from passing through the Strait of Hormuz, planning to implement access and fee systems for ships passing through the strait. Rising costs for oil and gas could become a long-term global pressure. The US states it will never allow Iran to permanently control the Strait of Hormuz or establish a toll system.

However, the impact on global supply chains is not only due to logistical freezes but also because the war’s strikes in late March spilled over from military targets to industrial facilities, damaging key raw materials and bulk commodity capacities in Gulf countries, turning short-term transportation disruptions into long-term capacity shortages.

For example, the Abu Dhabi plant of Emirates Global Aluminium and the Bahrain Aluminum production line were attacked, expected to create a supply gap of 1.2 million tons of aluminum in the second quarter, with global inventories dropping to only enough for 45 days of consumption; Qatar’s Ras Laffan gas field was forced to halt production, causing a disruption in about one-third of the world’s helium supply, essential for semiconductor manufacturing and MRI equipment, with Asian LNG spot prices rising over 93% month-on-month in March. Additionally, prices of basic chemicals like methanol and ethylene surged approximately 72% and over 80%, respectively, with polyester and nylon textile products facing rigid cost increases; shortages of sulfur, a key raw material for fertilizers, pushed up global urea and phosphate fertilizer costs, with international prices of urea and liquid ammonia rising about 50% and 10%.

The war’s impact on the global economy has deepened from initial energy shocks into systemic macro pressures, leading to clearer strains on inflation, growth, and financial stability worldwide. In March, various asset classes in global financial markets collapsed simultaneously—stocks, bonds, and gold all declined together, with traditional hedging tools almost failing across the board, leaving investors in a huge risk-avoidance dilemma. Major global economic institutions simultaneously lowered growth forecasts and raised inflation expectations, with real economic indicators beginning to show fatigue. If the war prolongs, the global economy may face a more severe “stagflation” test.

In early April, due to a temporary easing of the conflict, global markets rallied, but inflationary pressures remain.

This report selects four keywords—“UAE supply chain,” “international shipping,” “global stock markets,” and “petrodollar”—as case studies to “diagnose the pulse” of the crisis-affected global economy.

Keyword 1

The faltering transshipment model in the UAE: fragility of the global supply chain

Disruption of shipping through the Strait of Hormuz directly affects the global logistics chain passing through multiple ports in the UAE. Dubai, as a core hub of global transshipment trade, sees its logistics network interruption impacting far beyond UAE territory, precisely hitting industries such as used cars, textiles, energy, and building materials along its trade radiance, through a chain of “logistics halt—cost surge—contract failure,” deeply freezing certain business models.

The global used car circulation system relying on “Dubai certification” is frozen. The global used car trade, especially Japanese used cars, heavily depends on Dubai’s transshipment system: vehicles arrive in Dubai, undergo customs clearance, inspection, certification, and financial services, then are resold to markets in Africa, Europe, and Central Asia. Media reports that many Japanese used cars already shipped are stranded at sea, unable to complete transshipment procedures, leaving dealers in Sri Lanka, Nigeria, and other heavily dependent regions with no cars to sell.

Dubai is not only a trade hub but also an important energy export center. Abu Dhabi National Oil Company (ADNOC) informed partners that land-based crude oil shipments in March were reduced by about one-fifth. Although cargo can be rerouted from the offshore port of Fujeirah, this breaks the original supply system, forcing many Asian refineries to cancel orders due to transportation issues.

Fujeirah is one of the few energy ports outside the Strait of Hormuz, regarded as a “safe backup,” and one of the world’s top three marine fuel oil supply ports. However, it was also attacked at the end of March, halting oil loading operations, making the only remaining export channels that do not cross the strait less secure, further increasing supply disruption risks.

Meanwhile, many Chinese enterprises engaged in engineering projects in Dubai face supply chain ruptures. Chinese traders in Dubai report that cargoes en route trigger “risk alerts,” with freight rates soaring multiple times or even being unable to book space. Since no formal declaration of war has been made between countries, the application of “force majeure” clauses remains ambiguous, potentially preventing some merchants from recovering losses caused by the war.

Cross-border e-commerce relying on “overseas warehouses” also reveals extreme fragility in this crisis. First, logistics are blocked; after core hubs like Jebel Ali port cease operations, goods pile up in freight forwarders’ warehouses, unable to be shipped out. Second, the capital chain is impacted; some cross-border sellers report that when goods bound for Iraq are floating at sea, the local currency dinar depreciates sharply, causing customers to cancel orders due to inability to pay in dollars, resulting in both money and goods lost.

The business logic of Dubai’s transshipment model relies on geographic advantage and political stability, consolidating goods for value addition before redistribution. Its operation depends on peaceful conditions, open straits, and controllable costs. War breaks these conditions simultaneously, causing physical disruption, cost escalation, and trust breakdown.

In today’s highly specialized and refined global supply chain, a single node hub like Dubai, once paralyzed, can cause systemic shocks across all industries due to “path dependence.”

Keyword 2

The huge cost of international shipping: from “freezing” to “slow thaw”

On March 25, Iran announced that non-hostile ships could pass safely, and COSCO Shipping announced the resumption of new Middle East booking services. Global shipping is transitioning from “freeze” to “slow thaw,” but the US-UK-Iran war has already dealt a heavy blow to this industry.

Although vessel insurance remains available, major London maritime insurers confirm that the decline in shipping activity is due to rising safety risks, not a reduction in coverage. The London insurance market now requires ships to renegotiate premiums based on vessel type, cargo, and flag state, while transit insurance demand has plummeted. David Smith, head of maritime insurance research at McGill University, states that rapidly changing conditions cause premiums to fluctuate almost hourly.

More critically, the key to operating the global container fleet—“where does the marine fuel oil come from and how to replenish”—has become the main driver of uncontrollable shipping costs. The Middle East is a major producer and exporter of marine fuel oil, especially high-sulfur fuel oil, but military conflicts have turned this region from a “hub” into a “bottleneck.”

According to IEA data, Gulf Coast refineries produce 20% of the world’s international trade fuel oil; their residuals from crude oil are significantly higher than WTI crude. Even if Asian refineries switch to alternative crude from the US or Russia, they cannot produce the same volume of fuel oil.

Typically, monthly fuel oil exports passing through the Strait of Hormuz total about 3.7 million tons, with over 30% shipped to Asia. Fujeirah port in the UAE is the second-largest marine fuel oil refueling port after Singapore and Rotterdam, with January sales reaching 636k cubic meters (about 630k tons), a four-month high. However, in February, sales of high-sulfur fuel oil at Fujeirah plummeted 35.6% month-on-month, and by late March, it had almost ceased.

A chart from Investing.com on April 1 shows WTI crude oil futures prices over the past year.

Supply lines for fuel oil imported from the Middle East to Singapore nearly broke in early March, and several other top ten ports also began experiencing issues.

A recent report from the European Transport and Environment Federation states that since February 28, the global shipping industry has paid an additional €4.6 billion in fuel, transportation, and environmental costs. For example, Singapore’s very low sulfur fuel oil prices surged to €941 per ton, up 223% from early this year, setting a record high; global LNG prices rose 72% in March, further increasing operators’ costs.

Currently, liquidity in the fuel oil market is near exhaustion. The real-world purchase is for refined products like gasoline, diesel, and fuel oil, while refinery export prices reflect the true costs of the physical economy. The linkage between crude oil benchmark prices and fuel oil prices has broken down. Fuel oil, known as the “bottom of the barrel” in the oil industry, has traditionally been cheap and undervalued, but now it is one of the most expensive commodities globally. If the fuel oil supply chain collapses, container ships and bulk carriers will be forced to halt, transmitting through freight surges and delays to the real economy.

Some traders are abandoning original orders to transport fuel oil between US and Singapore ports. Major shipping companies like Maersk are sourcing alternative fuel oil from different suppliers in Rotterdam, Gibraltar, Long Beach, and Panama, and have started levying emergency fuel surcharges since March 25 to cope with rising distribution costs.

The outlook for the global shipping industry remains highly uncertain. On March 28, Yemen’s Houthi forces issued a statement claiming they launched their first military action in response to regional escalation. This adds instability to the Red Sea-Suez route connecting Asia and Europe, and the Suez Canal’s gateway, the Bab el-Mandeb Strait, may face renewed threats, creating overlapping pressures on the world’s two major shipping arteries, pushing the global shipping system into unprecedented coordination and dispatch challenges.

Keyword 3

Global stock markets: repricing around “geopolitical risks” and “inflation expectations”

Global capital markets experienced a severe “stress test” due to the US, UK, and Iran war, with “geopolitical risks” and “inflation expectations” being revalued, and the VIX fear index soaring. Generally, countries less dependent on Middle Eastern oil are more resilient; resource-rich countries tend to profit against the trend.

In March, US stocks experienced a “roller coaster” of “sharp decline—rebound—further pressure,” with overall selling pressure high, especially in tech stocks. The three major indices diverged: the Dow was relatively resilient or slightly up, while the Nasdaq fell over 10% from its high, entering correction territory, and the S&P 500 also declined significantly.

European stocks—Britain, France, Germany—also “broke down” in March, with declines exceeding those of US stocks at times. The week of March 2, the STOXX 600 index fell 4.6%, major German and French indices dropped over 5%; on March 26, European markets again plunged over 1% at opening. The DAX and CAC40 indices faced overall downward pressure in March.

Japanese and Korean markets bore the brunt, with nearly unidirectional declines in March, especially sharp “cliffs” and circuit breakers in late March. Canada’s stock market, supported by rising oil prices, showed some resilience, with the Toronto Exchange’s energy-heavy index even rising on some days. Australia’s ASX200 followed US declines, falling 7.4% in March—the worst monthly performance since 2022—but was less affected due to energy and gold sectors.

Latin American markets, exporters of commodities like oil and minerals, benefited from rising resource prices, outperforming developed markets. The Middle East showed extreme divergence: oil-producing countries like Saudi Arabia and the UAE strengthened against the trend, while importers like Turkey and Egypt suffered both stock and currency declines.

Thus, resource-rich countries such as Saudi Arabia, Australia, Russia, and Canada showed strong hedging properties during this phase, as rising oil prices improved fiscal surpluses and earnings outlooks. Conversely, resource-dependent industrial nations like Japan, Germany, and South Korea faced capital outflows and profit margin pressures from high energy costs.

In early March, global markets mainly sought safe havens—buying gold, US Treasuries, and selling stocks. But soon, the disruption of Strait of Hormuz shipping shifted the logic to “supply shocks” and “re-inflation trades,” with oil prices soaring, causing markets to shift from expectations of “rate cuts” to fears of “rate hikes or sustained high rates.” The Fed delayed rate cuts, leading to a sell-off in stocks and bonds.

CMB International explicitly states that if inflation rebounds and monetary policy expectations tighten, many high-valuation growth stocks globally will face pressure. For example, tech stocks are highly sensitive to interest rates; rising discount rates will directly compress valuations. Biotech firms with many unprofitable R&D-stage companies rely entirely on future expectations. Consumer discretionary stocks like airlines, autos, and travel are vulnerable to inflation squeezing consumer purchasing power, while corporate financing costs will also rise with interest rates.

In early April, boosted by easing war risks, market sentiment improved, and global stocks rebounded strongly, but the underlying oil supply issues and inflationary pressures remain.

Keyword 4

The petrodollar is entering a “long dusk”

As of April 1, the US dollar index fell below 100. Signals of ceasefire from the US, UK, and Iran weakened safe-haven demand, and market expectations for rate cuts increased, diminishing the dollar’s interest rate advantage. Overall, the dollar index rose about 2.4% in March.

As the main currency for crude oil pricing and trading, the dollar seems more like a safe haven than gold. However, after the outbreak of the US-UK-Iran war, the dollar index surged to 100 in the first two weeks but then lost momentum, remaining in a low zone since April 2022.

The judgment that “petrodollars are collapsing” has repeatedly appeared in market discussions in March. It does not mean the dollar will collapse tomorrow but that the three core pillars supporting this system—“security commitments,” “oil demand,” and “dollar credibility”—are simultaneously breaking down.

A chart from Investing.com on April 1 shows the dollar index over the past year. Calculated based on the exchange rate changes between the dollar and a basket of major currencies, this index measures the dollar’s strength in the international forex market. It mainly tracks the weighted exchange rates of euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc.

In 1974, the US reached an agreement with Saudi Arabia that changed the global currency landscape. The US provided military protection for Gulf oil producers, ensuring regional order and shipping security, while these countries’ oil trade was exclusively priced and settled in dollars. They accumulated large dollar surpluses used to buy US Treasuries, forming a closed loop with dollar flows back to the US, creating an “eternal” demand for dollars. Despite the US accumulating nearly $3.9 trillion in debt and a trade deficit exceeding $105k in 2025, the dollar remains the global reserve currency.

But in the US-UK-Iran war, the “security commitments” no longer work; the US “cannot protect” its Gulf allies. Iran’s missiles directly attacked Qatar’s Ras Laffan LNG facility, damaging 17% of Qatar’s LNG export capacity, with an annual loss of about $20 billion. Key energy infrastructure in the UAE and Saudi Arabia was also targeted, and the US failed to effectively safeguard these allies.

Former Goldman Sachs economist and UK Treasury former minister Jim O’Neill bluntly states: “This conflict has proven that relying on the US and forming alliances no longer guarantees real national security.”

The second pillar of petrodollars, “oil demand,” presupposes that the world cannot do without oil and that oil trade is large enough to sustain dollar demand. But two trends are undermining this.

One is the rise of emerging consumer powers shifting trade focus eastward. To hedge against dollar exchange rate risks, Asian buyers prefer local currency settlement. Deutsche Bank data shows the US is no longer the main buyer of Gulf oil; since 2019, it has become a net energy exporter.

The other is the accelerated “de-oilization” worldwide. Europe, Japan, South Korea, and other traditional energy importers are rapidly reducing dependence on Gulf oil. France is pushing forward with six new-generation EPR2 reactors and investing in offshore wind, photovoltaics, and geothermal energy; Italy is drafting legislation to lift nuclear bans; Japan is shifting from “dependence on nuclear power” to “maximizing utilization”; Saudi Arabia’s “Vision 2030” explicitly aims to invest heavily in wind and solar projects, with renewable energy expected to account for 50% by 2030. If the world accelerates the decline in fossil fuel demand, the impact on the petrodollar system will be as severe as non-dollar settlement pressures.

Additionally, “dollar credibility” is also wavering. The US has weaponized the dollar, turning it into a “risky asset.” After the Russia-Ukraine conflict erupted in 2022, G7 and allied countries froze over $636k of Russian foreign exchange reserves. Central banks worldwide have since “voted with their feet,” and by 2025, the total value of gold reserves held by central banks exceeded their holdings of US Treasuries for the first time. Some estimates based on central bank reserve allocations suggest the dollar’s share in global forex reserves has fallen to about 40% by early 2026—the lowest in two decades.

Bridgewater founder Ray Dalio issued a stern warning in mid-March: “This conflict has proven that the UK’s Suez Crisis of 1956 marked the end of the British Empire.”

Dalio listed three critical factors that could lead to the “collapse” of the US: first, unsustainable US debt burdens eroding dollar purchasing power; second, deep political polarization and social tensions weakening US resilience against external threats; third, high-cost conflicts with regional powers like Iran rapidly depleting military and economic resources.

(Reported by China Development and Reform News Agency, Ji Xiaoli)