Summary

For nearly six months, the United States and Israel have been locked in a regional conflict with Iran. The negative economic impact on the global economy has been significant, as traffic through the Strait of Hormuz remains far below prewar levels. This drop comes despite President Donald Trump’s assurance that the U.S. Navy controls the chokepoint and a statement by Energy Secretary Chris Wright that the Navy has been escorting ships through the strait, with a recent weekly average volume of 8 million barrels of oil per day — still much lower than the prewar average of 20 million barrels per day. Serving as a transit corridor for upwards of 20% of global energy trade, the Strait of Hormuz has become a core part of Iran’s power projection strategy. Even if the U.S., Israel, and the allied Gulf nations reach a deal with Iran, it is unlikely that the Islamic Revolutionary Guard Corps will allow transit through the Strait of Hormuz to ever return to prewar normality. Recommended Stories The memorandum of understanding has expired, along with the 60-day ceasefire. A resolution has still not been reached, and hostilities have already reignited, even though they didn’t fully subside during the ceasefire. With the implementation of what Trump has named “Economic D-Day,” the U.S. has increased its effort to economically cripple Iran with the announcement of Operation Economic Outcast, which seeks to completely isolate the country from any and all global trade. Iran has declared that such action will be met with a halt to all oil exports from the Gulf region, and that any country participating in America’s economic actions will be treated as an act of war. If Iran is allowed to exert permanent influence over the Strait of Hormuz, including through the implementation of a toll disguised as a forced administrative and service fee, not only will it fundamentally alter the economic value of the strait, it may also embolden other countries with similar proximity to key choke points and waterways, such as China with the South China Sea and the Taiwan Strait, to pursue similar policies as both economic and national security power projection strategy which would result in a permanent change to global seaborne trade, including, the flow of energy supply. The Strait of Hormuz and freedom of navigation Global seaborne trade tends to follow the guidelines set forth by the 1982 Law of the Sea Convention, later ratified by a global body in 1994 as the United Nations Convention on the Law of the Sea, which established limits for maritime zones, both territorial and economic, and recognized freedom of navigation in international waters and within critical chokepoints such as the Strait of Hormuz. Under these globally accepted guidelines, seaborne trade has remained largely unchanged, and although the U.S. did not ratify the agreement and is therefore not directly bound by it, the U.S. abides by the rules as an international courtesy. A key part of the internationally recognized freedom of navigation of the high seas is that all straits used for seafaring navigation, especially for global trade, cannot be restricted by coastal nations, either physically or by economic barriers. For this reason, Iran’s actions to restrict passage through the Strait of Hormuz, regardless of its reasoning, have directly violated a standard of international maritime law that has been recognized for decades, which Iran signed in 1982. Although Iran did sign the agreement, it was not fully ratified in Tehran as a binding treaty. China and the Taiwan Strait Granting Iran de facto control of the Strait of Hormuz could embolden China, the primary consumer of Iranian oil, to expand its regional claims throughout the South China Sea, which it already claims up to 62% of within what it calls the ten-dash line, and could further its claims of control over the critical chokepoint of the Taiwan Strait. Similar to the Strait of Hormuz, the Taiwan Strait serves as a transit corridor for a substantial amount of the flow of global energy, upwards of 18 million barrels of oil per day, or 10 billion barrels for the year in 2023, and is the primary route for the oil and liquefied natural gas supply for Japan, South Korea, China, and Taiwan. The Taiwan Strait also accounted for 44% of global container traffic in 2022. Much of this oil and natural gas comes from the Gulf region and passes through the Strait of Hormuz. Therefore, a secondary disruption to the supply chain from China could inflict even greater harm on energy costs in the major manufacturing nations of Japan, South Korea, and Taiwan. As Iran’s largest oil purchaser and as a buyer that enjoyed a significant discount compared to market rates until the U.S. blockade, China stands to gain as soon as Iran’s oil can flow again. However, if Iran is able to successfully outlast the blockade or increase overland shipments via rail, China might consider a similar long-term strategy of targeted drone and cyber warfare to force its neighbors to concede to its regional territorial claims. Such action would grant China de facto control over both the South China Sea and the Taiwan Strait if the U.S. were unable to intervene. If Iran is allowed to disregard international maritime law, to which it is a party, it stands to reason that China, a much stronger country, could threaten the same, fundamentally changing international seaborne trade and raising energy costs for most of East Asia. Caleb Jasso is a senior policy adviser at the Institute for Energy Research.