How the Iran conflict is reshaping global trade

By the time you read this, hopefully the Strait of Hormuz is open and global trade has resumed. A preliminary agreement announced June 14 between the United States and Iran to reopen the Strait of Hormuz has pushed oil prices to three-month lows, but uncertainty around safe transit and implementation remains. More than likely, safe passage through the world’s busiest chokepoint will take time. Our baseline forecast sees a full return to pre-war traffic only in 2027.

Why the expected delay? Even after a comprehensive deal is reached, Iran retains the ability to sustain intermittent harassment, deterring ships from resuming normal passage. As a cautionary tale, almost eight months after the Houthis announced a pause in attacking commercial vessels in the Bab el-Mandeb Strait, oil transit remains 50% below pre-war levels. As a result, insurance premiums in the region are likely to stay elevated.

The conflict has already caused considerable short-term economic damage, with commodity prices still elevated, ongoing inflationary pressures and central banks contemplating growth-dampening interest rate hikes. However, this week’s commentary delves into the more structural question of the longer-term impacts of the conflict on global trade.

From lowest-cost sourcing to trusted supply

The disruption in the Strait of Hormuz represents an unprecedented energy shock. According to the International Energy Agency, it has triggered the largest energy crisis on record, exceeding the combined impact of past oil shocks. The shock has accelerated a shift among energy importers—especially in the Asia-Pacific region—from a lowest-cost sourcing model to a “security premium” approach that places greater value on supplier reliability and political trust. This aligns with our longstanding view that, rather than de-globalizing, global trade has just become more expensive.

This mindset is likely to encourage greater diversification of both energy sources and supplier countries, making higher-cost but more secure oil and gas exporters more competitive. As countries, particularly in Asia, diversify their energy imports, this creates opportunities for exporters unable to compete on cost alone.

In addition to adding a risk premium to energy and other commodities (fertilizer, aluminum, chemicals and helium), the pace of the energy transition has accelerated. Renewables are increasingly seen as a geopolitical hedge, not just a climate play. As an example, when fuel prices cross key behavioural thresholds (for example, U.S. gasoline prices above the $4/gallon-mark), households and businesses tend to accelerate their shift to electric vehicles and broader electrification.

Global shipping disruption and rising trade costs

War-risk insurance premiums, rerouting and longer transit times are raising shipping costs and reducing reliability. A recent S&P Global analysis shows that disruptions at the Strait of Hormuz aren’t limited to that route, but are spreading across other key maritime corridors, tightening capacity at alternative routes such as the Panama Canal and Malacca Strait and creating widespread congestion across the global shipping network.

Importantly, these disruptions are likely to extend beyond the immediate crisis period. With the onset of weather pressures and peak-season demand at major transit points, these capacity constraints are expected to persist. The impact is acute for just-in-time and tightly synchronized supply chains. Even before this conflict, research by Oxford University estimated that disruptions at maritime chokepoints—whether geopolitical, weather-related or piracy—caused $14 billion in economic losses annually.

Even if transit conditions improve, it will take time for shipping schedules to normalize and backlogs to clear, meaning instability can persist for months, if not longer. At the same time, the repricing and withdrawal of war-risk insurance is becoming a structural constraint on shipping activity rather than a temporary cost shock, in some cases, requiring government backstops to sustain trade flows. Firms are more likely to buffer these risks by holding higher inventories and redesigning logistics networks—improving resilience but increasing costs.

Disruptions will also justify spending on trade-enabling infrastructure previously deemed unfeasible or redundant. This includes additional east-west pipeline capacity in Saudi Arabia and similar workarounds at other global chokepoints.

There may be a case, for example, to expand land routes across the Americas to mitigate the risk of low water levels in the Panama Canal. Expansion of Mediterranean transshipment hubs can complement passage through Suez and Bab el-Mandeb routes. Alternative pipeline and port links would help bypass congestion in the Malacca Strait. And shifting Black Sea grain exports to Danube ports, rail, or truck corridors into Europe would have alleviated food security concerns in 2022.

Global trade is shifting toward resilience

The latest conflict in the Middle East doesn’t mark a wholly new era for global trade; rather it accelerates and reinforces shifts already underway. For nearly a decade, we’ve undergone history’s longest real-world stress test. Shocks to trade—whether geopolitical, environmental, biological or man-made—have changed the calculus around supply chain management. Once targeted solely at cutting costs, globalization is now being required to maximize resilience.

For Canada, while this means the new costs of trade ought to be factored in for the foreseeable future, it also justifies outlays (both public and private) associated with opening ourselves to new opportunities. On the other side of the ledger, this new global trade paradigm also creates demand for the reliability and security of Canadian supply, even if at a premium.

The bottom line: What trade disruption means for exporters

The conflict in the Middle East is not only impacting global trade and economic growth today, but will continue to do so in the years to come. While major shocks to trade, like the one we’re currently experiencing, increase risks, they also present opportunities. Canada and Canadian exporters would be wise to look through the fog of war and invest in creating the conditions for success long after the guns have been silenced.

Explore EDC’s Global Economic Outlook and Country Risk Quarterly for strategies to manage risk and navigate global trade uncertainty.

This week, a very special thanks to Ian Tobman, manager of our Country Sector Intelligence team.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you’d like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.