Price: What war in the Middle East teaches us about trade and industrial policy

With the Iran war approaching its third week, the future course and scope of the conflict remain uncertain. Even so, while the human costs are the most immediate and tragic, the global economic implications have already proven to be significant. Energy markets have been roiled by one of the largest supply shocks in recent memory, seeing oil and gas prices surge greatly. This feeds directly into headline inflation and threatens to slow growth worldwide. Beyond energy, the war has also disrupted maritime and air logistics, with sizable consequences as key shipping lanes become increasingly restricted. For instance, the Strait of Hormuz is a vital conduit for fertilizer and aluminum inputs, as well as many other commodities. Continued disruptions in the strait are pushing up costs across manufacturing, agriculture, and construction sectors worldwide.

What is the lesson of these economic aftereffects for US trade and industrial policy? The takeaway should be that strong domestic supply chains are needed for national security and long-term economic stability. Unfortunately, following the war in Ukraine and the Covid-19 pandemic, the expanding conflict in the Middle East is yet another recent example of a crisis straining supply chains and spiking prices across the globe. Geopolitical conflicts and asymmetric shocks like these are not anomalies. They are to be expected with some regularity both now and in the future. And as the wars in Iran and Ukraine illustrate, even a conflict thousands of miles from the American border can cause serious ripples in the US economy.

While robust domestic supply chains and industrial policies do not prevent global geopolitical tensions, they can serve as a bulwark against those conflicts transmitting harmful economic effects to the US industrial base and, ultimately, to the American consumer. In this regard, excessive dependence on fragile global supply chains is risky at best. The short-term economic efficiencies of unabated free trade and globalization do not justify sacrificing economic stability and national security. This is particularly true for all metals-related industries and other key energy, manufacturing, and critical mineral sectors.

The convergence of global markets and prices for many industries and commodities is viewed by some as a victory for free trade and globalization. However, that feature becomes a bug when a crisis strikes. A regional conflict can quickly turn into an international economic shock, and integrated markets transmit price shocks rapidly across borders. At that point, governments are limited in their ability to insulate domestic consumers from foreign crises as their supply chains are already tied to the whims of global markets. This is the fundamental, single-point-of-failure risk of unchecked globalization.

Similarly, without policies to maintain strong domestic supply chains, geopolitical events abroad can externalize inflation, making domestic price stability contingent on distant foreign wars or other crises. That is hardly a viable long-term economic strategy or one that favors the American consumer. Take the US energy sector, for example. The United States is the leading global producer of oil and gas and has become a net exporter of oil in recent years for the first time in many decades. In other words, there is no supply problem, especially with integrated pipelines facilitating oil and gas imports and exports with Canada. Still, war in Iran has meant higher oil and gas prices for American households and businesses. Why? It is not because US demand is up or US supply is down, but rather because these are globally traded commodities that are priced according to global market conditions. The beneficiaries of this disparity are the energy companies able to take advantage of higher prices, despite not facing the same supply or demand shocks in their domestic market.

Characterizing the consequences of globalization as a China-only problem, as some have done, is too reductive. While China may be a driving force behind many of the pitfalls of globally integrated markets, it is by no means the only source of these problems. Too often, the overly simplistic answer of blaming China is used as a cop-out by those in favor of unbridled free trade. We caution against downplaying the role of non-Chinese actors, as this fails to recognize the full scope of the problem and, in doing so, limits the effectiveness of needed solutions.

Ultimately, while there may not always be easy answers to these lessons learned, it is clear that the path forward must entail durable trade and industrial policies. In this sense, policies like the Section 232 and Section 301 programs that support and maintain the US industrial base are fundamental and should not be weakened. Without that strong foundation, American steel producers and other US manufacturers become unnecessarily vulnerable to the aftershocks of geopolitical events abroad.