Iran War holds trade implications for Southeast Asia

The war in Iran continues to unfold in destructive ways that are only magnified by uncertainties over the duration, intensity, and scope of the hostilities. Southeast Asia is confronting many of the same threatening possibilities that other regions face: disrupted energy supplies, spiking oil and LNG prices and fueling inflation, slowing growth rates, higher shipping costs, extreme volatility, and dampened investor sentiment. 

Asia finds itself even more vulnerable to disruptions in the Straits of Hormuz than other regions.  A remarkable 87 per cent of crude oil and 86 per cent of LNG shipments that transited the Straits in 2025 were headed for Asia, and the vulnerabilities are especially acute in Southeast Asia. The Persian Gulf supplies the overwhelming share of oil in the Philippines (96 per cent), Vietnam (87 per cent), and Thailand (74 per cent).

Beyond these headline macroeconomic considerations, however, the future course of the war in Iran will also exert a strong influence on the most important trade issues confronting Southeast Asia.

Even under the most optimistic assumptions about the duration of the war, the US will experience inflationary pressures. US consumers are already paying more at the gasoline pump to fill up their cars, and rising energy costs inevitably trickle through into higher prices for virtually any product that needs to be transported. Food and agricultural prices could be hit doubly hard, as the Middle East is a key provider of fertiliser and the ingredients needed to make fertiliser.

Rising prices in the US will directly impact the Trump administration’s calculations—both political and economic—on tariffs.

After the adverse Supreme Court ruling on the use of IEEPA authority to implement its reciprocal tariff regime, the administration has moved forward with a strategy to essentially replicate the reciprocal tariff under different legal instruments. An almost immediate 10 per cent global tariff (threatened to go up to 15 per cent) was put in place under Section 122 as a temporary bridge to higher and more enduring tariffs under slower-moving authorities such as Section 301 and Section 232.  The Section 122 tariffs are set to expire in July 2026 (although a congressionally-approved extension is possible), and the US will hope to have tariffs under different authorities in place by then. Two separate Section 301 investigations, covering multiple countries, have already been announced.

There is perhaps only one thing that critics and supporters alike of Donald Trump can agree on: the President has extremely well-honed skills of self-preservation, and he is highly effective in protecting his own self-interests. President Trump has identified the upcoming midterm elections in the US in November as a potentially existential threat.  Trump has told Republican members of Congress point-blank that if the Democrats win the House of Representatives, they will once again impeach him. Potential causes include abuse of Presidential power as it pertains to directing the Justice Department to investigate and, in some cases, indict political opponents. Of course, should the Democrats also take control of the Senate, Trump would not only face impeachment (as he did during his first term), he would almost certainly be convicted by the Democratic Senate and removed from office.   

The midterm election will take place on November 3^rd, and the new Congress will be seated on January 3, 2027. The schedule for any Congressional activity beyond that will be determined by the leadership that has been elected.

Trump’s view of the midterm election as potentially existential is therefore justified. The war in Iran, however, creates significant political problems.

At that point, beyond the ignominy of being the first US president removed from office, the legal jeopardy Trump faces could be intense. Depending on new information revealed during impeachment proceedings, along with previous legal actions set aside after the 2024 presidential election, Trump could conceivably be facing imprisonment. Unless or until a subsequent President changes course on tariff policy, any tariffs (implemented under Section 301 or other authorities) would remain unaffected.

Trump’s view of the midterm election as potentially existential is therefore justified. The war in Iran, however, creates significant political problems. The war is unpopular with the American people. An average of the most reliable polling data reveals that only 38 per cent of Americans support the war. Historically, support in the US for a war declines as it drags on and the financial and human costs mount. Should historical norms hold, the current low levels of support will drop further, denting Republican prospects in the upcoming midterm elections—which are normally fought as a referendum on the sitting president. Political calculations suggest Trump would prefer an early conclusion to the war, but the decision will not be his alone. The other combatants—Iran and Israel—will also determine the course of events.

Worse yet, from Trump’s perspective, the most important issue voters will base their vote on will be the issue of affordability, which in the US political context essentially means inflation. The war has already begun to generate inflationary pressures that will only mount the longer the war drags on.  Even under the scenario of a relatively rapid conclusion to the fighting, enough damage has been done to facilities and infrastructure (for example, the Straits of Hormuz has been mined and the demining process will be “long and complicated”) so that disruption to energy supplies and resulting higher prices will be with us for months.

Tariffs, of course, would only further fuel inflationary pressures. Investigations leading towards tariffs under Section 301 have been launched but not concluded. As of now, the reciprocal tariffs have only been partially replaced by the global 10 per cent tariff (at least for those countries with higher reciprocal tariffs). We are months away from these higher tariffs being implemented, leaving the administration with ample space—if it so desires—to ratchet down its inflation-fueling tariffs.

Southeast Asia, one of the regions hit hardest by reciprocal tariffs, should pay close attention. Heading towards the midterm elections with a war-averse electorate struggling with higher prices, will President Trump continue to press forward with his administration’s plan to reconstitute the reciprocal tariff regime? Given President Trump’s strong instincts for self-preservation, a partial climbdown in tariffs is plausible—and perhaps even likely.

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