A Geopolitical August

August, often a month of vacations for many in the Northern Hemisphere, is also often a time of significant geopolitical activity. This year is no different, with active conflicts in the Middle East, Ukraine, and Africa, major decisions on US tariffs and trade policy – and always the prospect of a wildcard. 

• Conflict in the Middle East has become more intense, with attacks in the Strait of Hormuz and the Red Sea, and an uncertain prospect for negotiations between the US and Iran.
• Iran and Oman are reportedly negotiating an agreement to ease passage through the Strait of Hormuz, but this would require the payment of maritime service fees to those countries through a newly-established corporation, a significant change from the freedom of navigation through the Strait before the war. 
• Ukraine has had recent successes and has expanded the war further to Russia. However, it faces shortages of defense interceptors, leaving it potentially vulnerable to Russian ballistic missile attacks.
• The US is scheduled to enforce new tariffs on Canada August 19 absent an agreement. Potential tariffs relating to “structural excess capacity” on major trading partners could also come this month, along with further negotiations with those jurisdictions.
• Conflict has intensified in Sudan; Cuba remains high on the US geopolitical agenda.

Wars and Rumors of Wars

From the murder of Archduke Franz Ferdinand in 1914 that led to World War I to the Molotov-Ribbentrop Pact in 1939 to the invasion of Kuwait in 1990 to the Russian invasion of Georgia in 2008, late July and August – for many a quieter month of summer rest – have often witnessed intense geopolitical and military activity. Will it be so again this year? 

The Iran conflict has expanded in intensity in recent weeks despite a technical ceasefire. One principal issue is control of the Strait of Hormuz. Iran maintains control of the northern portion of the Strait and offers a route for passage; Oman has a similar route in the southern portion of the Strait. The US and Western powers clearly favor the Omani option as a prelude to the full reopening of the Strait, with the US maintaining its blockade of shipping to and from Iran, but Iran has attacked the southern route to seek to maintain its control.

While Iran denies that it and the US are currently negotiating (any negotiations are likely to be indirect, involving mediators and go-betweens such as Pakistan, Qatar, Turkey, and Egypt), reports of negotiations between Iran and Oman on a mutually acceptable solution to open the Strait seem credible. However, that agreement could in effect cement an Iranian role in running the Strait – a very different situation from that before the war, in which ships only had to obtain maritime insurance to pass the Strait. The ceasefire agreement contemplated the payment of “maritime service fees”; it is now possible there could be a new company jointly controlled by Iran and Oman which would charge the fees, which could be a concession by Iran.[i]

Iran has stated its goal is “a route acceptable to both [Iranian and Omani] sides, neither the northern route nor the southern route – but one that respects the sovereign rights of both sides and safeguards our national interests and security.”[ii] Still, this would be a major change from the situation before the war;[iii] ships transiting the Strait could in effect be required to pay both service fees to the new company and regular maritime insurance to insurers, raising costs.

Expanding the war?

The US said that it expects negotiations both to open the Strait and a “second phase [of] denuclearization. And that will take a little while.”[iv] This highlights that the US’ immediate goal is the Strait, while still seeking an agreement with Iran on its partially-enriched nuclear material which will be hard to negotiate. More broadly, the US faces a difficult choice in deciding whether to launch a large-scale attack on Iran if Iran does not negotiate what the US considers an acceptable deal quickly. Not only is the war increasingly unpopular in the US[v] but considerations of both military and political strategy and materiel factor into the equation.

As at other times during the war, large-scale US attacks would likely meet responses directed at the Gulf states. For that reason, the Gulf states opposed the rumored large-scale attack on Iran, which could have included attacks on essential infrastructure.[vi]

At the same time, the reality is the war has expanded in scope once again as well, including attacks on shipping in the Red Sea and even a drone attack on the Egyptian port of Damietta. The strategic purpose of these attacks is to discourage Saudi Arabia from using the Red Sea as a conduit for exports through the East-West Pipeline while the Strait of Hormuz is effectively closed. In response, Saudi Arabia responded to the attacks[vii] and is reportedly considering an offensive against the Houthis in Yemen,[viii] a resumption of the war there and a potential flashpoint for expanded conflict. While affected Gulf countries are seeking overland routes and expanded pipelines[ix] to move exports to ease the pressure, these alternative projects will take time to complete, for instance an estimated 24-30 months for new terminals for exports at Fujairah, in the United Arab Emirates.[x]

The war in the Middle East is also connected with Lebanon and Gaza. Lebanon has been quieter recently, including a partial Israeli withdrawal from specific areas in southern Lebanon under US auspices while Israel retains its buffer zone.[xi] However, a resumption of fighting there could encourage Iran to delay broader negotiations. In Gaza, the US-backed Board of Peace negotiated an agreement for disarmament of Hamas – but Hamas states it is conditional on a complete Israeli withdrawal from Gaza, which is unlikely, and Israel has not formally accepted the agreement, seeking Hamas’ disarmament first.[xii] Gaza remains a potential flashpoint for renewed conflict. Each agreement seems designed to further a broader agreement with Iran.

The war in Ukraine: Two wars merging or shared concerns?

For several years, Iran has supplied military equipment, including Shahed drones, to Russia. On July 25, Ukraine struck Iranian ships in the Caspian Sea transporting military cargo to Russia.[xiii] Drone warfare and mass attacks with drones and ballistic missiles in both conflicts highlight the importance of defense. Ukraine recently said that it has “zero interceptors” as its Patriot missile batteries have been used; Ukraine is seeking additional interceptors before the winter, a season in which Russia has targeted energy infrastructure using ballistic missiles.[xiv] While the US expressed support at the recent G7 Summit for Ukraine to produce Patriot under license, the US has not agreed to this formally. The decision highlights that both Ukraine and the US and its Gulf allies need Patriots and other defensive tools, which have been reportedly depleted during the Iran war.[xv] This factor surely affects the US’ calculus as to the desirability of renewing large-scale strikes on Iran. In addition, much of the harvests in both Russia and Ukraine must pass through the Black Sea to reach markets, raising the potential for conflict in that region. And both sides will want to use the summer to establish positions for the winter, when fighting is harder.

Trade and Tariffs

With the imposition of the new tariffs relating to forced labor on 60 economies on July 24, the US effectively has a global tariff regime in place once again to replace the expired Section 122 10% global tariff, though a number of goods, including many agricultural products, are exempt. However, the US has also threatened much higher tariffs, in some areas coming close to or exceeding the levels in the “Liberation Day” and fentanyl-tariffs the Supreme Court overturned earlier this year. Tariffs remain high on the agenda this August. The Administration has imposed 50% tariffs on a variety of Canadian goods scheduled to go into effect August 19; negotiations to avoid these and to work on a broader renewal or amendment of the US-Mexico-Canada trade agreement will happen in August.

Beyond this, the US is still considering imposing tariffs on 16 major trading partners based on its characterization of “structural excess capacity” (see Policy Backgrounder “Forced Labor Tariffs – and More to Come?”); the US Trade Representative could issue a final determination at any time imposing the tariffs – or could use the threat of new tariffs as leverage in negotiations with these economies to seek additional investment in the US, policy changes (for instance, with respect to the EU’s Digital Services Act and Digital Markets Act and digital services taxes in several European countries), or revisions to framework trade agreements.

The US is also still conducting several investigations on national security grounds which could lead to new sectoral tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (see CEOC Policy Backgrounder “Forced Labor Tariffs – and More to Come?”). Taken together, these new tariffs could lead to renewed global trade tensions. The US will also need to begin the preparations for an expected US-China summit in Washington on September 24; this will involve discussions on tariffs on China (including the current “trade truce” set to expire in November), critical minerals, and Taiwan.

Finally, it is possible the Federal Circuit could rule on the government’s appeal of the Court of International Trade’s order of a broad tariff refund system for the tariffs the Supreme Court declared unconstitutional; the government believes importers should have to file separate lawsuits to obtain their refunds, discouraging litigation. A ruling in August or early September would set up a very likely Supreme Court case for the new Term in October.

Wildcards

As the Ceuta crisis shows, in an interconnected world in which both legitimate news and disinformation can be amplified rapidly, wildcards have the potential to dominate news cycles quickly, shifting public opinion and forcing governments to react equally quickly. By definition, wildcards are unpredictable, though some issues remain simmering on the geopolitical stove.

First, Cuba. The US is continuing to pressure Cuba into adopting major economic and political reforms, and Cuba’s economy has been severely weakened through fuel shortages. The US has declined to take military action off the table, with reports suggesting[xvi] that military planning for an action of some kind is proceeding.[xvii] While the US would still prefer a diplomatic and political agreement, military action could range from a raid to enforce the current US indictment against former President Raúl Castro to a larger-scale military action. And while the element of surprise is always an important aspect of military operations, the military’s continued focus on Iran and the Middle East could make quick action against Cuba less likely.

Second, Sudan. The war in Sudan between the government’s Sudanese Armed Forces and the rebel Rapid Support Forces (RSF) continues, with a vast cost in lives and a humanitarian crisis, with 12 million people leaving their homes and up to 33.7 million people needing food aid. The next flashpoint is an expected siege of the city of El Obeid by the RSF, in which 500,000 people are trapped. Mass atrocities in El Obeid, about which the UN has warned, could place Sudan higher on the global agenda,[xviii] with potential consequences for other regional powers supporting different sides in the conflict, including Ethiopia and Egypt. Conflict could also reemerge in Ethiopia; Tigrayan forces who had crossed from Sudan recently clashed with Ethiopian government forces.[xix]

Third, the impact of weather. Governments around the world should be preparing for a potential super El Niño which could affect harvests in several key growing areas (see TCB Report “El Niño’s Global Reach: The Business Impact of Extreme Weather” and TCB Podcast “How a Super El Niño Could Test Business Resilience”); continued drought in several European countries is affecting river commerce on the Danube and other rivers and energy supplies that depend on water.[xx]

Beyond this, there are other potential wildcards. Jordan is so concerned about the risk of changes to the status quo on the Temple Mount in Jerusalem with the upcoming High Holidays and a contentious Israeli election that it convened a meeting of Arab and other Islamic foreign ministers;[xxi] any changes to the status quo would almost certainly trigger violent protests in the West Bank, the Arab world, and beyond, at a time when conflict in the West Bank has already been increasing.[xxii] Negotiations continue after the NATO Summit on a potential new security framework for the Arctic which could lead to a larger US military presence in Greenland; should the talks fail, US rhetoric could again shift.

Implications for Business

Each of these conflicts and potential conflicts affects US businesses differently according to their situation. The widest impacts occur in industries sensitive to energy prices and to tariffs, which can lessen US exports as well. Rising food and energy prices also have deep effects on the US and global economy.  But these are not new risks: new risks arise from potential conflicts, built on smoldering resentments or failed attempts to solve them in the past that can flare up in an instant, changing global headlines with unpredictable consequences – even, and perhaps especially, in August when governments may be shorter-staffed and response times may be longer, offering temptation to those who believe they might benefit from conflict and unpredictable consequences to global commodity and financial markets.

Endnotes