The Iran war may do what financial markets have already shown they can: constrain President Donald Trump’s tariff war. As higher energy prices begin to feed US inflation, it becomes harder to justify raising duties further, after a year of aggressive increases.
Sharp market sell-offs have, at times, been followed by pauses, delays or a softening of tariff measures, a pattern that has earned the label “Taco”, or “Trump always chickens out”, among investors. The two-week ceasefire announced on Tuesday, brokered by Pakistan, suggests the war has followed the same pattern.
Strait reopens
Iran has agreed to reopen the Strait of Hormuz, and oil prices fell on the ceasefire news.But a full recovery is not imminent. Supply will only resume in volumes that stabilise prices if insurers and shippers judge it safe to transit the strait, through which about a fifth of the world’s oil passes.
And there is little sign of a full resumption, with only a trickle of vessels now passing through and insurers still reluctant to underwrite the risk.
Energy supply, then, will remain well below normal levels, putting sustained upwards pressure on prices. Christine Lagarde, president of the European Central Bank, has warned that the economic damage from the war will be long-lasting, even as US officials seek to play down the disruption.
Her point is that even if the fighting stops, the oil supply will not recover quickly. Too much Gulf infrastructure has been damaged and restoring regular flows will take time.
Beyond crude
And the effects are already spreading beyond crude, hitting petrochemicals and fertilisers. Governments are stepping in to shield households and firms by cutting taxes, capping prices and subsidising energy.
That may ease the immediate pain but it also keeps demand from falling as supply remains curtailed. The result is a more persistent inflation shock; European Union officials have already warned that broad support risks pushing up prices and carries “serious fiscal implications” for the bloc.
With oil prices still well above pre-war levels despite this week's falls, petrol costs have risen quickly, putting upwards pressure on headline inflation in the EU as well as the US. But the more important question is what comes next.
The slow burn
The answer lies in services inflation. The pass-through to core inflation will be slower, but more persistent. As higher energy costs feed into transport, logistics and operating expenses, they push up costs across the wider economy, particularly in services, the stickiest part of US inflation.
All this is to say that, if the oil shock persists, it will not stay confined to fuel. It will broaden and prove harder to reverse.
This is where trade policy comes in. Stickier inflation will constrain America’s ability to raise tariffs further on goods coming into the world’s largest economy. Higher import duties risk adding to price pressures as the Federal Reserve pauses rate cuts to assess the energy shock and avoid adding to inflation risks.
Trade policy boxed in
In practice, trade policy is constrained by the inflation shock. A year ago, Liberation Day saw Mr Trump announce sweeping tariffs on US imports, marking a sharp break with decades of trade liberalisation and jolting financial markets.
After the US Supreme Court ruled in February that the president’s use of emergency powers for broad tariffs was unlawful, he imposed a temporary 150-day tariff rate, set at 15 per cent, creating a window before duties can rise again.
In practice, that window allows Mr Trump to announce fresh duties, trigger negotiations with trading partners and delay putting them into effect. That lets him project toughness on trade while postponing the inflationary impact of tariffs, which research shows is almost entirely borne by US businesses and consumers.
This happened last year when Mr Trump announced big tariffs on the European Union, only to pause them for 90 days as negotiations began, with the EU suspending its retaliation in response. Since then, tensions have persisted, but the immediate escalation was avoided.
Companies must act
Companies are already adjusting. The initial response to tariff threats was to wait. Faced with uncertainty over the scale and timing of US duties, firms held back investment, hoping for clarity before committing capital. After all, if tariffs proved temporary, it made little sense to restructure supply chains or shift production.
That clarity has, sadly, not come. Tariffs have persisted, and the uncertainty around them has become a permanent condition, not a temporary one. Firms can no longer afford to delay investment indefinitely, but nor do they want to absorb the cost of higher duties.
That uncertainty now extends to trade policy. The energy shock makes a further escalation in US tariffs less likely in the near term, but not impossible. Firms, therefore, need to plan for a range of outcomes. That begins with stress-testing worst-case scenarios and tightening cost control.
More structural responses are also being considered, with some firms looking at shifting production to the US to manage tariff exposure.
All this requires a change in strategy. Companies will need to move away from optimising each business unit in isolation, and instead manage the group as a portfolio. In practice, that means accepting that some parts will perform well while others do not, and building a strategy around resilience rather than pure efficiency.
And at the macro level, the implication is coming into sharp relief: the Iran war may set the limits of how far America’s tariff war can go.
