Will the US-Iran deal give Donald Trump more room to revive his damaging trade war? Only if it keeps oil prices cheap. If crude stays cheap, inflation eases and US President Donald Trump gains room to slap fresh levies on America’s trading partners. If it climbs again, however, his ambitions will collide with higher prices, higher borrowing costs and nervous financial markets.
Three questions will determine what happens next: are the legal obstacles to tariffs gone, will inflation leave room for them, and will businesses act as though the Gulf crisis is over?
Start with the law. In February, the US Supreme Court blunted Mr Trump’s tariff war when it blocked him from imposing tariffs with the stroke of a pen – or a social media post – under emergency powers. That forced his administration to fall back on older trade laws that require a proper legal process before fresh levies can take effect.
For example, earlier this month Mr Trump proposed duties of at least 10 per cent on imports from 60 countries following a forced labour investigation. Trade investigations are therefore likely to form the legal backbone of the next phase of his trade war.
Raising taxes on imports is one thing; living with the economic consequences is another. Those new tariffs, if applied, will hit US manufacturers that depend on imported inputs. And they are likely to lobby for – and probably win – exemptions.
We have been here before: in 2018, Mr Trump’s steel tariffs triggered a backlash from American manufacturers. General Motors and Ford blamed higher metal costs for weaker earnings. US companies that depended on imported metals then convinced the White House to grant thousands of exemptions after proving that domestic suppliers could not meet their demand.
But the costs of Mr Trump’s tariffs will not stop at the factory gate.
Inflation limits tariffs
Today, consumer price inflation is the chief constraint on his trade agenda. Fresh duties would add to price pressures just as inflation has surged following the oil shock from the Iran war, reaching a three-year high of 4.2 per cent in May.
That leaves the Federal Reserve with little room to cut borrowing costs. At its first meeting under new Chairman Kevin Warsh last week, the US central bank kept interest rates on hold and signalled that the next move could be up, not down.
Mr Trump is therefore unlikely to pursue tariffs that risk reigniting inflation and unsettling financial markets. That points to a different kind of trade war.
The administration will probably announce sweeping tariffs to maximise its leverage, then scale them back if trading partners offer enough concessions. If the administration secures enough ground at the negotiating table, it can scale back the tariffs and limit the inflationary fallout.
This strategy is a hostage to oil prices, however. But so far Brent crude has dropped back below its prewar level to about $72 a barrel, as the Strait of Hormuz, through which about a fifth of the world’s oil flows, gradually reopens.
That price is now the key indicator to watch. If it stays low, inflationary pressures should ease and Mr Trump will have greater scope to push tariffs higher. But if crude starts climbing again, inflation will be a powerful constraint, heaping fresh political pressure on the administration ahead of November’s midterm elections.
There is, however, a more optimistic scenario: if the ceasefire evolves into a lasting peace deal, a wave of returning supply could leave the oil market awash with crude next year, according to the International Energy Agency. That would push energy prices lower and ease inflationary pressures.
But that outcome still depends on a fragile peace becoming a lasting one. Businesses know that too, and are unlikely to return to prewar assumptions overnight.
Business remains wary
The temporary ceasefire has reopened the Strait of Hormuz, but it has not erased the risks to supply chains that the conflict painfully exposed. More than 1,200 cargo ships carrying an estimated $125 billion of goods were stranded during the blockade. Shipping groups are thus investing in alternative routes into the Gulf, despite the interim peace.
Other changes to trade are likely to outlast the conflict, too. Companies that rely on Gulf supplies of helium, fertiliser or liquefied natural gas are unlikely to put all their eggs back in one basket. Suppliers outside the Gulf are likely to pick up more business.
Companies are also unlikely to start spending freely again. Confidence may return during the third quarter of 2026, but few firms will be in a hurry to bet on it. Many are likely to keep cash on hand, build larger inventories and delay investment until they are convinced the crisis is truly over.
Many will accelerate efforts to move critical inventories out of the Gulf while committing fresh capital to the region only in stages. That matters because the Gulf is becoming a test case for how companies respond to acute geopolitical uncertainty. That may prove to be the conflict’s most enduring legacy.
So the US-Iran deal will determine not only how far Mr Trump can push his tariff agenda, but also how quickly businesses regain the confidence to invest, rebuild supply chains and deploy capital in the Middle East.
If lower oil prices bring inflation under control, the White House will have greater room to escalate its trade war. If they do not, household budget pressures will define the limits of Mr Trump’s trade agenda, far more than diplomacy.
