President Donald Trump declared on Tuesday that the US was withdrawing from the Iran nuclear deal, in what is arguably the biggest foreign-policy move his administration has made since taking power.
This has sent shockwaves around the world, as analysts fear that it will lead to a resumption of work by Iran on nuclear warheads, fuel an arms race in the Middle East, and add to sectarian conflicts in the region.
Israel and Saudi Arabia – the two regional powers who were most hostile to the 2015 deal – will be relieved that any rapprochement between the US and Iran is currently unthinkable. Meanwhile, European allies are disheartened that their advice to Trump to remain in the deal has been ignored.
Global stock markets, including in Asia, have barely moved in response, as investors wait to see what Iran’s reaction will be. Unsurprisingly, the only asset to have made decisive moves in response to this is oil.
Higher energy prices are perhaps the most significant threat to Asian economies – a risk that will grow if the breakdown in US-Iranian relations leads to increased confrontation between Israel and Iran. Large energy importers, such as China, India and Japan, are particularly vulnerable to higher energy prices. However, China – which is currently Iran’s largest single customer for its oil – is unlikely to cut back on its purchases, since it will not wish to be seen as being bullied by Washington.
A rising US dollar – perhaps driven higher by investors now buying on its “safe haven” status – will make life harder for Asia-Pacific economies that export dollar-denominated commodities, such as Australia, as demand may weaken as the commodities become more expensive to importers once their (higher) energy bills are paid.
In addition, US dollar borrowings will be more expensive to service, which will be even more detrimental to those Asian nations and corporations that are experiencing a slowdown.
Economically, perhaps the most vulnerable country to the developments surrounding the Iran deal is Japan, which is a large and growing buyer of Iranian oil while at the same time a country that will want to be seen as firmly embedded in the US camp. Furthermore, it concluded a bilateral trade deal with Iran in 2016 intended to boost Japanese investment in the country.
But it too has an interest in a collaborative and diplomatically responsible Iran, since Tehran is believed to have been a source of nuclear know-how to North Korea.
Much will now depend on the longer-term response from Tehran. It is to be hoped that it will take a measured and balanced approach, but should the Iranians take a stronger retaliatory stance, the oil price and the dollar may both jump significantly higher.