Conflict, containers & crude: How the Iran-Israel flare-up is testing global trade

The escalating Iran-Israel conflict is emerging as a major disruptor in the already fragile global trade ecosystem. With geopolitical tensions threatening to destabilize critical maritime arteries such as the Red Sea and the Strait of Hormuz, the implications go far beyond regional politics — they strike at the heart of global supply chain security. For trade-reliant economies like India, the consequences are immediate and multifaceted: surging freight and insurance costs, prolonged transit times due to rerouting via the Cape of Good Hope, and upward pressure on energy prices.

These shocks are feeding into inflationary headwinds and dampening global consumer demand — a double blow for exporters. India’s bilateral trade with both Israel and Iran is already reflecting these stresses, while the air freight sector faces rising costs amid constrained airspace. As the conflict continues to unfold, the broader question is no longer just about disruption — it’s about how resilient and future-ready India’s trade architecture really is.

The recent flare-up in the Iran-Israel conflict is threatening to derail global trade recovery, with experts warning of far-reaching economic consequences if the situation in West Asia escalates. Rising energy prices, inflationary pressures, and potential disruptions to key shipping routes are already triggering concern among global markets, especially in trade-dependent economies like India.

Red Sea shipping lanes had become accessible once more after being closed for several months due to Houthi rebel attacks on commercial vessels. These disruptions had begun in October 2023 when the initial conflict broke out following attacks on Israel. The US later intervened with strikes on Houthi positions, leading to a temporary reduction in hostilities and allowing limited cargo traffic to resume.

Ships transiting the Red Sea save an estimated 15 to 20 days when moving between Asia and Europe or the US, compared to alternate routes. However, renewed tensions are forcing carriers to again avoid this route and instead sail around the Cape of Good Hope—significantly raising fuel costs and insurance premiums.

The Red Sea strait serves as a key maritime route, carrying about 30% of global container traffic and 12% of worldwide trade. Approximately 80% of India’s merchandise trade with Europe flows through the Red Sea, and a significant portion of trade with the United States also follows this route. Together, Europe and the US contribute to 34% of India’s total exports.

According to industry estimates, as quoted by Pankaj Chadha, Chairman, Engineering Export Promotion Council (EEPC), re-routing ships around the Cape of Good Hope typically raises costs by around US$ 500-1,000 per container, translating to a 40 to 50% increase in overall shipping expenses. If the situation does not improve, there is a strong possibility that shipping companies will revise them in the coming days, he added.

Further complicating matters is the threat to the Strait of Hormuz—a vital artery for the global energy trade. The strait, which lies between Iran and Oman, connects the Persian Gulf to the Arabian Sea and is responsible for the passage of nearly 21% of the world’s petroleum products. Key Asian economies including India, China, Japan, and South Korea are the primary destinations for crude oil transported through the Strait of Hormuz. Oman also relies on this route to deliver liquefied natural gas to India. Among regional producers, only Saudi Arabia and the United Arab Emirates (UAE) have operational pipelines that bypass the Strait.

While some political voices in Iran have suggested blocking the Strait of Hormuz, ships continue to pass through it for now. But any threat to this strategic corridor would have a direct impact on India’s energy import bill.

The resulting energy price spikes could trigger inflation and reduce demand in key global markets, affecting export volumes. Air-freight is also under pressure as airlines reroute to avoid sensitive airspace over conflict zones. Many flights from India are already avoiding Pakistani airspace, pushing up costs further.

India’s bilateral trade with both Iran and Israel has already suffered reversals. Exports to Israel fell sharply from US$ 4.5 billion in 2023–24 to US$ 2.1 billion in 2024–25, while imports Israel declined from US$ 2 billion to US$ 1.6 billion. India’s exports to Iran, which held steady at US$ 1.4 billion in both 2023–24 and 2024–25, are now likely to face a downturn. Meanwhile, imports from Iran have already fallen to US$ 441 million in FY25, compared to US$ 625 million in the previous fiscal year.

The conflict has added to the broader stress that global trade has been under since the US-China tariff war began under President Donald Trump. Trade liberalisation efforts have slowed, and global demand remains weak. Reflecting this trend, the World Trade Organization (WTO) recently downgraded its forecast for global trade in 2025, projecting a 0.2% contraction—sharply down from its earlier forecast of 2.7% growth.

India, which had achieved 6.01% export growth in 2024–25 to reach US$ 825 billion, had been eyeing the US$ 1 trillion mark this year. However, this target now appears increasingly uncertain due to mounting geopolitical risks.

The Iran-Israel conflict is not just a regional flashpoint — it’s a critical stress test for global trade resilience. For India, the ripple effects extend far beyond short-term freight cost spikes or bilateral trade dips. The sustained threat to vital maritime routes like the Red Sea and Strait of Hormuz exposes a strategic vulnerability in India’s external trade architecture, heavily reliant on a few chokepoints and traditional shipping lanes.

“As global demand softens and protectionism hardens, India’s ambitious US$ 1 trillion export target will require more than product diversification — it will demand logistical agility, deeper trade partnerships beyond Europe and the US, and urgent investment in alternative corridors like INSTC, Chabahar, and East African routes to enhance its trade,” comments Virat Bahri, Joint Director – Research, Trade Promotion Council of India. The current crisis underscores the need for India to fast-track its transition from a reactive trading nation to a proactive global trade leader — one that builds resilience into its supply chains and policies before the next shock hits.