Oil Shock and New Tariffs Deliver Twin Blow to Global Economy

The global economy is weathering a rare and punishing combination of crises. Five months into a devastating war with Iran that has blocked the Strait of Hormuz and sent oil prices soaring, the United States has now imposed a fresh wave of tariffs on 60 countries — a one-two punch that economists warn is testing the resilience of markets, businesses, and households worldwide.

On July 25, the Trump administration rolled out new Section 301 tariffs of 10 to 12.5 percent on imports from countries accounting for 99.4 percent of U.S. imports, citing inadequate enforcement of forced labor bans. The tariffs arrived just as temporary 10 percent levies were set to expire, following the Supreme Court’s decision in February to strike down the earlier “Liberation Day” tariffs as illegally enacted under emergency powers.

“These new trade tensions come at a moment in which the global economy, due to higher energy prices, is in a weaker spot than on Liberation Day last year,” said Carsten Brzeski, an economist at ING, according to The New York Times via Oman Observer.

The Oil Shock: A Crisis Within a Crisis

The war with Iran, which began on February 28 with coordinated U.S.-Israeli airstrikes under Operation Epic Fury, has triggered what the International Energy Agency has called the “largest supply disruption in history.” Iran’s closure of the Strait of Hormuz on March 4 — a chokepoint for 20 percent of the world’s oil and a significant share of global LNG — sent crude prices above $120 a barrel within weeks. Gulf oil production collapsed by roughly 10 million barrels per day by mid-March.

Though prices briefly fell to $71.57 by July 1, Brent crude has since rebounded to near $100 a barrel. The volatility has been compounded by escalating Houthi attacks from Yemen, which have opened a second front in the conflict and threatened Red Sea shipping lanes.

The human and economic toll is mounting. QatarEnergy declared force majeure after Iran struck the Ras Laffan LNG complex. The Philippines declared a national energy emergency in March. In the United States, gas prices hit $4 a gallon and mortgage rates are ticking upward. Japan’s Cabinet Office warned that companies are passing on war-related cost increases at a faster pace than they did after Russia’s invasion of Ukraine in 2022.

As Paola Subacchi, a professor at Sciences Po in Paris, told The New York Times: “The situation in the Middle East is to me, and from what I can see from the data, very much more worrying for the global economy than this fireworks of tariffs.”

Tariffs Return Under New Legal Authority

President Trump’s new tariffs represent the administration’s third attempt to impose broad import duties in just over a year. After the Supreme Court ruled that the International Emergency Economic Powers Act did not authorize his Liberation Day tariffs, Trump turned to Section 122 of the Trade Act of 1974 for a temporary 10 percent levy. With those expiring on Friday, the White House has now invoked Section 301 — the same authority used against China during Trump’s first term — to impose new duties using forced labor as justification.

“Today’s action will begin to correct what is both a human rights abuse and distortive trade practice to improve the welfare of workers everywhere,” U.S. Trade Representative Jamieson Greer said in a statement, as reported by Al Jazeera.

But experts are skeptical. Caroline Freund, dean of the UC San Diego School of Global Policy and Strategy, told the BBC that the forced labor justification is a pretext. “I think they were looking for a legal reason to put the tariffs in,” she said, adding that the administration’s true goals are reducing the trade deficit and reviving U.S. manufacturing.

John Diamond, director of the Center for Tax and Budget Policy at the Baker Institute, echoed the sentiment. “It’s a little bit ridiculous to think that over 60 major trading partners, including countries in the EU, are really relying on that much forced labor,” he told Al Jazeera. Still, he noted, the courts are less likely to overturn these tariffs than the earlier IEEPA-based ones.

More Section 301 tariffs are likely coming: Greer’s office has launched probes into 16 countries covering 70 percent of U.S. imports over allegations of manufacturing overcapacity.

Asia Bears the Brunt — But Shows Resilience

Perhaps no region has been hit harder by the dual shocks than Asia, where economies depend heavily on both exports and imported energy. Yet the region has so far performed better than many expected.

“The biggest takeaway for me has been how resilient these economies have been to all these shocks,” Sonal Varma, an economist at Nomura, told The New York Times. Companies have absorbed costs, passed them on to consumers, or rerouted supply chains. Governments have rolled out subsidies and emergency fuel supplies.

Japan secured a reduced tariff rate of 15 percent after promising $550 billion in U.S. investments. South Korea committed tens of billions toward shipbuilding and battery manufacturing, while Taiwan pledged billions to expand semiconductor production — bets that are paying off as the AI boom fuels demand for advanced chips.

The divergence within Asia is stark. Countries riding the AI wave — South Korea, Taiwan — are outperforming. Those more exposed to energy costs, like the Philippines, are struggling. The Philippines declared a national energy emergency in March and continues to grapple with rising fuel prices while being largely left behind in the AI-driven growth story.

The U.S.-China Showdown

All eyes are now on the United States and China. Xi Jinping is planning a state visit to Washington in September, and Beijing has already signaled its leverage.

“China has shown itself to be a very formidable trade bargainer,” said Carl Tannenbaum, chief economist at Northern Trust. “They have been preparing for this for a long time, and they know exactly where our vulnerabilities are.”

Mary E. Lovely, a senior fellow at the Peterson Institute for International Economics, said Chinese leaders are “very confident that their chokehold on permanent magnets and rare earths will prevent President Trump from really going much higher than where he already is” on tariff levels, according to the New York Times report. That confidence could translate into China securing lower tariffs than its neighbors, giving it a competitive edge.

Stagflation on the Horizon?

The IMF has already revised world GDP growth to 3 percent for 2026, partly offset by AI-driven demand. But the combination of an energy crisis and an escalating trade war is reviving talk of stagflation — rising prices paired with slowing growth.

Carl Tannenbaum offered a cautiously optimistic view, telling The New York Times that “the worst of the tariff-related goods inflation is probably behind us,” noting that companies already raised prices last year and did not roll them back after the Supreme Court’s decision. But the energy shock is a different beast — one that, unlike tariffs, directly raises costs across nearly every sector of the economy.

What to Watch

The coming months will be critical. The Xi-Trump summit in September could determine the trajectory of U.S.-China trade relations. More Section 301 tariffs loom as the USTR completes its probes. And the war with Iran shows no signs of resolution, keeping energy markets on edge.

For households and businesses worldwide, the message from economists is clear: buckle up. The twin shocks of war and trade policy are not merely compounding — they are interacting in ways that make the global outlook more uncertain than at any point since the COVID-19 pandemic.