The Iran-Israel war has exacerbated world trade prospects, and any further escalation of the situation in West Asia could lead to sharp contraction in global demand, as energy and other costs might flare up, experts say.
The immediate fallout of the conflict that started on early Friday for India’s foreign trade will be in terms of freight and insurance charges going up, director general of Federation of Indian Export Organisations (FIEO) Ajay Sahai said. This comes after a period of calm as Red Sea routes were slowly coming back to normal.
Cargo ships had gradually returned on Red Sea routes, saving them 15-20 days while moving to US and Europe from India and other parts of Asia. “The ships will again avoid the Red Sea and Suez Canal which will lead to escalation of freight costs that will have to be borne by the trade,” he said.
“Things were getting back to normal on the Red Sea route and now it will be closed again,” chairman of Engineering Export Promotion Council Pankaj Chadha said. While Indian exporters have not reported immediate demand from shipping companies on revision of rates, in the coming week this demand might come, he added.
The present conflict that began with an attack on Israel on October 7, 2023 had brought cargo movement through Red Sea routes to a halt due to attacks by Houthi rebels on commercial shipping. After the US intervened with attacks on the rebels the firing on commercial ships stopped,
“Everything depends on whether the conflict remains localised or expands to include other countries.Its impact will be first felt in global crude oil prices,” Sahai said
Apart from the Red Sea route, this time transit through Strait of Hormuz is another factor that is weighing on the world energy trade. “While some voices have been raised in Iran on closing this route, at present ships continue to move through it. Still some ships may start avoiding this route too.” FIEO DG said.
The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Around 21% of global petroleum liquids consumption passes through that route. China, India, Japan, and South Korea were the top destinations for crude oil moving through the Strait, Oman also uses this route to supply liquefied natural gas to India. Only Saudi Arabia and the United Arab Emirates (UAE) have operating pipelines that can circumvent the Strait of Hormuz
The impact these developments will have on energy prices will again lead to inflation and demand compression in the key markets, Sahai said. A further increase in air freight rates is also expected as aircraft also avoid airspace over the key countries of West Asia. Already flights from India are avoiding Pakistani airspace, he added.
The impact of war will be more direct in case of India’s trade with Iran and Israel. After the October attacks, India’s exports to Israel have fallen sharply to $ 2.1 billion in 2024-25 from $ 4.5 billion in 2023-24. Imports from Israel came down to $ 1.6 billion from $ 2.0 billion.
Similarly exports to Iran of $ 1.4 billion, which were at the same level in 2024-25 as in 2023-24 will also suffer. India’s imports from Iran were at $ 441 million in FY 25 as against $ 625 million in the previous year.
The conflict adds to the pressure world trade was under after the US President Donald Trump inaugurated a trade war using high tariffs. The government is expected to hold meetings with exporters in the coming days to discuss the recent developments.
Based on the tariff war impact,the World Trade Organisation (WTO) has already said that world trade will contract 0.2% in 2025 as against the earlier projection of 2.7% expansion. India’s overall exports that had grown 6.01% on year to $ 825 billion in 2024-25 were expected to touch $ 1 trillion by this year according to FIEO could fall well short of this target due to geopolitical uncertainty.
