HO CHI MINH CITY, Vietnam — When the war in Iran began on February 28, the expectation in Asia was of a serious but gradual impact, with the loss of access to a relevant share of the world’s oil and gas. In practice, the economic and social effect of the conflict came faster and stronger than authorities and analysts imagined.
Asia-Pacific countries are dealing with sudden and difficult-to-manage shocks. Privately, many people compare the scale and degree of disorganization of the crisis to what was seen in the Covid-19 pandemic.
Even if a peace agreement is reached soon, the scenario for the region — which has been the engine of global growth for decades — includes, at least in the coming months, canceled flights, more expensive food, pauses in production lines, delays in deliveries and empty shelves of products that seemed guaranteed throughout the world: plastic bags, noodles, vaccines, syringes, lipstick, microchips, sportswear.
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According to authorities and experts, if the strangulation of commercial traffic in the Middle East lasts just a few more weeks, and uncertainty persists, the lack of products could push several countries into waves of protests and, later, recession.
Companies of all types are on the verge of bankruptcy. Governments take on heavy debt to try to contain inflation. In the harshest scenarios outlined by the UN and other organizations, millions of people in Asia could return to poverty by the end of the year.
“The impacts are very rapid and very profound,” says Phillip Cornell, a senior researcher at the Atlantic Council’s Global Energy Center, based in Sri Lanka. “Just in terms of magnitude, it’s a really, really big thing.”
Historically, scarcity of inputs often releases the worst of both human psychology and capitalism. The IMF has been warning that the global economy is slowing almost everywhere because about a fifth of the world’s oil and liquefied natural gas — plus essential byproducts — has been off the market since the start of the war. Even if the Strait of Hormuz were unblocked tomorrow, it would take years for oil and gas production and logistics to return to pre-war “fat” levels.
Richer countries, such as China, feel less of the hit in the short term, thanks to greater fuel reserves and budget space. But this mattress is not eternal — nor does it apply to everyone. The rest of Asia, not counting China, accounts for a share of the global economy comparable to that of the United States or Europe. And many of these countries are worse off than they let on.
In conversations with reporters, farmers in Vietnam, workers in India, inn owners in Sri Lanka, drivers in the Philippines and executives in Hong Kong and Singapore showed more concern than many politicians in the region, who insist on a speech of “everything under control” far removed from the hustle and bustle behind the scenes.
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Three pillars of Asian stability — transportation, industry and social mobility — are being hit at the same time.
Transport collapse
The war in Iran, started by the United States and Israel on February 28, brought trucks, ships and planes to a halt in just a few hours in a region known for constant movement on land, in the air and at sea.
The airline sector has become the most visible symbol of the turnaround in Asian transport.
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In March, more than 92,000 flights were canceled worldwide, double the pre-war standard, with most of this jump concentrated on routes linked to Asia-Pacific.
Airlines crossing the Middle East — where around 24 million migrants from South and Southeast Asia live and work — immediately suspended flights to Dubai and other Gulf hubs. With the price of kerosene practically doubling and the risk of shortages, companies have been cutting routes “with no return date”.
Qantas, Air New Zealand, Lion Air (Indonesia), VietJet, AirAsia, Air India and Cathay Pacific are among those that have reduced networks. Malaysian Batik Air went even further: it reduced 35% of flights this month alone to try to avoid bankruptcy.
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Shukor Yusof, from the Endau Analytics consultancy in Singapore, calculates that air traffic in the region has already shrunk by around a third. Small companies accumulate losses of millions of dollars per week. The large, more capitalized ones will probably survive. Low-cost companies, which depend more on purchasing fuel on the spot market, tend to shrink, merge or disappear.
Industry locked down
Many of Asia’s most successful export industries depend on a lot of energy — and inputs from the Middle East. Seven weeks after the start of the war, stocks are at their limit.
Cuts in industrial production multiply and expose weaknesses that almost no one looked at closely.
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The production of copper and nickel, for example, requires very high temperatures obtained with natural gas and also uses sulfur, a byproduct of burning fossil fuels. Both are in short supply, and several nickel processors in Indonesia have already reduced production by at least 10%.
Polyester and nylon also come from petroleum. In Bangladesh’s textile hubs, such as Gazipur and Ashulia — where pieces for Walmart, Zara and Uniqlo are produced — serious disruptions to production and export schedules have become the norm and are likely to get worse.
“The pressure we are facing now will become very difficult to manage if the supply of gas and fuel does not return to normal”, says Abdullah Hil Nakib, deputy general director of the TEAM clothing group. “We are already seeing our inputs rise in price. Today, the yarn has practically doubled in value.”
In the most advanced manufacturing segments, tension increases even more. Helium, a gas used in the production of semiconductors, is another bottleneck. Qatar, responsible for almost a third of global supply, had to stop production on March 2 after Iranian attacks on its gas plants.
Prices have soared, and some chipmakers in Asia are slowing production and looking for alternative suppliers.
One bottleneck pulls the other. Without enough petrochemicals to produce plastic packaging, fewer Korean cosmetics reach stores. Lack of fertilizer threatens Vietnam’s rice harvest. Cattle farmers in Australia, known for its beef consumption, are already talking about the risk of a shortage of red meat due to closed slaughterhouses and truck drivers out of work.
No open people
Before the conflict, UN projections indicated that most of the new global middle class in the next decade would be born in Asia.
Last week, a United Nations report estimated that 8.8 million people in Asia and the Pacific are at risk of falling into poverty because of war, depending on how long the conflict lasts. The majority — something like 5 million — would be in Iran. But, in a region where the majority work informally and do not have a strong social protection network, the effects are already beginning to accumulate on other fronts.
“The scale and speed with which the impact reached Asia and the Pacific was much greater than anyone imagined,” says Kanni Wignaraja, UN Assistant Secretary-General and UNDP Regional Director for Asia and the Pacific.
The expansion of poverty, she notes, tends to mix with other problems: essential medicines and vaccines that fail to reach the most vulnerable; schools and universities having difficulty keeping students in the classroom; increased pollution with the massive return to burning coal to generate energy.
In India, entire industrial complexes have been shut down for weeks due to lack of fuel. Without jobs in the cities, many workers are returning to the fields to harvest wheat. Basic medicines, such as paracetamol and some antibiotics, have become more expensive.
The UN report calculates that the war could cost Asia and the Pacific between US$97 billion and US$299 billion — somewhere between 0.3% and 0.8% of the region’s GDP.
In real life, the bill usually starts with more expensive food and less work.
“You lose income and, at the same time, pay more”, summarizes Wignaraja.
In the northern Philippines, a region that produces most of the country’s cool-weather vegetables such as cabbage and broccoli, shortages are born of waste: harvested crops are rotting in fertile fields because farmers can’t afford to transport them to markets.
The ravages of war, so rapid and so deep in the Asia-Pacific, cannot be easy to contain. Even if the United States and Iran reach a lasting peace, the combination of shortages and inflation has already gained inertia and is in motion.
“You’ve seen tsunamis—they move across the ocean very, very fast,” says Cornell of the Atlantic Council. “It’s shocking to see how much policymakers in the US think they are protected from this.”
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