This article is a response to requests I received after my recent interview with Pascal Lottaz on Neutrality Studies to elaborate on the ECB paper and the vulnerabilities of the Chinese industrial sector mentioned in the interview.
The Wrong Question
For months, the debate surrounding the Strait of Hormuz has been framed in stark binary terms. Is the Strait reopening or is it closing? Are energy markets normalizing, or are we one missile strike away from economic catastrophe?
But if we step back from the melodrama of the 24-hour news cycle—the daily movements of Brent, WTI and tanker traffic—and view the bigger picture, a more uncomfortable reality comes into focus. Neither normalization nor collapse is the likely outcome. Indeed, the restricted, unstable but just-about-functioning energy system that now exists is itself the strategically significant, and ultimately intended, outcome of the war. An outcome that is, in the final analysis, unusually favorable for the United States.
While there is no documentary evidence proving Washington went to war to create a permanently constrained Hormuz, three important facts are increasingly obvious.
First, American strategic analysis before the war understood that conflict with Iran would produce, at the very least, a partial restriction of Hormuz. Second, the economic consequences of such a restriction are extraordinarily asymmetric in favor of the United States. And third, American strategy toward China has, according to the published defense policy literature, shifted from an assumption of overwhelming military superiority toward deterrence, denial, and economic pressure. A strategy articulated in Pentagon policy papers such as the National Defense Strategy (NDS) 2026 and military strategy expositions such as The Strategy of Denial by Elbridge Colby—both of which emphasise a shift away from direct military confrontation toward denial of regional hegemony.
The ECB’s Finding
Earlier this month, I referenced a European Central Bank (ECB) scenario analysis in passing as part of a longer update on the Petroyuan Trap. But it deserved more attention than I gave it. The paper, published on July 2 by three ECB economists, models the macroeconomic consequences of a prolonged disruption to Gulf energy exports. Its findings are significant enough to warrant a closer look on their own—not because they are surprising, but because they quantify, in the language of central banking, a mechanism I’ve been describing for months. The report distinguishes between two layers of disruption. The first is the direct energy shock: exports of oil, gas, and refined products from the Gulf fully and persistently halted. The second is a broader supply shock: the same disruption extended to difficult-to-substitute goods such as fertilizers, petrochemicals, and helium.
The results of the modelling are striking. Under the energy disruption scenario alone, Asian economies face the largest production losses. South Korea could lose up to 11% of output. India around 8%. Japan around 7%. ASEAN economies up to 5%. The euro area faces losses of up to 3%. The United States is barely affected.
The ECB report is mentioned around 52 minutes.
But the more significant finding is in the dynamic analysis. China, the report concludes, would be more severely affected than either the euro area or the United States—not because its direct energy exposure is the highest, but because of its position within energy-intensive manufacturing supply chains.
Under the ECB’s persistent energy-disruption scenario, Chinese GDP growth is projected to be 0.8 percentage points lower than it would otherwise have been in 2026, and 1.1 percentage points lower in 2027. Inflation peaks 2.3 percentage points above the baseline. The ECB then models a second, broader scenario in which the disruption extends beyond energy to difficult-to-substitute inputs such as fertilizers, petrochemicals, and helium. Under this combined scenario, the damage is larger: Chinese GDP growth falls 0.9 percentage points below baseline, and inflation peaks 2.6 percentage points higher in 2027. Crucially, the effects do not dissipate once the initial growth shock passes. Inflation remains elevated through 2028.
The mechanism, as the ECB explains, is that the economic impact does not end when prices rise. Physical shortages propagate through supply chains. Energy-intensive industries—petrochemicals, aluminium, fertilizers, semiconductors—are hit first. From there, the disruption spills into manufacturing and processing.
The COVID Precedent: What the Value-Added Data Showed
This finding aligns closely with an analysis I published earlier in the year, based on data from Global Economic Indicator’s China Industrial Value-Added Report. That analysis examined how Chinese manufacturers responded to the supply chain disruptions of the COVID-era.
The data showed a clear pattern. When import costs spiked during the pandemic, Chinese export prices remained relatively stable. Producers did not pass those costs through to foreign buyers. Instead, they absorbed them. Producer Price Index inflation surged, while Consumer Price Index inflation remained subdued. The gap between the two became a measure of the pressure being absorbed by the industrial sector.
Why did this happen? Because China’s private-sector export manufacturers—the hundreds of thousands of small and medium-sized factories that produce the goods the world consumes—operate on notoriously thin margins. They compete primarily on price, not on brand or technology. When input costs rise, they cannot simply raise prices without losing orders to competitors in Vietnam, Bangladesh, or Mexico. So, they eat the cost by compressing their own margins, drawing down savings, delaying investment, and borrowing to survive.
The central government understood this dynamic and rapidly responded with one of the largest, most coordinated industrial support programs in modern history. Cheap credit through state-owned banks. Tax deferrals. Utility discounts. Direct fiscal transfers. The government’s balance sheet became the shock absorber of last resort.
Industrial value-added held up—not because of the inherent strength of the sector, but because the state poured resources into keeping it functioning. The system held but on state support, and the cost of that support was enormous.
The lesson of COVID was that China’s industrial base is fundamentally fragile in the face of sustained input price increases. Many of the enterprises survived solely because the state had the fiscal capacity and the political will to absorb the shock on their behalf.
Why Chinese Manufacturing Is Structurally More Exposed
The COVID data reveals a pattern but it does not fully explain why Chinese manufacturers were vulnerable in the first place. The answer lies in the structure of Chinese manufacturing sector itself.
Four factors distinguish Chinese producers from their competitors in Vietnam, Bangladesh, Mexico, and elsewhere.
Capital intensity. Chinese manufacturing is significantly more capital-intensive than manufacturing in lower-cost jurisdictions. A larger share of the cost structure is machinery, plant, automation, and the energy required to run it. When input costs rise, the capital-intensive producer faces a larger absolute cost increase per unit of output than the labour-intensive producer, even when the percentage increase is identical. The Chinese firm also carries depreciation and servicing costs on that capital, which do not shrink when input prices rise. A factory with a large automated line cannot un-automate in response to a cost shock. A competitor relying on labour can slow hiring, reduce shifts, or compress wages. The flexibility works the other way around from what you might expect.
Energy intensity. Chinese manufacturing uses far more energy per unit of output than its competitors. It also sits at the centre of a dense domestic supply-chain network in which intermediate goods pass between factories, each stage adding energy and petrochemical input costs. When energy and feedstock prices spike, that cost compounds at every link. A Vietnamese or Bangladeshi producer in the same sector is often assembling imported components with relatively little domestic upstream processing. The energy shock hits fewer stages and with less amplification.
Currency exposure. Most globally traded inputs are priced in dollars. The yuan has been managed and has trended stronger, while the currencies of Vietnam, Bangladesh, and Mexico have been weaker and more flexible. A competitor paying in a depreciating currency gets a larger effective discount on dollar-denominated inputs. The Chinese producer does not. The competitor’s weak currency acts as a shock absorber. The Chinese producer’s stronger currency does not, because its domestic cost base has risen at the same time.
Margin structure. Chinese private-sector exporters already operate on notoriously thin margins, often in the low single digits. A competitor in Vietnam or Bangladesh may start from a similar margin percentage, but the absolute cost increase relative to their capital base is smaller. More importantly, the competitor is usually positioned at a lower point on the value chain, where buyers are more willing to accept price increases because alternative suppliers are similar. Chinese producers often compete against other Chinese producers and against established branded incumbents, which limits their ability to pass costs through.
The compounding effect. These four factors do not operate independently. They reinforce each other. Capital intensity means higher fixed costs. Energy intensity means higher variable costs. Currency appreciation means there is no discount from a depreciating currency. Thin margins mean less capacity to absorb costs. Deep supply-chain integration means the shock compounds at every stage. The result is that a given increase in global input prices hits Chinese manufacturing harder than it hits competitors in the same sectors.
This is the structural vulnerability the COVID data revealed. It is also the vulnerability the ECB has now modelled. Chinese manufacturers absorb shocks on behalf of the broader economy. They survive on thin margins and state support when that shock hits. And they are exposed to sustained input price increases in ways that more diversified, less capital-intensive, and less energy-intensive economies are not.
Why the ECB’s Findings Matter
The value-added data showed how Chinese manufacturers responded to the COVID shock. The ECB shows what happens when a similar shock is applied on a larger scale, for a longer duration, and with the added complication of physical shortages in hard-to-substitute inputs.
The difference is the duration. During COVID, the supply disruption was real but temporary. The government could reasonably expect normalization within quarters. The stimulus was a bridge to recovery. The Petroyuan Trap scenario assumes a structural disruption—a permanent degradation of Gulf energy infrastructure and a sustained reduction in global supply. In this situation, there is no normalization to bridge to. The stimulus would be needed indefinitely, while the state’s capacity to provide it will likely be needed elsewhere.
The ECB’s finding that inflation persists through 2028, even after the initial growth shock partially unwinds, is very important here. It confirms that the mechanism is not self-correcting. The supply chain damage has a long tail. The pressure on Chinese manufacturers does not dissipate when the initial shock passes. Instead, it compounds over time.
The trap, as I have described it, is designed to exploit precisely this vulnerability. The energy shock is the first blow. The food shock is the second. The Trap postulates that a speculative attack on the offshore yuan exchange rate will be the third. Each reinforces the last and constrains the states capacity to deal with the next.
The Strategic Logic
To achieve a restricted energy flow and structurally higher energy prices, Washington does not need to physically control Hormuz itself. Military pressure on Iran can predictably produce Iranian retaliation against shipping and energy infrastructure. Iran thereby physically restricts the flows upon which America’s competitors disproportionately depend. The incentive structure is asymmetric. Iran pulls the trigger and Asia takes the hit.
This does not in any way suggest Iranian action is orchestrated by Washington. Far from it. But there is substantial evidence that the partial closure of the Strait was a known risk of military confrontation and it was therefore an accepted risk. The ECB report is irrefutable evidence that at least one of the supporting parties in the conflict—the EU—believes that the emergent equilibrium significantly favors the United States. It is also evident that the position the ECB describes is broadly compatible with the strategic direction previously articulated in high-level US policy papers.
Bessent Confirms the Frame
Bessent confirms the Strait is never going back to normal.
This is where the recent remarks by Treasury Secretary Scott Bessent become significant. In an August interview, Bessent said the Strait of Hormuz would become “irrelevant” within two years, with more than 50 to 70 percent of the energy currently passing through it redirected through underground pipelines. The Strait, he said, was “never going back to the way it was.”
Bessent’s framing should be interpreted as a strategic signal. A Strait that is never going back to normal is a Strait that remains permanently contestable. A permanent source of uncertainty for every economy that depends on it. And it remains a point of leverage for the power that can influence how much energy moves through it.
If the objective were to restore the pre-war status quo, the language would be about reopening, securing, and normalizing. Bessent’s language is about permanence, restructuring, and irrelevance. That is the language of a strategic environment that has been deliberately reshaped—or at least, an environment whose reshaping is being welcomed rather than resisted.
The Return of the Plaza Accord
Since the start of the US war in the Persian Gulf, another idea has surfaced in the Western economic debate: a new Plaza Accord, this time for China.
In June, German Chancellor Friedrich Merz called for a new, coordinated currency agreement modelled after the 1985 Plaza Accord to force a revaluation of the Chinese renminbi to address trade imbalances. This was more than a mere slip; it was strategic positioning. Merz’ statement was swiftly followed by an even more explicit call in the Wall Street Journal, arguing that the world’s major economies should pursue a modern Plaza Accord to force the renminbi higher. The Journal argued explicitly for a policy of coordinated pressure, potentially including tariffs, designed to compel Beijing to accept currency appreciation.
The historical parallel is obvious. The original Plaza Accord forced a dramatic adjustment in the international economic position of Japan—the primary Asian economic challenger to the United States at the time. China is acutely aware of that history.
But China in 2026 is not Japan in 1985. It possesses vastly greater strategic autonomy, nuclear weapons, a powerful military, enormous industrial depth, and substantial leverage over Western supply chains. This is why economic leverage over China must be generated indirectly, at the periphery of the Chinese system. Through currency wars, tariffs, technological containment, supply chain restriction, and energy.
The Emerging Architecture
Whether Washington can open the Strait of Hormuz or not is the wrong question. We should ask, what strategic environment has the war actually produced?
The answer is, that the United States now sits in an extraordinary position. Its principal competitor faces structurally higher energy prices and energy insecurity. The Gulf energy economy remains functional enough to avoid catastrophe but impaired enough to raise costs. And the United States retains far greater influence than China over how much energy moves through it.
This does not prove that Washington launched the Iran war to constrain China. It is not a smoking gun. But it does appear to reveal a coherent underlying logic.
Viewed together, these policies—technology controls, tariffs, a Plaza-style deal, a permanently contested Hormuz, structurally higher energy prices—resemble a strategy of economic containment without direct confrontation.
The Right Question
Viewed from this perspective, the Iran war requires a different strategic interpretation. The objective has never been to fully reopen the Strait. The objective was to create a geopolitical situation that can be used to escalate and de-escalate economic leverage over America’s principal economic rival, to fracture BRICS and lock the Global South back into the dollar zone.
Bessent’s remarks fit this framework perfectly. A Strait that is “never going back to the way it was” is not a failure of policy. It is the desired outcome. A permanent source of uncertainty, a permanent point of leverage, and a permanent constraint on the energy security of America’s competitors.
If Iran reduces flows, China suffers disproportionately. If flows become dangerously restricted, Washington can protect shipping and release strategic inventories. If the system begins returning completely to normal, renewed pressure on Iran can recreate uncertainty. The result is not American control in the absolute sense. It is something subtler. The ability to influence the marginal availability of the energy upon which China’s industrial system depends.
A completely closed Hormuz would hurt the gloabal economy and, by extension, America too much. A completely open Hormuz removes the leverage. The strategically advantageous position exists between them. A goldilocks zone. Just open enough to keep the global economy functioning. Just restricted enough to increase the cost of Chinese power, exert financial pressure over Brazil and India and force the Global South to accept the sovereignty sapping conditionality of the financial assistance offered by the World Bank, IMF and ADB. And just controllable enough that the degree of pressure can change without the United States ever having to fight China directly.
In this context, the war against Iran is better understood as one component of the much larger struggle over the future balance of power not just in Asia, but on the broader Eurasian continent and across the Global South.
So the question is not: when will the Strait return to normal?
It is: what if it isn’t supposed to?