Oil (CL1:COM) is back at $80 per barrel as the fight for control of the Strait of Hormuz unnerves investors. Iran has continued to target commercial vessels in the critical waterway, prompting the U.S. to conduct waves of airstrikes against Iranian installations along the coast. Things have spiraled even further since a short-lived memorandum of understanding was inked in June, with the Islamic Republic's IRGC targeting U.S. air bases and assets in Qatar, Kuwait, Bahrain, Oman and Jordan.
State of Hormuz: Before the war, a fifth of all traded crude and natural gas passed through the key chokepoint. Iran has since vowed to impose "fees" for traversing its "approved routes," while threatening any ship that veers off course or doesn't pay the toll. President Trump fired back on Monday, saying he would "reinstate" a blockade and act as the "Guardian of the Hormuz Strait," while charging a 20% fee on all transiting cargo to cover security costs.
Shortly following Trump's declaration, the International Maritime Organization, the U.N. body overseeing global shipping safety, issued a statement clarifying that "there is no legal basis through which to introduce mandatory tolls simply to transit through a strait." While the U.S. has never formally ratified the United Nations Convention on the Law of the Sea (UNCLOS), it has historically recognized its provisions as "customary international law" that guarantees freedom of navigation. Interestingly, by attempting to levy a toll, the U.S. is adopting the same territorial-control arguments it has spent decades opposing across the globe.
Art of the Deal? Trump typically takes a far position that is a "little outrageous, or bold, or controversial" to bring "leverage" to the negotiating table. The statements here also reflect the transactional foreign policy and pay-to-play approach he has taken with allies, like NATO spending and global trade. The latest maneuver is aimed at squeezing Iran economically while forcing allies in the Persian Gulf and elsewhere to pay for U.S. military protection.
Thought bubble: This type of hard-power approach contrasts with decades of foreign policy. Historically, the U.S. provided its navy and nuclear umbrella to allies in exchange for strategic access to global bases and the ability to quickly sanction its adversaries around the world. This dependence on American security helped build immense soft power and trust, and gave Washington the keys to the global economy. Should the U.S. begin charging allies in the Strait of Hormuz, it could prompt those allies to look elsewhere by expanding their own militaries, investing in rival infrastructure, or cutting outside deals to protect their ships more cheaply. If military control of a waterway equals the right to taxation, what will also stop China in the South China Sea or Russia in the Arctic? (6 comments)
