The US is in a tough spot with Hormuz, but China has recently gotten involved, and its situation might not be much better.
A few days ago, a Chinese netizen calling himself laohu (tiger) posted a video that went viral. It told Iranians they could search for heat traces in the sky using infrared spectrum, thus bypassing stealth technology that made American planes invisible. A few days later, Iran for the first time shot down a US plane over its territory. Although the plane wasn’t stealth, the video remains insidious. Previously, China had remained neutral in the conflict, unlike in Ukraine, Gaza, or Venezuela, where it took a side against the US and lost.
Chinese ingenuity helped Serbia shoot down a US plane in March 1999, and now it may seem it assists Iran in doing the same. The 1999 incident nearly led the US to war with China, and today? Serbia wasn’t strategic for America, but Iran and the Strait of Hormuz, the gateway to global oil, are.
It could be very dangerous. But it’s also tricky, because this is just a Chinese civilian providing an idea, it’s not state military assistance.
In any case, it doesn’t bode well for the upcoming summit between US President Donald Trump and his Chinese counterpart, Xi Jinping.
It happens against a very delicate background. Iran should never have closed the Strait. By doing so, Iran revealed its desperation: it has no other tools left to fight. Closing it gives Iran control over global energy prices and the essential helium supply, which is crucial for chip manufacturing.
Currently, there are four options in this situation: 1. Iran surrenders and relinquishes control of Hormuz; 2. Hormuz is captured; 3. The US suffers a devastating hit; 4. Iran steps back peacefully as a compromise is reached.
Long-term, the Iranian chokehold on the Strait is shifting the regional political landscape. The US, Israel, and some Arab nations are planning a pipeline to transport Gulf oil to the Mediterranean through Israel. However, the project could take at least a couple of years to complete; in the meantime, this poses significant challenges for Europe and Asia, which are net oil importers.
The US is self-sufficient in oil and gas, but price spikes of oil or helium could crash the market. So could a failed attempt to seize Hormuz. America might find itself between another proverbial strait, that between Scylla and Charybdis. Trump’s career could end up shipwrecked, one way or another, on the sandy shores of the Gulf, and the US would need to wrap its head around recovering from this mess.
The US could likely seize Hormuz, but can it do so safely with limited losses that might cause US emotions to spiral out of control? Without detailed knowledge of the plans the Pentagon is examining, it’s hard to say, but from the outside, it may seem like a gamble.
Russia might have gained some relief, but it could be temporary. The war has focused Gulf attention on Ukrainian technology. These countries are now eager to purchase affordable, effective Ukrainian skills and thus to fund and support Kyiv’s war efforts. The fight against Russia may have shifted the balance.
China’s angle
China is in a different position. If it had stayed out of the war, it could have reaped many benefits without irking the US. It is friendly toward Iran to secure its oil supply at a relatively low cost. Still, the main point was not to antagonize the US, its biggest customer, which accounted, directly and indirectly, for more trade surplus than any other country. Good traders know that the customer is always right, and if you push your clients too hard, you risk losing them.
A trade surplus is crucial for China because its domestic consumption market is still underdeveloped. Beijing is aware of this and aims to increase consumption. However, it’s unclear how they plan to do this or what resources they will use.
Chinese workers need higher salaries, but it’s unclear where the funding will come from or how it will affect the final sale price. If workers receive higher wages, the prices of goods will rise, and as a result, Chinese products could become less competitive, hitting its surplus.
It wouldn’t be a problem if the Chinese domestic market increases, but will it?
If productivity rises, what happens to those pushed out of industry? They won’t earn much and won’t spend much either.
One solution, simplistically, is to increase taxes and use the revenue to raise salaries. However, raising taxes can be politically sensitive. Alternatively, the government could cover a larger deficit to increase disposable income directly or indirectly. But then, how do you fund the deficit without higher taxes? Ultimately, the core issue in China really comes down to taxation.
There’s no straight way out, but in a nutshell: a welfare state, higher taxes, and thus democracy. Short of that, there’s a path to North Koreanization, i.e., growing closure, self-reliance, and isolation from the rest of the global system.[1]
The problem has persisted since the early 2000s, and since then, many Chinese have found ways around it, often using their ingenuity to cut a few corners. The main corners were: expanding the trade surplus (which causes global imbalances) and the internal financing (which bloats state deficits). The state deficit remains manageable as long as the RMB isn’t fully convertible and there’s a large spread between deposit and loan interest rates. However, this rots the entire financial system.
But if a delivery guy in Beijing gets 3 RMB for a run, he has no money to spend, and his wage destroys the earnings of shop and restaurant workers. Moreover, the delivery person has no sense of safety beyond his next run. When 40% of the urban workforce is part of the low-paid gig economy, there isn’t much consumption one can prime. This was evident over two decades ago, as my 2007 essay shows, and yet we are at a 3 RMB delivery fee. It echoes what Lao She beautifully described a century ago in his short story “Camel Xiang.” Back then, it was the life of a rickshaw puller, initially tough and proud of his strength, but eventually drained of energy and miserable.
Saddled with these problems, China should be cautious when navigating the Hormuz dire straits. But will it?
[1] See China: in the Name of Law. A New Global Order, China’s Inevitables: Death, taxes—and democracy
