In retaliation for the US and Israeli missile attacks, Iran has launched what amounts to an all-out economic war. If the conflict continues for even another week, its impacts will begin to be felt around the world as the third price increase since the pandemic sweeps global markets.
For Britain, a new twist in living standards comes just as political instability in the country increases, with the Labor and Conservative parties facing existential challenges to their left and right.
Keir Starmer’s half-hearted response to the war reflects a deeper strategic problem for the UK: an economy built over decades for a globalized world cannot fit into a world where globalization is unraveling.
The creation of a closely intertwined economy that spans the entire globe has also created points of enormous stress and strain, where the flows of manufactured goods, people and raw materials that sustain it must pass through the narrow spaces of our globe.
These include the 40-mile-wide Strait of Malacca, a channel through which 80% of China’s imported oil flows pass; the Panama Canal, only 91 meters at its narrowest point; the Bab el-Mandeb Strait, between Yemen and Eritrea, through which 40% of trade between Asia and Europe passes; and the Strait of Hormuz, a route through which a fifth of the world’s oil passes.
Accidental, natural or intentional, the effect of a blockage on any of these channels is the same. When, in 2024, the Panama Canal was restricted by drought and the Houthis blocked Bab el-Mandeb, the combined effect was to contribute 0.6 percentage points, or about a fifth of global inflation during the year, as shipping companies diverted from both routes. The climate crisis has become a force multiplier for asymmetric warfare: extreme weather, such as the multi-year drought in Central America, amplifies the disruptive potential of hotspot closures elsewhere.
Today, the Bab el-Mandeb and Hormuz straits, narrow openings on either side of the Arabian Peninsula, are under an effective blockade. But now it is the other great global system of the world economy – its financial network – that multiplies the purely military threat. The decision by major insurers to cancel war risk coverage in the entire Persian Gulf effectively closes both straits to shipping. Washington, struggling for a response, has pledged to provide its own insurance as well as naval escorts, but both could take weeks to arrange.
Those shocks spread around the world, but few developed countries are as exposed to choke points and raw material pressures as Britain. In a brilliant essay, Helen Thompson, a political economist, details how the harrowing turn to a globalized world, which encompassed the unleashing of the City of London on the one hand and the deindustrialization of northern England, Scotland and Wales on the other, left the United Kingdom uniquely vulnerable to the kind of pressures that Iran so ruthlessly exploits today.
Britain buys far more from the rest of the world than it sells to it, meaning, in practice, that it depends, collectively, on the rest of the world to maintain what passes for the standard of living in the UK.
This external dependency is divided into two parts. The first is less serious and, especially since the 2008 financial crisis, has tended to attract more attention. Because Britain has so little to sell to other countries but wants to buy from them, it ends up effectively borrowing from everyone and selling assets to try to make up the difference.
As a result, the United Kingdom depends on what Mark Carney, former governor of the Bank of England turned Canadian prime minister, called the “kindness of strangers.” In other words, Britain can continue to endure this imbalance as long as the rest of the world is willing to finance it.
The result, over time, is that the United Kingdom has accumulated extraordinarily large debts, concentrated in its financial institutions. According to Bank of England figures, Britain owes around 550% of UK GDP to the rest of the world, far higher than any other G7 country. If the kindness of those strangers ever wears thin, the UK could face some combination of rapid capital outflows, a collapse in the value of the pound and rising interest rates.
In principle, this dependency is solvable because it does not depend on real physical things, but on agreements on pieces of paper and numbers in computer systems. Supporters of modern monetary theory take this truth and use it to talk about the British government’s ability to print money or ignore its debt. They argue that monetary restrictions are ultimately not a real restriction on economic activity and, at least in principle, it is possible to imagine a world in which the UK agrees to renegotiate its various debts with everyone else and thus reduce this overwhelming external exposure.
Unfortunately, this frighteningly complex problem is the easy part of Britain’s external dependence. The hard part, which Thompson focuses on, is something approaching an intractable issue. The United Kingdom not only depends on financing from the rest of the world; fundamentally depends on material resources from other countries to keep people fed, warm and with the lights on.
This became dramatically evident just a few years ago, when the Russian invasion of Ukraine caused a catastrophic rise in Eurasian gas prices. Britain imports around 50% of the natural gas it uses, for electricity and heating, and this is the “particular vulnerability” that Thompson highlights. It means that the war on the other side of Europe turned, in the space of a few months, into a disastrous decline in living standards for most people as gas prices soared.
Britain directly imports around 40% of the food it consumes, a percentage that is constantly increasing, leaving it exposed to disruptions in food markets around the world, whether from extreme weather conditions that disrupt harvests or, as today, from geopolitical shocks.
Worse still, since the UK has to import virtually all the artificial fertilizers its intensive agriculture demands, as well as the energy needed to power tractors and heat greenhouses, the true dependence of food consumption on imports in Britain is much greater. Swati Dhingra, the Bank of England’s rate-setter, estimated the figure was closer to 80%. Defra’s national security report, finally published in January, emphasized the serious vulnerability of British food systems to climate collapse and biodiversity loss.
Today we find ourselves in the early stages of a Ukraine-style upheaval. European spot prices for natural gas have increased by 40% in recent days; In the UK, where the market is inevitably tighter, the price rise is much greater, with spot prices almost doubling since the weekend.
For now, households are somewhat protected, thanks to the haphazard energy price cap mechanism, introduced in 2019. But the next step in that cap is due in July, and Ofgem, which mechanically processes the data and has a duty to protect privatized profits, is likely to announce a dramatic jump in domestic energy prices.
Meanwhile, around 15% of global grain trade passes through the Bab el-Mandeb Strait, and we can expect prices for hydrocarbon-intensive fertilizers to rise in tandem with fossil fuels. Compounding the risks of crop failures seen in the Mediterranean, food prices in the UK could soon start to rise.
But these prices don’t refer to pieces of paper or numbers on a computer screen. They represent a real balance between material resources and consumption, and that makes them incredibly difficult to change. Britain could, over time, seek to reduce its dependence on imported oil and gas, and this is a very strong argument for pushing for a Chinese-style transition to renewable energy, something highlighted by Ed Miliband, the energy secretary.
The UK could also support a transition of its food system away from its reliance on imports, for example by reducing reliance on artificial fertilisers, making greater use of new farming techniques (from drones to vertical farming) and encouraging greater domestic and allotment use.
Perversely, climate breakdown, disruptive as it is, may be easing some parts of this shift in Britain, for a while. The first rice was grown in Cambridgeshire, for example; The first pressing of Essex olives took place last summer; Populations of at least some sea creatures, such as native oysters, are booming. As the balance of economic activity shifts northwards, including the opening up to trade of the Arctic Sea Routes, deindustrialised towns and cities in the north of the UK could experience new opportunities for life.
But all this takes time. And it will require large investments, which are much more difficult to finance today than before thanks to rising inflation and rising borrowing costs. The “big push” this needs to get started needs to be addressed with downward redistribution: first in tax terms, through wealth taxes and a broader overhaul of the system, chasing down speculation and rent-seeking, and second, by changing market prices.
The latter will require breaking the outdated taboo on price caps and regulations, and any rise in energy prices today would need to be met with controls that protect households while respecting climate ambitions, taxing energy and defense super profits. If the situation worsens and the price of basic foodstuffs rises again, the demands for the government to intervene will also be stronger and more determined.
This is the secret that links rural East Anglia to the city of Hackney: a visible environmental crisis in the countryside is linked to a silent food price crisis in the cities, and both are exposed to geopolitical shocks. The politics that can unite both sides of this equation is the politics of the future.
