If an oil tanker is delayed or prices suddenly rise in the Middle East, gas, grocery, and utility bills can go up for millions of households almost overnight. Inflation quickly becomes more than just a news story—it turns into a real financial problem for families and businesses.

When governments use limited strategies instead of working together on economic policy, it can lead to more inflation and unstable currencies in both developing and developed countries.

Commercial diplomacy—defined as coordinated government action that marshals trade, financial, and supply-chain negotiations to stabilize economic conditions—offers a counterweight to escalation. In practical terms, this diplomacy is carried out through a variety of mechanisms. Policymakers can leverage tools such as central bank swap lines to ease currency pressures, negotiate bilateral and multilateral trade agreements to secure vital goods, use forums like the G20 and World Trade Organization for rapid policy alignment, coordinate supply chain task forces for crisis response, and deploy targeted investment guarantees or export credit facilities to help maintain the flow of essential goods. By using these tangible instruments, governments can quickly respond to market shocks and maintain economic stability.

The energy shock that travels globally

The Middle East plays a key role in the world’s energy supply. When there is trouble along shipping routes like the Strait of Hormuz or the Red Sea, insurance costs go up, shipping takes longer, and oil prices become more unpredictable.

Even the fear of risk can push futures markets higher. For instance, during the 1979 Iranian Revolution, Brent crude prices jumped by more than 200 percent in under a year, mostly because people were worried about supply, not because there were real shortages. Higher oil prices act like a tax on the world economy:

• Transportation costs increase
• Manufacturing input prices rise
• Food production becomes more expensive
• Electricity generation costs surge in energy-importing nations

For countries already dealing with inflation, this adds even more pressure on prices. Central banks may have to keep interest rates high for a longer time to avoid losing ground on lowering inflation, but this can slow down economic growth.

Inflation’s silent partner: Currency devaluation

When there is geopolitical instability, investors turn to ‘safe haven’ currencies like the US dollar. As money moves to safer places, the currencies of emerging markets often lose value.

This situation sets off a cycle that can make things even less stable:

1. Oil prices rise.
2. Energy-importing countries pay more in dollars.
3. Their currencies depreciate.
4. Imported goods become even more expensive.
5. Inflation accelerates domestically.

For countries that owe a lot of money in US dollars, a weaker local currency makes it harder to pay back those debts. This can cause problems quickly. In 2018, for example, when investors moved toward the US dollar, Argentina’s peso dropped fast. The government suddenly had much higher debt payments and had to get a $57 billion emergency loan from the International Monetary Fund, the largest in IMF history. This affected businesses and families as interest rates and prices shot up. It shows how a conflict or market shock in one place can cause a financial crisis in other countries, making the global economy less stable.

Trade routes and supply chains under pressure

The Red Sea is a major route for shipping containers between Asia and Europe. If there are problems there, ships have to go around Africa instead, which takes weeks longer and costs much more.

Global supply chains are still fragile after changes caused by the pandemic and the war in Ukraine. If ships have to go around Africa instead of using the Red Sea, the trip can take up to 10 more days and cost almost $1 million extra per voyage, according to Maersk in 2021. These delays can cause shortages, higher shipping costs, and more inflation from the supply side. 

These risks happen right away. Insurance costs can go up within hours of a warning. Commodity prices change immediately, and financial markets become more volatile. 

Why commercial diplomacy matters now more than ever

Military deterrence may address immediate threats, but economic stabilization requires commercial diplomacy. Sustained engagement among governments, trade blocs, financial institutions, and private-sector actors is needed to prevent economic fragmentation. Governments play a vital role in setting strategic direction, negotiating international agreements, and mobilizing crisis response. Trade blocs are responsible for aligning regulatory standards and facilitating the swift movement of essential goods across borders. Private sector actors—including leading companies and industry associations—contribute by sharing timely market intelligence, coordinating logistics, and ensuring supply chain resilience. Forums like the G20 Trade Ministers’ meetings, the International Energy Agency’s Emergency Sharing System, and the World Trade Organization serve as practical platforms for this coordination. Regular dialogue at such venues enables rapid information sharing, aligns policies, and reassures markets that collective action is not only possible but already underway.

Commercial diplomacy operates on three critical fronts:

1. Securing energy supply agreements

Energy-importing nations should diversify supply contracts and negotiate long-term stability mechanisms. Bilateral and multilateral agreements can reduce price volatility and prevent panic-driven purchasing. For example, after Japan’s 2011 Fukushima disaster, the country rapidly diversified its liquefied natural gas (LNG) suppliers by locking in multiple long-term contracts with producers in Australia, Malaysia, and Qatar. This approach helped shield Japanese buyers from extreme price spikes and prevented costly bidding wars on the spot market, providing a playbook for how energy-importing countries can move quickly to secure reliable supplies and avoid escalation during a crisis.

2. Protecting trade corridors

When countries work together on maritime security and diplomacy, insurance costs go down and trust in shipping routes returns. Keeping shipping steady helps prevent inflation from spreading.

3. Currency and financial cooperation

Central bank swap lines, shared liquidity programs, and regional stabilization funds are proven tools in a crisis. For example, during the 2008 financial crisis, the US Federal Reserve established dollar swap lines with major central banks worldwide. This helped ease dollar shortages, calm markets, and stop currency crises from spreading. Groups like the International Monetary Fund and the World Bank also help by quickly providing emergency funds when needed. However, it is important for major economies to work together. If countries act alone with export bans, protectionism, or currency devaluations, the crisis can get worse. Kers seeking to drive coordination can immediately begin by initiating regular technical consultations, sharing timely market information with their counterparts, and setting up dedicated crisis response task forces with finance and trade ministries from major partner countries. Joining or strengthening participation in existing multilateral platforms such as the IMF’s crisis alert groups, the G20 Financial Stability Board, or regional reserve pooling arrangements can also accelerate joint responses. Swift bilateral outreach—such as establishing a direct communication channel between central banks or proposing a joint statement with affected trading partners—demonstrates both commitment and action, helping reassure markets and prevent panic.

The inflation–diplomacy trade-off

History shows that markets worry more about uncertainty than about conflict itself. If countries keep talking, risk premiums go down. But if tensions rise and economies split apart, people start to expect higher inflation.

Commercial diplomacy lowers uncertainty by:

• Providing transparent communication on supply flows
• Preventing retaliatory trade restrictions
• Coordinating macroeconomic responses
• Signaling long-term commitment to market stability

In today’s connected world, commercial diplomacy is not just a nice idea—it is a key part of keeping the economy running smoothly.4

A strategic choice

The global economy faces a turning point. Policymakers can either let rising tensions lead to more inflation and unstable currencies or they can work together through commercial diplomacy to mitigate these risks.

The message is clear: in a world where supply chains and financial markets are connected, we need both military strength and active economic cooperation to keep things stable.

Inflation might start with oil prices, but it spreads because of what people expect. Diplomacy shapes these expectations just as much as the markets do.

Right now, commercial diplomacy is crucial. It will decide whether economic problems stay under control or turn into a bigger crisis.

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