The debate over Iran is still being framed too narrowly. But rather, it should be interpreted in a wider geostrategic pivot. The intervention in Iran creates a difficult wedge issue that may weaken China’s resolve to support Russia and it is a direct shock to Russian capabilities in Ukraine. This is why at a strategic level, Europe is more than ambivalent and possibly explains why Mark Rutte is so sharply aiming to rally NATO along to ensure they aid in force projection in the region. In the broadest sense this is just a continuity of the pivot to Asia, a theme I highlighted before.
But there are broader implications, which one only sees with a sufficient high level contrast. The downstream implications of the Iran escalation may effectively lead to a (much broader) sharing of the burdens of Chinese excess capacity. Right now, Europe and the US in particular are at risk from said excess capacity. Tariffs and market-access restrictions, end to de-mininis shipments, along with higher transportation costs, make Europe and the US harder destinations for Chinese overproduction. The problem of Chinese excess capacity may thus be regionalized in Asia and target Africa. In production-network terms, this is part of a broader reorganisation of where adjustment pressure lands across the value chain, which is a most important lens. This, however, also does require that the shock is not of long duration as the Ukraine conflict. And the interest constellation may be such that the shock should provide some scars, but not too deep.
Trade barriers on their own do not make excess capacity disappear, rather they redirect it. When geopolitical risk raises shipping, insurance, and fuel costs increase, that redirection becomes even more uneven, especially if said shock has far more uneven effects on consumers. Europe sits in an unusual position: Chinese overcapacity is most threatening there in EVs and BYD and others have set their sights on this attractive consumer market, owing to the political uncertainty induced sluggish transformation of the automotive sector.
The European response has not been a clean tariff wall as the US has implemented, let alone a purchase subsidy that excludes Chinese makers (as the British implemented), but rather, a minimum-price regime that effectively offers Beijing a carrot (and protects interest of European car manufacturers producing EVs for export in China). This may well be the best response for Europe to help shape the (re) direction of Chinese excess capacity in the automotive space in a direction where the EVs can yield the largest economic development benefits, while also ensuring, demography adjusted, the biggest mitigation of expanded CO2 emissions from continued combustion engine sales. Trade restrictions rarely eliminate the underlying model, they change the route through which it operates.
The minimum prices will likely settle at a level allowing Chinese firms to earn higher margins in Europe, compared to their home markets or lower-income overseas markets. This slows the rate of EV adoption and indirectly protects European producers. That arrangement buys time for European carmakers and may be more consistent with the European demographic realities. It also highlights a simple truth: on EVs, Europe and China have found a temporary modus vivendi, China inside is working reasonably well and any excess profits earned in Europe may be partially re-invested there. This would amount to technology transfer that, in an echo of history, may reverse the path of technology transfer in the 1990s.
So where would this redirectec China shock fall?
The Iran oil price shock is being felt across South and Southeast Asia, where it depresses real income and hence, may create strong buy incentives for Chinese EVs. This is all the more strongly pronounced if China continues to receive Iranian crude, unlike their neighbours, on whom the US may lean heavily. That is: the oil price shock is more severe for the rest of Asia than for China itself with China already quite quick in decarbonizing.
Countries such as Thailand, Vietnam, Indonesia, India, Pakistan, and Bangladesh are more directly exposed to Middle Eastern energy risk. That creates a powerful buy signal for cheap Chinese EV producers to redirect capacity into these markets at relatively lower prices, possibly involving RMB settlement, while benefiting from higher margins in Europe. In practice, the oil shock does not only raise costs. It also accelerates capital replacement away from the combustion engine.
This is where the politics become difficult for Beijing. The same dynamic that helps China place its export surplus can also turn Asia into the next arena of resistance against Chinese excess capacity. This may be the essence of geostrategic goal to rally countries across South Asia against Chinese dominance and Bejing will be all too aware of this gambit. Expect a lot fewer Chinese tourists in Europe, and many more all over South Asia.
What appears, in the short run, as a welcome supply of cheaper EVs may quickly move to become a narrative of a Chinese threat to industrialisation, local assembly, and trade balances. The United States understands this logic. Socialising the burden of Chinese overcapacity is not just an economic move; it is also a coalition-building strategy designed to align Asian economies against dependence on China’s production system.
And, there is a further much more substantial risk: Africa must not become the release valve for any oil-price shock accelerated capital replacement of combustion engine cars. One major risk is carbon leakage through capital replacement in reverse: rather than becoming a destination for new EVs, Africa becomes the dumping ground for used internal-combustion vehicles. That would be a strategic failure. Africa should not be asked to absorb the world’s obsolete drivetrain stock any more than it was asked to build out copper wires before mobile telephony. It should aim to skip the carbon age, not inherit it second-hand.
Trade defence measures, along with trade flow monitoring are vital to reduce this risk. The EU’s market access negotiation with China, definining minimum prices, model-by-model could be an important vector to ensure this indirect risk is accounted for. If the Europeans think that far. The chain of reasoning that may have produced the current policy approach may not have invoked that thought. The “dreaded European working group” may well be of some good use.
But how best to reduce this carbon leakage risk overall? Rather than exported old ICE vehicles, it may make sense to develop recycling, retrofitting, and spare parts retrieval capabilities. The likely slower rate of EV adoption in Europe may create a demand for spare parts going forward. At the same time, another consequence of the Iran conflict means that elevated steel and other material prices could, in principle, strengthen the business case for car dismantling, materials recovery, and circular secondary markets. A genuine recycling industry could also create a pivot engine for mechanics, auto shops and other suppliers now tied to the combustion-enegine economy. But this transition will not happen at scale if fiscal systems continue to privilege virgin extraction over reuse.
That is why VAT reform matters. A circular industry will struggle to emerge if secondary materials are taxed more heavily, treated as higher-risk inventories, or made harder to trade than virgin inputs. Tax design should lower the burden on reuse, repair, refurbishment, and recycled content; preserve full input credits for recyclers; and remove the relative price advantage of newly extracted materials. What appears to be a narrow tax question is, in fact, an industrial strategy question.
There is a final signal to watch in Iran itself which further reinforces the case that is being made in this analysis. If escalation continues, targeting patterns will matter. Targeting a fuel oil based power plant or a diesel engine factory may not be an incidental target if the longer-run equilibrium is to prepare a market ripe for China to enter. After any conflict resolution, Iran will seek to maximize its foreign exchange earnings and for that, quick decarbonization of the energy system and parts of the transporation system seems straightforward. China stands ready as it does in Iraq. All across the Middle East, renewable energy producers have less of a storage problem, since reverse osmosis water desalination as process can be used to store excess energy in the form of drinking water and the process is highly compatible with helping with grid balancing. And costs are tumbling.
With Iranian EV adoption and a necessary solar build-out aimed at freeing more crude for export rather than domestic burning in power generation. Put differently, the conflict may be shaping not only the battlefield, but also the post-conflict energy system that will be shaped by a contest for market share in a declining crude oil market. This is the real political economy dimension.
That is: the real challenge, then, is not simply how to contain an oil shock. It is whether governments can stop this shock from reorganising global decarbonisation along the worst possible lines: Chinese overcapacity redirected into politically fragile Asian markets, Europe’s old cars exported into Africa, and the green transition reproduced as a hierarchy of dumping grounds. That is the institutional task now in front of us.