Washington’s Middle East gamble may deepen its own decline while reinforcing Beijing’s rise

The conflict now engulfing the Middle East is no longer merely a regional conflagration. It is the most rapidly escalating and volatile front in the broader contest between the incumbent superpower America and its rising challenger, China. On current evidence, Washington’s foolish gambit is playing right into Beijing’s hands.

The Middle East has long been a theatre where global superpowers go to battle out their differences. What is different today is both the speed of the escalation, and the asymmetry of risk. The pre-eminent hegemon, the US, has everything to lose.

The official geopolitical logic behind America’s gung-ho escapade alongside its rogue ally Israel is roughly as follows: Iran is the weakest of the three pillars sustaining Chinese and Russian influence in Eurasia. Topple it and the adversary’s architecture weakens. It is a theory drawn out of a kind of 19th century Great Game logic. It is also, on present trajectories, increasingly flawed.

The dragon has hedged its bets

China’s most immediate vulnerability is energy. Last year it imported roughly half its crude oil and a third of its liquefied natural gas (LNG) from the Middle East. A prolonged blockage of the Strait of Hormuz therefore should leave Beijing exposed. This seems to be the assumption in Washington.

Yet China has spent years preparing for exactly this contingency. Its emergency petroleum reserves are estimated to be 1.3 billion barrels, by far the largest in the world. These dwarf the Strategic Petroleum Reserve of the US, which entered this war far from full and sit at roughly 60% capacity.

Iran has also indicated that vessels linked to “non-hostile” partners – shorthand for China, India and Pakistan – may continue to transit the strait. Nearly half of China’s imported gas arrives via pipeline from Russia and Turkmenistan under long-term contracts, insulated from Gulf price turbulence. Goldman Sachs therefore estimates that only 6% of China’s total energy consumption is directly exposed to such a disruption in the Strait of Hormuz.

More importantly, China has built a deep structural buffer. Electricity accounts for 30% of China’s energy consumption, roughly 50% more than in the US or Europe. Electric Vehicles are ubiquitous. Its rapid build out of solar, wind and nuclear capacity means that roughly 45% of its electricity is from non-fossil sources. This gives it an implicit advantage over other energy importers that are more dependent on fossil fuels. The war, counter-intuitively, could make Chinese manufacturers more competitive, not less.

A supplier of last resort

Energy is only part of the story. China’s position at the centre of global supply chains is likely to be reinforced by this crisis.

It is the world’s second largest exporter of fertiliser, which will become ever more critical if exports from the Middle East dwindle. It controls 80% of global graphite production, which is essential for batteries; 60% of fluorospar, which is used in nuclear fuel and semiconductor manufacturing; and the majority of global magnesium production, which is critical for aircraft and missiles. Raytheon, one of the US’ largest defence contractors, has said that decoupling from Chinese suppliers is simply impossible. The Pentagon is likely to remain dependent on Chinese rare earth inputs for a decade at least. More acutely, US missile manufacturers are estimated to hold only roughly two months of stocks of the rare earth components that its missiles and fighter jets require to run.

The fabled meeting between President Xi Jinping and an increasingly cornered US President Donald Trump, now scheduled for May, will be taking place within this context. China, perhaps for the first time in its history, will be negotiating with its incumbent rival from a position of strength.

The dawn of the ‘petroyuan’?

The financial dimension is equally critical. For decades the oil trade has been conducted overwhelmingly in US dollars. This “petrodollar” system has not only been a critical source of demand for the greenback and source of lower interest rates, but also a point of leverage for the US.

Now, Iran is reportedly negotiating agreements with some countries by which transit fees and energy payments are settled in yuan rather than dollars, facilitated in part by the “shadow fleet” of tankers that already operate outside of Western financial oversight.

If such practices expand, they could accelerate Beijing’s effort to internationalise the renminbi. Will this conflict accelerate a broader shift; a gradual erosion of dollar dominance and the emergence of yuan-denominated energy trade, leading to the beginning of the “petroyuan”? Could this war be yet another nail in the coffin of the dollar’s status as the world’s reserve currency?

A deficit that compounds

All of this is unfolding against a backdrop of mounting fiscal stress in the US.

The federal budget deficit has been running more than 6% since 2020. These are wartime levels of expenditure, even before a single dollar of military expenditure from this war is counted.

Goldman Sachs predicts that deficits will remain between 6.5% and 7% of GDP over the next five years, with debt to GDP on track to be more than 175% by 2045, according to Deutsche Bank. In March 2026, America’s total deficit broke through $39-trillion, less than five months after breaching $38-trillion.

In addition to this fiscal excess, Trump has further proposed a blowout defence budget of $1.5-trillion, the largest in history, and has since requested a further $200-billion for the war in Iran alone. If he decides to undertake a land campaign the costs will skyrocket further. The 2003 invasion of Iraq, which would be smaller than a similar campaign in Iran, ultimately cost between $2-trillion and $3-trillion when long-term obligations were included, according to Bloomberg.

A prolonged confrontation in the Middle East will compound an already precarious fiscal trajectory. Investors should keep a close eye on the US two- and 10-year yields for signs of stress in the world’s most critical debt market.

America’s arc of violent decline

Historian AJP Taylor argued that World War 2 was not an accident but the inevitable aftershock of World War 1, born from the poisonous settlement of Versailles. A similar logic applies today.

That this Middle Eastern front in the broader global struggle was ignited by Hamas’ attack on Israel and the subsequent genocide in Gaza is no coincidence. The state forged in the aftermath of World War 2, in response to the original sin of the West perpetrated by the Nazis, was almost inevitably going to be the fissure in the global system that would crack open into the most rapidly escalating live theatre of the Second Cold War.

The supreme irony of America’s new war alongside Israel is that instead of weakening China’s position it may instead accelerate the very shift in global power it was meant to arrest. Beijing understands that China does not need not win this confrontation outright. They simply need to wait, and allow the declinist American superpower to exhaust itself and its fiscal means through overextension.

The danger for the whole world is that if that arc of violent decline steepens, and a cornered America begins to lash out more directly, the risks of severe miscalculation could rise sharply.

Smart gamblers do not bet on losing hands. I always thought Trump, for all his faults, was a good gambler. Yet in this war he appears determined to do exactly that. DM