Geo-economics and the new logic of MAD

Iran’s pursuit of a nuclear deterrent has done everything except deter aggression. From the covert sabotage of Iran’s nuclear programme to last year’s 12-Day War and the ongoing conflict, Iran remains a key American and Israeli strategic target. However, during Gulf War III, the regime has realised that it has long possessed a ‘nuclear’ strategic asset: a geo-economic weapon that recalls the calculus of mutually assured destruction (MAD) that defined the Cold War.

The Strait of Hormuz carries roughly 20 per cent of global oil and gas supply. Closing it, even for just a few weeks, is sufficient to send a stagflationary shockwave through the world economy, distort supply chains and prices for years, and crater politicians’ approval ratings. Tehran did not even have to mine the Strait. The mere threat that it would attack transiting ships attempting to cross it was sufficient for insurance companies to withdraw their coverage and thus bring trade through the Strait to a sudden standstill. True, the United States and Israel have demonstrated military strategic mastery, executing what is possibly the most complex and precise campaign in history. Yet, what America’s multi-billion-dollar armada could not outflank was the panic of an insurance underwriter. With midterms on the horizon and affordability being a key political battleground for the Republican Party, the Strait of Hormuz is a potent weapon.

If, like me, you are subscribed to far too many political event newsletters, there is no doubt that the slowly receding deluge of ‘Lessons from Ukraine’ talks will soon be replaced by book launches, panels and lectures, dissecting the Third Gulf War as a turning point in Middle Eastern, US, or military technological history. However, for all its apparent novelty, from a geostrategic perspective, Gulf War III represents continuity in disguise.

The Trump administration did not fully comprehend that, with the Strait of Hormuz, Iran had second-strike capabilities outside the military domain that cannot simply be outgunned. Assuming that military supremacy guarantees strategic victory in a geo-economic conflict is like bringing a stealth bomber to a bank run. Military might is loud and terrifying, but ultimately useless in geo-economic terms. Washington’s belated decision to join the IRGC’s geo-economic game – weaponising the Strait to starve Iran’s economy 45 days into the conflict – came far too late to guarantee strategic victory. Which side caves first remains to be seen, although time is now clearly in Tehran’s favour. The lesson from what world leaders are beginning to call a strategic ‘humiliation’ for Trump is clear: the US can crater Iran militarily, but Iran can inflict potentially terminal political and economic pain in return.

From the perspective of rational risk assessment, this follows the deeply familiar calculus of mutually assured destruction (MAD). In short, the logic of MAD dictates that adversarial powers refrain from escalating tensions when the product of two variables – the potential harm of an escalatory step, multiplied by the probability of that escalation actually happening – is severe enough to make the initial risk unpalatable.

During the Cold War, the nuclear race between the United States and the Soviet Union created what the scholar John Lewis Gaddis called ‘the long peace’ of the 20th century. Knowing that the other power possessed nuclear second-strike capabilities powerful enough to guarantee an apocalyptic retaliation, Washington and Moscow refrained from confrontation. In the language of MAD, despite a nuclear attack or an accidental nuclear strike being exceedingly unlikely, the apocalyptic harm potential allowed the Cold War to remain cold.

As the United States and Iran now find themselves in a strait-blocking contest, the foundations of a new equilibrium are being laid. Only this time, the symmetry of the nuclear threat is replaced by vastly asymmetrical threat profiles, in which it is impossible to separate military and economic domains. The economic pain resulting from blocking the Strait of Hormuz provokes nowhere near as much harm as nuclear escalation. However, compared to nuclear strikes, blocking the Strait comes at a low immediate cost and is easily reversible. This lowers the threshold for escalation and thus hikes the probability of escalation. Mutual deterrence, it turns out, does not require existential harm; a sufficiently probable disruption that it is politically unbearable is enough to do the damage.

Consider the maths of asymmetric deterrence over a single four-year presidential term. For the sake of argument, assume a 0.1 per cent chance of a nuclear strike in any given year, but a 10 per cent chance of Iran imposing a month-long blockade of the Strait of Hormuz. Presume also that, for political decision-makers, the harm of a nuclear strike is 100 times greater than the combined political and economic cost of a blockade. In such a scenario, the expected harm caused by escalation, whether via a nuclear strike or a blockade, is equal.

Gulf War III is not the first time the West has failed to grasp the asymmetric logic of the new MAD. Last autumn, China skilfully outmanoeuvred Trump’s tariff tornado by threatening to withhold its supply of critical rare earth elements, which are essential for strategically useful products – from arms and fighter jets to semiconductors and medical equipment. The current détente between Washington and Beijing, feeble as it may be, rests on the tacit acknowledgement that China’s rare earth move has established an equilibrium of geo-economic mutually assured destruction in the Sino-American trade war.

Meanwhile, the European Union still mistakes economic size for economic leverage. Despite fielding the world’s second-biggest economy in nominal GDP terms, the EU’s twin dependencies – on American digital tech and security guarantees, and Chinese raw materials and intermediate inputs – have left it relegated to a reactive, second-tier player in the complex world of ‘geo-techno-economics.’ In the calculus of MAD, European deterrence is practically non-existent. Brussels remains apprehensive about engaging in economic warfare, aggressively pursuing comparative advantages, and ultimately weaponising the resulting leverage. Its ‘probability of escalation’ variable is effectively zero. And, in deterrence mathematics, any harm potential multiplied by zero is zero.

Far from a dying relic of military history, the logic of MAD therefore remains central to 21st-century statecraft. And, indeed, states across the world are waking up to the strategic necessity of building credible geo-economic ‘second-strike capabilities’ and defence shields against chokepoint weaponisation. Protectionist industrial policies in the US and the EU, Washington’s drive to diversify and domesticate its critical raw material supply chain, and Brussels’ digital sovereignty agenda are the 21st-century equivalents of building nuclear bunkers.

This fusion of geo-economics and traditional military-centred MAD calculi makes a ‘long peace’ in Cold War II conceivable. If the Cuban Missile Crisis anchored MAD in Cold War I, the multitude of geo-economic embarrassments of the mid-2020s could provide the foundations of the long peace of Cold War II.

Beware, however, that this MAD should not be mistaken for tranquillity. Just like the notion of the ‘long peace’ of Cold War I brushes over the bloody proxy wars in Korea and Vietnam, a world of geoeconomic MAD is only peaceful on the surface. As Iran’s ability to counter US-Israeli military dominance elucidates, the barriers to entry are infinitely lower in geo-economics than they are in the military domain. Rapid and sometimes unexpected advances in emerging technologies, such as AI, add to that volatility.

A web of mutually destructive geoeconomic chokepoints reinforces the power of brinkmanship and supply-chain hostage taking, leading to an environment of constant, low-threshold warfare – a reality in which the global economy is no longer just another battlefield, but itself becomes an instrument of deterrence.