Geopolitical and trade risks both flared this week. The ceasefire between the US and Iran has collapsed, and fighting is disrupting key shipping routes just as Washington unveiled a new tariff plan aimed at reshoring generic drug manufacturing. The rising tensions add to uncertainty about the global economy and how it might impact Canada’s economy. As announced on Tuesday, Canada is facing the potential of more tariffs from the US.

• Fighting in the Middle East intensified yesterday, as the US carried out its 11th consecutive night of strikes on Iran, targeting military and drone sites near the Strait of Hormuz. Iran struck back at US bases in Jordan and Bahrain.
• Yemen’s Houthi rebels declared a blockade of the Bab el-Mandeb strait, a key Red Sea shipping route, adding to disruption already seen in the Strait of Hormuz. Oil prices moved higher yesterday after Iran struck a tanker there.
• On the trade front, US President Donald Trump announced a phased tariff on generic prescription drugs. There will be a 0% tariff starting August 1, 2026, rising to 100% in two years and 200% the year after.
• The goal is to push generic drug makers to build manufacturing plants in the US. India, which supplies roughly half of the US’s generic drugs, has a lot at stake if the tariffs come into force.

The two-year runway on generic drug tariffs gives markets and manufacturers time to adjust, so its near-term market impact could be limited. The Middle East conflict is the more immediate concern as rising oil prices and shipping disruptions through the Strait of Hormuz and the Red Sea could push up oil costs, complicating the inflation picture central banks are watching. The Bank of Canada is carefully monitoring developments in the Middle East to gauge its impact on Canadian inflation and economic activity.

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