Trump's Strait of Hormuz Plan Explained: Can the US charge ships and what it means for India

US President Donald Trump on Monday said America will impose a 20% charge on all cargo shipped through the Strait of Hormuz, a route through which nearly 20% of the world's oil supply passes and it being a vital link for India's enormous crude imports.

Iran has dismissed Trump's proposal, saying the US has no authority over the Strait of Hormuz. Foreign Minister Abbas Araghchi said Iran, and not US, is the true 'guardian' of Hormuz.

"POTUS is absolutely right. Whoever provides secure and safe passage of commercial vessels through the Strait of Hormuz should be compensated for this service." He then added, "Iran has always been the GUARDIAN of the Strait and will remain so FOREVER. 20% is of course too much. We will be fair," Abbas Araghchi wrote on X.


Also Read: Trump says US will be 'guardian' of Strait of Hormuz, impose 20% cargo levy

The exchange came as tensions between Washington and Tehran recently escalated sharply despite ceasefire, which however is seen as fragile. The US announced it was reinstating a blockade on Iranian shipping after fresh missile and drone attacks between the two sides. Iran had earlier declared the Strait of Hormuz closed until stability returned, while the US said it would keep the waterway open and act as its "guardian". The renewed confrontation has pushed up oil prices and raised fresh concerns over global energy supplies and shipping through one of the world's busiest trade routes.

Any disruption or higher cost of shipping through the Strait of Hormuz has global implications because it is one of the world's busiest energy corridors. For India, which imports more than 85% of its crude oil requirements and relies heavily on supplies from Gulf producers, higher shipping costs or trade disruptions could raise oil prices, increase import bills and add pressure on inflation.

Can the US legally control the Strait of Hormuz?

The United Nations' maritime agency said on Monday it does not support imposing charges on ships passing through the Strait of Hormuz, following Trump's statement to levy a protection fee.

The UN's maritime agency, the International Maritime Organisation, had earlier said that no one has the right legally to block shipping in straits that are used for international transit.

According to a BBC report in April, Secretary-General Arsenio Dominguez had said, "I do understand there is a conflict going on there, but there is still no legal basis in international law to take any actions to block any strait used for international navigation."

Also Read: India condemns Hormuz attacks, summons Iranian envoy after sailor's death

Article 37 of United Nations Convention on the Law of the Sea gives all ships and aircraft the right to pass through these straits, and that passage must not be blocked. Under the law, countries bordering a strait are not allowed to block the passage of ships or aircraft. They are also expected to inform users of any known risks to navigation or overflight. Transit through the strait cannot be suspended.

The UN's maritime agency said on Monday that it does not support charging ships to use international waterways. It added that it would comment further once more details emerge on US President Donald Trump's plan to reinstate a naval blockade on Iran and impose a 20% charge on cargo moving through the Strait of Hormuz.

"We have always been consistent on our stance on fees – IMO stands firmly against charging ‌fees ⁠for passage through straits used for international navigation. There is no legal basis through which to introduce mandatory tolls simply to transit through a strait," Reuters cited a spokesperson with the U.N.'s International Maritime Organization said.

At the end of its 137th session recently, the International Maritime Organization's Council reaffirmed that ships must continue to enjoy navigational rights under international law. In a resolution, it said the right of transit through straits used for international shipping must not be blocked, restricted or suspended.

"The Council reaffirmed that passage through the Strait should remain free of any tolls and charges, in accordance with international law, including the IMO Convention," according to its statement.

Also Read: Oil traders call Trump's Hormuz bluff at their peril

Why is the Strait of Hormuz so important?

The Strait of Hormuz is considered the world’s most strategically important oil transit bottleneck, according to the US Energy Information Administration (EIA). Such chokepoints are narrow maritime corridors along key global shipping lanes through which large volumes of energy supplies move every day.

Around a fifth of global oil and liquefied natural gas (LNG) exports pass through the narrow waterway between Iran and Oman, linking the Persian Gulf with the Arabian Sea.

Because several major oil producers, including Saudi Arabia, Iraq and the UAE, rely on this route, any disruption can have global consequences. Renewed tensions between the US and Iran have once again put the strait in focus, raising concerns over shipping safety. A prolonged disruption could push up oil prices, add to inflationary pressures and hit energy-importing economies, particularly in Asia and India.

Disruptions in Hormuz, even temporary, can delay cargoes, drive up freight and insurance costs, and trigger spikes in international oil prices. While tankers can sometimes reroute, alternative passages typically involve longer sailing times and higher expenses. In certain cases, there are no viable substitutes.

How can Trump's 20% Hormuz toll proposal affect India?

To begin with the obvious, a charge on cargo moving through the Strait of Hormuz would make shipping more expensive, whether the cargo is crude oil, liquefied natural gas or everyday goods. Businesses are unlikely to absorb the extra cost entirely, meaning at least part of it could eventually be reflected in the prices paid by buyers.

For India, the stakes are higher because the country depends heavily on energy imports from the Gulf. A large share of those shipments travels through the Strait of Hormuz. If transporting cargo through the route becomes more expensive, India's import bill could rise, especially if higher freight charges are accompanied by increased insurance costs or firmer oil prices.

The impact would extend beyond petrol and diesel. Industries that rely on imported crude, gas, chemicals and fertilisers could face higher input costs, while consumers may feel the effects if businesses pass on some of the increase. The overall impact, however, would depend on whether the proposed charge is implemented, how long it remains in place and whether shipping companies absorb part of the cost.

India's June retail inflation quickened to 4.38%, breaching the RBI's medium-term 4% inflation targe for the first time in 17 months. The June inflation print cautions policymakers of an uncertain outlook amid the renewed tensions around Hormuz that can lift oil prices again while El Nino threats too remain an overhang.

“Oil prices have started to increase once again,” ICICI Bank's Sameer Narang and Jyoti Sharma wrote in a note. “This has added an element of uncertainty to inflation as well as growth.”

Oil prices had surged to multi-year high this year amid Iran conflict and had dropped to $75 a barrel recently. However, the renewed tensions have pushed oil prices up again and Brent crude futures surged to a one-month high of near $85 per barrel.

Another spike in global crude prices will add pressure on India's oil marketing companies. By May this year, India had sharply raised retail fuel prices in tranches.

Prolonged high oil prices would stretch public finances and potentially alter its fiscal deficit trajectory. Infrastructure spending plans may also need reassessment if fuel subsidies expand.

West Asia is also the main source of India's LNG imports. About four-fifths of the country's purchases come from the region, with nearly 60% travelling through the Strait of Hormuz, making any disruption to the route a potential risk for energy supplies.

A spike in oil prices, rising geopolitical uncertainty and risk-off sentiment globally can also further weaken the rupee, which breached 96 per USD today once again.

What could happen to oil prices and global trade?

A 20% charge on cargo passing through the Strait of Hormuz could ripple through global trade well beyond the Gulf. Shipping companies would have to decide whether to absorb the extra cost or pass it on to customers. If they choose the latter, businesses importing everything from crude oil and natural gas to consumer goods could end up paying more, with those costs eventually reaching consumers.

While some may argue oil this time have shown subdued rising trend since renewal of US-Iran tensions, the 20% Iran toll plan matters for what it signals. Disruptions to shipping via Hormuz may lead to supply shortages, reversing forecasts made earlier this month of surplus.

Andy Lipow, president of Lipow Oil Associates, told CNBC's Squawk Box Asia that if Trump's proposed charge is applied to crude oil shipments, it could add about $16 a barrel to the cost of oil moving through the Strait of Hormuz. He added that the US administration has not yet provided details on how the proposal would work in practice.

CNBC also reported that Citi warned the proposal could increase the risk of a wider military conflict in the near term if such a charge is enforced.

The wider effect on global trade would depend on whether such a charge is implemented, how long it remains in place and how other countries respond. While alternative export routes exist for some producers, they cannot fully replace the capacity of the Strait of Hormuz. As a result, a prolonged increase in shipping costs could raise freight rates, increase insurance premiums and make international trade more expensive, particularly for countries that rely heavily on energy imports.