Over troubled waters: Trump’s bridge-and-plant plot

0:03Gregg Carlstrom:The Economist.

0:10Gregg Carlstrom:Hello and welcome to The Intelligence from The Economist. I'm your host, Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world.

0:24Gregg Carlstrom:That AI jobs apocalypse still ain't here. But where it seemed most likely was in India, which relies heavily on farming out its coders for cheap. But AI is allowing the country's big IT firms to change how they do business. They may be hiring more people, not fewer. And baking and bingo, knitting and crocheting, pottery painting and flower arranging. This is the stuff of young people these days. We ask why Granny Corps is taking Gen Z by sedate storm.

1:01Gregg Carlstrom:First up, though.

1:13Gregg Carlstrom:President Donald Trump doesn't want you to know what he will do in Iran. is off limits in Iran as far as targeting, including power plants, bridges, you've mentioned those. Very little is off limits. Are there certain kinds of civilian targets, though? I'm thinking schools or hospitals that you want to take off limits. I don't want to tell you that. But he does want you to know what he could do. We have a plan, because of the power of our military, where every bridge in Iran will be decimated, where every power plant in Iran will be out of business, burning, exploding, and never to be used again.

1:49Gregg Carlstrom:I mean, complete demolition by 12 o 'clock. After an unprecedented, sweary Easter Sunday social media post, one that doesn't bear repeating here, he amped up his threats yesterday, suggesting that America could destroy Iran in one night. And with one of his trademark moving deadlines, that night could be tonight.

2:10Jason Palmer:As ever, it's hard to know what Donald Trump is going to do.

2:16Gregg Carlstrom:Greg Karlstrom is our Middle East correspondent and is in Qatar this morning.

2:20Jason Palmer:We are hours away now from this deadline that he has given the Iranians. There's always the possibility that it's postponed again, but it's very hard to see how the U.S. and Iran are going to get to some sort of a deal in the next few hours. And there is a real fear in this region that we're headed for a major escalation in the war.

2:43Gregg Carlstrom:And what's clear about this as deadlines move around is that both sides seem to be claiming to be winning. Is that even a sensible question to ask who's winning this war?

2:52Jason Palmer:Both sides can credibly claim to be at least achieving the things that they are setting out to do. The Iranians have been fighting this asymmetric war against the global economy, and their goals have been to be resilient, to keep fighting, and to inflict enormous costs on the region. and on the world. And they've been able to do that. Just in the past few days, we've seen Iran attack a major petrochemical plant in Saudi Arabia, gas fields in Abu Dhabi, oil refineries in Bahrain and Kuwait. And the damage to the global economy is going to linger. The Americans and the Israelis, meanwhile, they are trying to batter not just Iran's military capabilities, but increasingly Iran's economy as well.

3:35Jason Palmer:And if you look at Iran's missile program, for example, Yes, it is still able to fire missiles at Israel and the Gulf countries, but its ability to replenish those missiles after the war is in doubt because there has been a systemic campaign of airstrikes against the factories, the supply chain that produces missiles in Iran. So they're both doing operationally what they set out to do, but they're not achieving their strategic aims yet. The Americans want to compel Iran essentially to surrender, to make a deal on favorable terms for the United States. Iran, for its part, wants to stop this war and wants to prevent future wars without having to make major concessions.

4:16Jason Palmer:And they haven't been able to achieve that. And so the narrative on both sides is that they're winning. But in strategic terms, no one is winning yet.

4:23Gregg Carlstrom:So this narrative of both sides claiming to be winning is what you'd expect in any war, I suppose. It is.

4:30Jason Palmer:I think what's striking about this one, though, is that the two sides are essentially fighting parallel wars, right? America and Israel are fighting Iran, and then Iran is fighting mostly its Gulf neighbors and the world economy. And so both sides can credibly claim to be winning their own war, even as they are simultaneously losing the other one. And we saw that over the long weekend with this drama around the American F-15 that was shot down over Iran. The Iranians then started scouring the country looking for the two downed airmen. America set into motion what sounds like a very complicated rescue operation.

5:09Jason Palmer:And it was a success in the end for the Americans. They brought back their two personnel without any loss of life on their part. It was a success for them. it was an embarrassment for Iran, which wasn't able to capture the pilot and the weapons officer. On Monday, we saw Donald Trump give this press conference at the White House, and it sounded almost like he was giving a mission accomplished speech, as if the entire purpose of this war had been about trying to rescue these two airmen. And then meanwhile, the Iranians tried to spin this as a failure for America because the number of American planes were blown up during the rescue operation.

5:46Jason Palmer:And so this was a very rare moment in this conflict where the two sides were actually directly fighting each other instead of fighting these parallel wars. And they both looked for a way to spin it somehow to their advantage. But looking through the spin, Greg, where do you see the balance of power at the moment? I'm not sure we can say anyone has it yet. I mean, the costs on all sides have been enormous. On the American side, beyond the aircraft that were destroyed over the weekend in this rescue operation. America has lost a number of aerial refueling tankers. It's lost an E3 AWACS radar airplane.

6:20Jason Palmer:It has less than 20 of them in its arsenal. So losing one of them is a major loss. And when you speak to defense sources in the Gulf, they tell you the damage at some of the bases that the U.S. uses here. Al-Odaid in Qatar, Prince Sultan in Saudi Arabia, other bases. It's extensive. It's far more extensive than has been reported. So there is a blow to the American military. Stockpiles of interceptors and standoff munitions and other things that the U.S. is burning through at a very rapid clip. And that is going to have implications, if not for this war right now, for America's ability to fight future wars.

6:57Jason Palmer:Gulf states themselves are also suffering, obviously, enormous costs from this. We're all focused on what's happening to the oil and gas infrastructure in the region because of what that means for the global economy. But you look beyond that at the damage to business in Gulf states where this war has scared off travelers, tourists, in some cases, even residents of Gulf countries who have left and may come back after the war, may not come back after the war. Governments are having to earmark billions and billions of dollars for economic support for struggling businesses in their countries. So there's a huge amount of economic damage.

7:34Jason Palmer:And then there's reputational damage for Gulf countries, which no longer look like oases of stability in the region. And those costs are going to be with them for a long time to come. But it has to be said that there is a great deal of damage to Iran as well at the same time. There is. And I think increasingly what's clear is that a long war is not just going to batter Iran's military capabilities. It is going to undermine the very foundations of Iran's economy. America and Israel have attacked the largest steel mills in the country. They've attacked its natural gas fields, its main petrochemical processing plant, one of its most prestigious universities.

8:13Jason Palmer:And losing those steel mills, for example, the best case scenario is that they will be out of commission for a year. That means one of Iran's largest sources of non-oil export revenue will not be producing. It usually brings in about$7 billion a year in export revenue. It also fuels a number of other domestic industries. Iran makes lots of cars. It has a big construction industry. All of that is downstream from steel production. And all of that is going to be affected. And we're already hearing reports of companies in Iran that are laying off workers because they will not have access to raw materials anymore.

8:48Jason Palmer:And so the consequences of all of this are going to ripple through the Iranian economy, which even before the war had very high unemployment rate, had inflation that was running. close to 50%, food prices going up even faster, add to that thousands, perhaps tens of thousands of families that no longer have an income. And the economic consequences of this are going to be enormous. And this is before we get to Donald Trump's threats of knocking out the Iranian power grid.

9:17Gregg Carlstrom:Well, exactly that. This sounds on both sides like a fairly unsustainable situation. And when we've spoken to you in the past about this, so we've sort of laid out three possible paths, escalation, staying the course as it is, or finding a way out, finding peace. At this moment, which do you think is most likely?

9:36Jason Palmer:Escalation seems like the most likely path that we're going down. There has been another last-ditch effort to try and get to a deal. The latest proposal that's being discussed would be for a temporary ceasefire, maybe two or three weeks, and then the US and Iran would use that time to try and negotiate a permanent ceasefire. The Iranians are not really interested in that. They want a permanent end, not just to this war, but to their whole state of conflict with the United States. And so the idea that they might agree to reopen the Strait of Hormuz in exchange for a few weeks of truce, it's very hard to see them doing that.

10:12Jason Palmer:So I think we are headed down a path where this is likely to escalate. And if Donald Trump follows through on his threats, if he does what he said he's going to do, first of all, that will almost certainly qualify as a war crime. Bombing one power plant can be justified in military terms. Bombing an entire country's electric grid as a way to pressure it into making a deal, that is very much beyond the pale. If he does this, the consequences for Iran will be profound to its economy, to public health. And Iran, again, does not have the resources to rebuild an electric grid if it is destroyed by the Americans.

10:50Jason Palmer:Iran has threatened to retaliate in a similar fashion against Gulf states, which has always been the doomsday scenario for governments in this region. And not just power plants, but water desalination facilities. If those things are successfully attacked, you're talking about entire cities in the Gulf that could very quickly become uninhabitable. So that's what we're on the precipice of right now. All the damage that we've seen to the region and to the global economy. if Trump goes ahead with these threats, that is likely to become exponentially worse.

11:23Gregg Carlstrom:Sobering stuff. Greg, thanks very much for your time.

11:25Jason Palmer:Thank you, Jason.

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12:15For decades, the Indian IT industry has profited from labour arbitrage. Gavin Jackson is our South Asia business and economics correspondent. India has plenty of people, and many of them have advanced degrees in software engineering. The cost of hiring one of these people is a fraction of hiring the exact same sort of person in America. Indian businesses have profited by hooking up these smart, talented people with businesses in America and Europe. But now there's an even cheaper alternative, AI agents.

12:51Gregg Carlstrom:Now, Gavin, we've talked a whole lot about AI agents on this show, and in particular how AI is going to be best of all perhaps at coding, and that that might in turn affect the IT industry in a general sense. How is that looking so far? the tool that's causing a big stir in india's tech hub of bangalore is called claude code it's from anthropic and it can put together a software app a prototype in minutes but for it to run efficiently securely and so on it requires deeper technical knowledge but the worry for the industry is that if one skilled developer with claude can do the work of several developers then businesses in america may find they have less need of the indian it outsources these are the guys who provide the most labor intensive part of the software industry.

13:35But if there's a lot of fear on the ground, not a lot concrete is actually happening.

13:40Gregg Carlstrom:This is starting to feel like a kind of running theme on this show about the AI doomsday scenarios not playing out yet. What's the bottleneck in this case? So one person I met was doing sales for these companies and he says, you talk to the clients and the first thing they say is we want a 40 % productivity gain. They want fewer people doing more work. But when it comes to actually doing that, reality intrudes. Businesses are complicated things. They have legacy systems, they have regulatory duties, they have different systems that have to communicate with one another. And it seems like the AI agent struggles in that sort of scenario.

14:15So it turns out Claude Code isn't a plug and play sort of thing, which means the outsourcers see this as an opportunity. Reconfiguring businesses to use AI may turn out to be a big source of revenue for the consultants as well. One of the founders of the consulting firm Infosys reckons AI-related services could be worth up to$400 billion by 2030.

14:34Gregg Carlstrom:So there's sort of two things going on then. It's that the outsourcers, the bulk of the work that was supposed to get farmed out most quickly isn't going so quickly, but also some of the value then accrues to sort of slightly up the IT chain. That's certainly what they're hoping. But the reality is when you look at the hard data, the results, all that kind of thing, you just don't see anything really happening. Revenue is largely growing at the same pace. Headcount is growing at the same pace. You don't see anything in the hard numbers, despite all of this huge amount of talk about what's going on.

15:06But another part of this is a lot of India's IT industry isn't in the traditional outsourcing companies anymore. Instead, you have global capability centers. These are in-house outsourcers. So instead of going to an Infosys, a Tata Consultancy Services, that kind of company. You set up your own base in India, hiring Indians directly. Instead of just shoving the grunt work out to one of these outsourcers, they're moving their core business functions to these global capability centers where they kind of have more ownership over what's going on. The intellectual property stays within the company, the technical expertise stays within the company.

15:39And that's kind of because when the Indian outsourcers were getting started, software and IT was this new novel thing you were bolting on to an existing company. But now every company has to be a tech company. Retail sales have gone online, distribution's gone online, marketing's gone online. So you're less willing to outsource that core business function to another company, but you want to keep it in-house. And so that means that even if clawed code becomes the way that you do software development, it may still be an Indian engineer who's managing clawed code, who's prompting it, who's refining its code and so on, but it may not be one of the outsourcers themselves who's doing it.

16:14Gregg Carlstrom:So what people will get out of India is no longer just the sort of cheap coding labor, but something more vertically integrated? Services more than just code? I think there's sort of three lessons from India's experience with this. One is about technology. It takes a long time to implement technologies and you have to reorient everything around the technology rather than just plug it in. Another is how India itself is trying to move up the value chain. It's gone from doing the most basic white-corner work to doing more value-added stuff, stuff that involves more skill and probably involves a little bit more autonomy.

16:44Instead of just doing what you're told, Indian IT companies have more ownership of the products they work on and create. And the third thing is just how valuable people will remain. Even if you have Claude Code able to do a lot of the work, you've still got a lot of relatively cheap engineers in India. And if you can find something productive for them to do, you can probably make quite a lot of money doing so. So there's a big incentive to work out whatever that is.

17:07Gregg Carlstrom:Far from thinning out the ranks in these IT companies, the AI revolution may actually expand them. The thing is with all this AI stuff is that there's so much talk about possible futures and all of them are a little bit plausible ever since chat gpt debuted the indian outsourcers have been flagged as the sector most exposed to ai displacement if you're worried about ai taking white collar jobs then these are exactly the white collar jobs that you should be most worried about but three years on the disruption has not arrived so even though it's not in the way people predicted it does show the impact that ai is having on business the tech may upend the industry, but its overall effect is unclear or uneven, and there may not be big aggregate gains to be had.