THE CONSTITUTIONAL CEILING AND THE GEOSTRATEGY OF COERCION:

     A Bayesian Game Theory Analysis of the 2026 Supreme Court IEEPA Tariff Ruling

Abstract

On February 20, 2026, the Supreme Court of the United States issued a landmark 6-3 ruling in Learning Resources, Inc. v. Trump and V.O.S. Selections v. United States, holding that IEEPA does not authorize the President to impose tariffs. The ruling strikes down all "Liberation Day" reciprocal tariffs and related IEEPA-based duties — a revenue stream worth over $160 billion already collected and $1.4 trillion projected over the next decade. This paper extends the original case study with real-time data, applies a Bayesian game theory framework to model the strategic interactions now reshaping the global trade order, and assesses the administration's pivot to alternative statutory authorities. The ruling, arriving as G7 foreign ministers convene for their first session under France's 2026 presidency, marks not only a constitutional inflection point but a fundamental restructuring of U.S. coercive economic diplomacy.

 I. Historical Context: The Rise and Architecture of Emergency Tari

 The genesis of this constitutional crisis traces to April 2, 2025 — a date the Trump administration branded 'Liberation Day.' Invoking IEEPA of 1977, President Trump declared chronic trade deficits and fentanyl flows a national emergency, a legal theory with no historical precedent. IEEPA was designed for targeted, surgical interventions: asset freezes, sanctions on rogue actors, and blocking transactions with hostile parties. Never before had any president attempted to use its ambiguous authorization to 'regulate importation' as a basis for a global, open-ended tariff regime.

The legal architecture was built on two words in IEEPA — 'regulate' and 'importation' — separated, as Chief Justice Roberts observed with some dryness in his majority opinion, by sixteen other words. Upon this slender textual foundation, the administration erected the most sweeping unilateral tariff system since the Smoot-Hawley Act of 1930: a 10% baseline on virtually all U.S. imports, escalating 'reciprocal' rates reaching 145% on Chinese goods, 50% on Brazilian imports, and threatened 25% duties on Danish goods tied to Greenland ambitions. By February 20, 2026, the Penn-Wharton Budget Model estimated IEEPA tariffs had collected $164.7 billion in cumulative revenue, representing just over half of all U.S. customs duties collected since January 2025.

 The legal challenge was swift and successful below the Supreme Court. In May 2025, the U.S. Court of International Trade unanimously ruled IEEPA did not authorize the tariffs. The Federal Circuit, sitting en banc, affirmed that ruling in August 2025. The Supreme Court granted expedited review and heard oral arguments November 5, 2025. The six justices in the majority — Roberts, Gorsuch, Barrett, Sotomayor, Kagan, and Jackson — coalesced around complementary rationales, while Alito, Thomas, and Kavanaugh dissented. The fractured majority opinion, combining the 'major questions doctrine' with a textual analysis of IEEPA, is itself a landmark in administrative and constitutional law.

II. The Ruling Deconstructed: A Splintered but Decisive Majority

 The majority opinion is architecturally sophisticated, with different coalitions joining different sections. Roberts' core holding — that IEEPA's text does not authorize tariffs — commanded all six majority justices. The 'major questions doctrine,' holding that Congress must speak clearly before delegating power over decisions of vast economic significance, commanded only Roberts, Gorsuch, and Barrett; the liberal justices reached the same outcome through a purer textualist analysis.

 Roberts anchored his textual argument on history: the very first act of the First Congress in 1789 was a tariff law, exercising what the Framers understood as an exclusively legislative power. 'When Congress has delegated its tariff powers,' Roberts wrote, 'it has done so in explicit terms, and subject to strict limits.' He pointedly noted that the U.S. Code contains dozens of statutes granting executive authority to 'regulate' various activities — yet none of those statutes has ever been interpreted to convey taxation authority.

Justice Gorsuch, adhering consistently to his non-delegation jurisprudence, wrote separately to emphasize that an executive power without defined limits — the ability to impose 'any tariff, on any country, at any rate, for any duration' — amounts to a delegation of legislative power. Gorsuch's contribution has particular doctrinal significance: he signals that any replacement statute enabling comparably unconstrained executive tariff authority may face the same constitutional fate.

 Justice Kavanaugh's dissent, though unsuccessful, was strategically crafted. He acknowledged the constitutional concerns but argued that the practical disruption — $160+ billion in potential refunds, bilateral trade deals premised on IEEPA rates now void ab initio — militated for deference. Crucially, Kavanaugh signaled a possible off-ramp, noting that 'with respect to tariffs in particular, the Court's decision might not prevent Presidents from imposing most if not all of these same sorts of tariffs under other statutory authorities.' This observation effectively previewed the administration's 'Plan B' strategy within hours of the ruling.

 III. Bayesian Game Theory: Modeling the Post-Ruling Strategic Environment

 III.i. The Framework: Incomplete Information and Updating 

Beliefs Bayesian game theory is particularly apt for analyzing the post-ruling environment because all major actors — the administration, trading partners, Congress, and markets — operate with incomplete information about each other's true preferences, constraints, and fallback strategies. Each actor must form prior beliefs about others' types (cooperative, adversarial, opportunistic) and update them as new signals arrive. The Supreme Court ruling itself is a major signal that reshapes prior beliefs across the system simultaneously.

Before the ruling, the dominant equilibrium was one of coerced compliance: trading partners, uncertain about whether IEEPA tariffs would survive judicial review, faced a credible threat and many adjusted behavior accordingly. Several nations accelerated bilateral negotiations, purchasing U.S. exports of LNG, soybeans, and aircraft to reduce their bilateral deficits. The Court's ruling shatters that equilibrium, triggering a Bayesian update across all players: the administration's coercive capacity is lower than believed, the probability of sustained tariff threats is revised downward, and the credibility of 'Plan B' alternatives is uncertain.

 Bayesrading Partners' Revised Beliefs After the Rulingian Update:  

 Prior (pre-ruling): P(IEEPA tariffs survive) ≈ 0.35  |  P(court strikes down) ≈ 0.65 Posterior signal received: Court rules 6-3 against IEEPA tariffs (strong signal) Revised belief: P(Section 122 tariffs survive legal challenge) ≈ 0.70 (strong statutory basis, 150-day limit self-contained)

Revised belief: P(Section 338 survives challenge if invoked broadly) ≈ 0.45 (untested, possibly Gorsuch non-delegation risk)

Revised belief: P(Section 232/301 replicate IEEPA scope within 6 months) ≈ 0.55 (long review process; partial replication more likely) 

 Key implication: Trading partners' dominant strategy shifts from 'comply to avoid IEEPA tariffs' toward selective resistance, knowing replacement tools are slower and more constrained. 

III.ii. The Administration's Strategic Response: An Immediate Pivot  

  Within hours of the ruling, President Trump held a press conference, calling the decision 'deeply disappointing' and describing certain justices as 'a disgrace to our nation.' Yet the administration's operational response was remarkably swift and strategically pre-planned: Trump announced he would immediately sign an executive order imposing a 10% global tariff under Section 122 of the Trade Act of 1974, while simultaneously initiating 'several Section 301 investigations' into unfair trade practices. 

This bifurcated response reveals a Bayesian prior that was already prepared for a loss: Treasury Secretary Scott Bessent had publicly stated as early as December 2025 that the administration could 're-create the exact tariff structure' using other statutory authorities. The rapid pivot is consistent with a player who had a contingency strategy with high prior probability of deployment (P ≈ 0.70), suggesting the IEEPA tariffs were always partly a tool for forcing faster bilateral negotiation, with the expectation that they would eventually be constrained by courts.

Administration's Sequential Strategy Tree (Bayesian Decision Model)

Node 1 — IEEPA tariffs in place: High leverage, bilateral deal-making possible → Branch A (Court upholds): P ≈ 0.35 pre-ruling → dominant equilibrium maintained → Branch B (Court strikes down): P ≈ 0.65 pre-ruling → triggers Node 2 Node 2 — Post-ruling fallback: → 

Section 122 (immediate, 150-day, capped at 15%): Expected utility MODERATE (fast deployment, limited scope) → 

Section 301 investigations (9-month process): Expected utility HIGH (targeted, legally robust) but delayed → 

Section 232 (national security, 270-day process): Expected utility HIGH for specific sectors (steel, pharma, semi) → 

Section 338 (untested, Smoot-Hawley vestige): Expected utility UNCERTAIN (P of legal challenge = 0.55) 

→ Legislative path (Congress): Expected utility LOW given Senate dynamics; P(passage within 90 days) ≈ 0.20 

Dominant immediate strategy: Section 122 as bridge + Section 301 investigations as long-term scaffold

III.iii. Trading Partners: Cooperative vs. Opportunistic Types

From the perspective of major U.S. trading partners, the ruling creates a classic Bayesian signaling game. Partners must now decide whether to: (a) exploit the window of reduced U.S. coercive capacity to harden negotiating positions; (b) lock in favorable bilateral agreements before replacement tariffs are fully operational; or (c) pursue multilateral coordination through the WTO or G7 to establish new norms constraining unilateral tariff use. 

The observed behavior immediately after the ruling provides signals about partners' underlying types. Canada's Trade Minister Dominic LeBlanc stated the ruling 'reinforces Canada's position that the IEEPA tariffs imposed by the United States are unjustified' — a signal of a 'resistance' type player preparing to leverage the ruling in the July 2026 USMCA review. The European Union signaled it was 'carefully analyzing' the ruling, consistent with a cautious 'conditional cooperator' type — willing to reduce friction if U.S. replacement tariffs are more predictable, but prepared to counter-escalate if Section 338 is deployed broadly.

G7 Partner Strategy Matrix: Dominant Responses by Player Type

CANADA (USMCA review July 2026): Prior: High exposure to IEEPA → Strong compliance pressure Post-ruling: P(Canada toughens USMCA demands) ≈ 0.75; P(seeks reciprocal concessions) ≈ 0.80 Expected Canadian strategy: Use ruling as leverage on dairy, digital taxes, auto rules 

EU (Section 232 / potential Section 338 exposure): Prior: Moderate IEEPA exposure, high Section 232 (steel/aluminum) exposure Post-ruling: P(EU retaliatory tariffs if Section 338 invoked broadly) ≈ 0.70 Expected EU strategy: Conditional cooperation; accelerate Mercosur ratification as credible outside option 

CHINA (ongoing Section 301 tariffs unaffected): Note: IEEPA China tariffs struck down; Section 301 tariffs remain in place Post-ruling: Minimal immediate strategic shift; Section 301 tariffs (list 3/4A) upheld by Federal Circuit P(China accelerates trade partnerships with ASEAN/Global South) ≈ 0.85 

BRAZIL (IEEPA 50% tariff struck down): Post-ruling: Immediate economic relief; P(Brazil returns to constructive U.S. dialogue) ≈ 0.40 P(Brazil deepens EU-Mercosur alignment) ≈ 0.80; leverage of Bolsonaro prosecution issue diminished

IV. Fiscal Architecture: The Revenue Black Hole and Refund Crisis

The fiscal dimensions of the ruling are immediate and severe. The Tax Foundation estimates that more than $160 billion in IEEPA tariffs have been collected through February 20, 2026, and that the 10-year prospective loss — tariff revenue that would have been collected from 2026 through 2035 — is approximately $1.4 trillion. This erasure amounts to approximately three-quarters of the new tariff revenue the administration had projected to finance the 'One Big Beautiful Bill' tax cuts of 2025. 

The Penn-Wharton Budget Model's granular monthly data confirms the trajectory: IEEPA collections began in February 2025 and accelerated sharply, reaching approximately $20.8 billion per month by January 2026, representing 51.9% of all U.S. customs duties that month. The share of total tariff revenue attributable to IEEPA had risen monotonically throughout 2025, meaning the fiscal dependence on these illegally collected funds was deepening at the very moment the Court struck them down. 

The refund question is constitutionally charged and practically treacherous. The Court's ruling held IEEPA tariffs void ab initio — unlawful from inception — but deliberately said nothing about refund mechanisms. Justice Kavanaugh's dissent warned explicitly: 'The United States may be required to refund billions of dollars to importers who paid the IEEPA tariffs, even though some importers may have already passed on costs to consumers or others.' The Court of International Trade, to which the case was remanded, is expected to begin lifting stays and setting a reliquidation roadmap, but trade lawyers caution that the process will be protracted, contentious, and may overwhelm CBP's administrative capacity. The Congressional Research Service notes that as of December 10, 2025, approximately $129 billion in estimated deposits had been paid, with roughly 19.2 million of 34 million IEEPA-covered entries remaining unliquidated — meaning the precise refund liability is still being determined. Importers who filed timely protests at the CIT are better positioned; those who did not may face statutory time bars under Section 1581. The refund process itself represents a second fiscal shock arriving in slow motion, spread across months or years of litigation. 

Fiscal Impact Summary (as of February 20, 2026)

IEEPA tariffs collected (cumulative through Feb 20, 2026): ~$160–165 billion Projected 10-year revenue loss (2026–2035) from IEEPA removal: ~$1.4 trillion (Tax Foundation) Section 232 tariffs (unaffected by ruling): Projected to raise ~$635 billion over next decade Effective tariff rate: Drops from ~17% to ~9% effective rate (still ~4.5× pre-2025 baseline) Potential refund liability: $129–175 billion (depending on unliquidated entries) Consumer savings (if no replacement tariffs): ~$1,200–$1,400 per household over 10 years (Tax Policy Center)

GDP growth drag removed: +0.3% long-run GDP recovery (Tax Foundation estimate)

V. Geostrategic Theater: Greenland, Brazil, Iran, and the USMCA

V.i. Greenland and the North Atlantic

The Greenland gambit was among the most dramatic applications of IEEPA as geopolitical leverage. In January 2026, the administration threatened 25% tariffs on Denmark — a NATO ally — to extract Danish acquiescence in U.S. ambitions to 'acquire' Greenland, a move framed as strategically necessary for Arctic security. The Munich Security Report 2026 documents how the U.S. administration 'in early 2026 announced tariffs on eight European countries opposed to its ambition of purchasing Greenland.'

With IEEPA authority now void, that threat collapses entirely. The 62nd Munich Security Conference, which ran February 13-15, 2026 — just five days before the ruling — had already witnessed Secretary of State Rubio attempting a more emollient tone toward European allies, having assessed that the aggressive Vance approach of 2025 was counterproductive. The Supreme Court ruling, arriving as the first G7 foreign ministers' meeting under France's presidency had just concluded, hardened European resolve. P(European unified resistance to Greenland pressure) rises from approximately 0.55 to 0.85 in the post-ruling environment.

V.ii. Brazil and the Bolsonaro Dimension

The 50% IEEPA tariff on Brazilian imports — extraordinary given that the U.S. actually runs a trade surplus with Brazil — was widely interpreted as naked political retaliation for Brazilian authorities' prosecution of former President Jair Bolsonaro. This represented tariffs being deployed as an instrument of domestic political interference rather than economic rebalancing, a usage far removed from any plausible statutory purpose. The ruling provides Brazil immediate relief from this legally baseless impost. 

The strategic implications extend beyond bilateral trade. As the Munich Security Report notes, 'US trade pressure has hardened their stance vis-à-vis Washington and could push them closer to Beijing.' China has responded to U.S. economic coercion by proactively expanding trade relationships, offering zero tariffs to 53 African countries and upgrading agreements with ASEAN, Brazil, and Kenya. The erasure of IEEPA leverage over Brazil comes too late to reverse the geopolitical drift; P(Brazil meaningfully re-engages constructive trade dialogue with U.S. in 2026) is assessed at approximately 0.35.

V.iii. Iran and Secondary Sanctions Architecture

The administration had deployed IEEPA tariffs as a de facto secondary sanctions tool, threatening countries that purchased Iranian oil with trade penalties. This was an innovative but legally questionable expansion of IEEPA's emergency authority into the domain of energy geopolitics. With that tool invalidated, the administration must rely on conventional secondary sanctions under existing Iran-specific statutes — a less flexible but better-established legal architecture.

The Munich Security Conference context is relevant: CNN reported that the next round of Iran nuclear talks was expected in Geneva around the time of the ruling, involving both Special Envoy Steve Witkoff and Jared Kushner. The simultaneous loss of IEEPA leverage and ongoing nuclear negotiations creates a complex signaling environment where the administration must project credibility on Iran without its most flexible coercive tool.

V.iv. USMCA and the North American Recalibration

The mandatory USMCA review scheduled for July 2026 now occurs in a fundamentally different legal landscape. Canadian exports, while nominally exempt from many IEEPA tariffs under rules-of-origin provisions, had faced significant uncertainty and 'border thickening.' Canadian Trade Minister LeBlanc's post-ruling statement signals Ottawa's intent to use the judicial outcome as leverage. The administration, stripped of IEEPA's speed and flexibility, will enter July negotiations knowing that its replacement tools — Section 122 tariffs expiring after 150 days, Section 301 proceedings taking nine months, Section 232 requiring national security findings — are slower, more legally constrained, and more politically exposed.

P(U.S. achieves substantive new concessions in July USMCA review) drops from approximately 0.60 under IEEPA leverage to approximately 0.35 under Section 122/232/301 toolbox, given Canadian negotiators' revised beliefs about U.S. coercive capacity.

VI. The 'Plan B' Arsenal: A Bayesian Assessment of Replacement Authorities

VI.i. Section 122 — The Immediate Bridge

Section 122 of the Trade Act of 1974 was the administration's first move after the ruling, with Trump announcing the same day he would sign an executive order imposing a 10% global tariff under its authority. Section 122 allows a president to address 'large and serious' balance-of-payments deficits through a temporary import surcharge of up to 15%, but with critical constraints: the tariff is limited to 150 days absent congressional extension, must be non-discriminatory (the same rate for all partners), and cannot be used to pursue differentiated country-by-country 'reciprocal' rates. It has never previously been invoked.

The 150-day ceiling is strategically critical: it provides approximately five months of bridging pressure — enough to span the July USMCA review — but insufficient for the long-term structural leverage IEEPA provided. Section 122's non-discrimination requirement also eviscerates the core 'Liberation Day' strategy of differentiated country rates used as bilateral negotiating chips. As Fortune's analysis observed, 'Trump will no longer be able to honor many of the deals he has negotiated' with individual nations, since those deals were premised on differentiated IEEPA rates that Section 122 cannot replicate.

VI.ii. Sections 301 and 232 — The Long-Game Scaffold

For more durable tariff authority, the administration is simultaneously initiating Section 301 investigations (targeting unfair trade practices) and Section 232 proceedings (national security findings). Both require extended administrative processes — up to nine months for Section 301 and 270 days for Commerce to report under Section 232 — but both carry firmer legal ground and survived Trump's first term largely intact.

The Federal Circuit's September 2025 ruling in HMTX Industries v. United States affirmed Section 301 List 3 and List 4A tariffs on China, though that decision awaits potential Supreme Court review. Section 232 tariffs on steel, aluminum, automobiles, semiconductors, copper, lumber, and pharmaceuticals remain in place and are projected to generate approximately $635 billion over the next decade. ING's analysis notes that 'Section 301 and 232 investigations can target specific sectors more precisely than IEEPA's broad-brush approach,' meaning the replacement regime may actually prove more surgically effective in targeted sectors even if less useful for broad-based leverage.

VI.iii. Section 338 — The Nuclear Option

The administration has also signaled interest in Section 338 of the Tariff Act of 1930, a Great Depression-era provision permitting up to 50% tariffs on countries that 'discriminate against' U.S. commerce. Section 338 has never been fully tested in modern courts and would face immediate legal challenge under the major questions doctrine given the Gorsuch-Barrett portion of the Roberts opinion. Given that Gorsuch and Barrett joined the majority specifically to constrain unbounded executive tariff authority, any broadly deployed Section 338 regime — asserting discrimination by essentially all trading partners, as IEEPA did — would likely face a similar constitutional fate.

      

Legal Survival Probabilities: Alternative Tariff Authorities (Bayesian Assessment)

Section 122 (10% global, 150 days): P(survives legal challenge) ≈ 0.80 — Explicit statutory text; balance-of-payments trigger plausible; 150-day self-limiting reduces major-questions risk Section 301 (targeted, after investigation): P(survives challenge) ≈ 0.85 — 

Strong precedent from Trump 1.0; Federal Circuit affirmed in September 2025 Section 232 (national security, specific sectors): P(survives challenge) ≈ 0.80 — Established jurisprudence; steel/aluminum already upheld; new pharma/semi investigations on firmer ground 

Section 338 (discrimination basis, broadly applied): P(survives challenge) ≈ 0.40 — Untested; broad application likely triggers Gorsuch non-delegation concern; Roberts major-questions doctrine applicable 

Congressional legislation (reimposing IEEPA-equivalent): P(passage within 6 months) ≈ 0.20 — Senate voted to rebuke Canada tariffs; Republican fractures visible (Rand Paul, Don Bacon); Democratic opposition certain

VII. Bond Markets, Credit, and the Dollar: Macro Financial Fallout

The financial market reaction to the ruling reflects a complex superposition of two opposing forces: relief at the removal of a major tax on household consumption and business inputs, offset by alarm at the fiscal hole created and the policy uncertainty generated by the administration's immediate replacement tariff announcements. The 10-year U.S. Treasury yield moved to approximately 4.10% in the immediate aftermath, reflecting elevated borrowing costs as bond markets processed the 'revenue black hole.' 

The U.S. dollar softened against the euro, yen, and British pound as the 'tariff premium' built into dollar valuation over the past year unwound. The Canadian dollar experienced a relief rally given Canada's direct IEEPA exposure. Credit rating agencies are re-evaluating the U.S. fiscal outlook, with the removal of $1.4 trillion in projected tariff revenue complicating the deficit trajectory already pressured by the 'One Big Beautiful Bill' tax cuts. The simultaneous replacement announcement of Section 122 tariffs partially arrested the dollar decline, as markets assessed that some tariff-driven revenue would persist — though at lower levels and for only 150 days without congressional extension. 

The manufacturing sector presents a more nuanced picture. NPR reported that U.S. factories shed 108,000 jobs in 2025 despite tariff protection — a paradox explained by the fact that the majority of manufacturers rely on imported components and inputs, making tariffs a net drag on most of the sector even while providing protection for finished goods producers. CNBC's analysis estimated the consumer tariff burden would drop from approximately $1,300 per household in 2026 to approximately $400 under the Section 232 tariffs that remain in place, a significant if incomplete relief.

VIII. The G7 Context and the Emerging Post-Tariff Order

The 62nd Munich Security Conference, held February 13-15, 2026 under the theme 'Under Destruction,' provided the immediate geopolitical backdrop against which the Supreme Court ruling must be read. The MSC Report 2026 analyzed how 'Washington has openly dispensed with the rules of global trade it once helped create,' deploying tariffs as coercive instruments in ways that have accelerated China's self-positioning as a champion of open trade — a remarkable geopolitical inversion. The conference saw the first G7 foreign ministers' meeting under France's 2026 presidency, with French Foreign Minister Jean-Noël Barrot setting 'addressing major global macroeconomic imbalances' as a key priority. 

The ruling's arrival five days after the Munich conference adds strategic texture to the G7 diplomatic landscape. European leaders who had been strategizing about how to respond to continued U.S. tariff pressure now face a recalibrated environment in which U.S. coercive capacity is reduced but not eliminated, and in which the administration's demonstrated readiness to deploy Section 122 tariffs within hours of the ruling signals continued aggressive intent. The G7 summit itself, scheduled under France's presidency for mid-2026, will provide the next major diplomatic arena for working through the post-IEEPA order. 

The Munich Security Report's framing of 'destruction over reform' resonates in the trade context: the ruling is a restoration of constitutional order, but it does not resolve the underlying tensions that drove the administration's tariff strategy. U.S. trade deficits remain historically large — the 2025 U.S. trade deficit reached $901 billion, barely reduced despite the tariffs — validating the administration's diagnosis even as the Court rejected its chosen remedy.

IX. Structural Implications for Presidential Power and the Non-Delegation Doctrine

The ruling's long-term constitutional significance extends well beyond tariff policy. By applying the major questions doctrine to restrain a unilateral executive claim over a domain of vast economic significance, the Roberts Court continues a trajectory that began with NFIB v. OSHA in 2022 (blocking COVID vaccine mandates) and West Virginia v. EPA (restricting EPA climate regulation). The Roberts-Gorsuch-Barrett coalition within the majority represents a jurisprudential school committed to policing the boundaries of executive delegation — a project that will constrain future presidents of either party. 

The liberal justices' decision to join the majority through a purely textual rather than structural rationale preserves their ability to resist future applications of the major questions doctrine in other regulatory domains (environmental regulation, student loans, health policy) while agreeing with its application to tariffs. This careful calibration signals that the ruling's precedential reach is deliberately bounded by the unusual circumstance of a president claiming unlimited, indefinite, unconstrained tax authority under an ambiguous statute. 

Justice Gorsuch's concurrence, which operationalizes the non-delegation doctrine in ways the full Court has not endorsed since the 1930s, is the most theoretically ambitious part of the ruling. If Gorsuch eventually commands a majority for a robust non-delegation revival — which would require at least one more vote — the implications for the administrative state would be transformative, reaching far beyond trade policy into environmental, financial, and healthcare regulation.

X. Conclusions: The Constitutional Ceiling and the New Equilibrium

The February 20, 2026 ruling in Learning Resources, Inc. v. Trump establishes what this paper terms the 'constitutional ceiling' of executive trade power: the point at which the legislature's exclusive Article I authority over taxation and tariffs reasserts itself against executive expansion, regardless of foreign affairs or emergency justifications. The ruling does not restore the pre-2025 trade order — Section 232 tariffs alone will raise approximately $635 billion over the next decade, maintaining the effective tariff rate at roughly 9%, more than four times the pre-Trump baseline — but it fundamentally restructures the character of U.S. trade coercion. 

The Bayesian game theory analysis suggests the post-ruling equilibrium will be characterized by four features. First, greater legal predictability: replacement tariff tools are more constrained but also more jurisprudentially stable, reducing the variance in trading partners' beliefs about U.S. coercive capacity. Second, bilateral deal erosion: the non-discrimination requirement of Section 122 and the investigation prerequisites of Sections 301 and 232 make it structurally impossible to maintain the web of differentiated bilateral 'deals' premised on IEEPA's unconstrained flexibility. Third, increased multilateral leverage for partners: the WTO, which has been marginalized by unilateral IEEPA action, may partially recover relevance as U.S. options narrow. Fourth, a congressional battle: the administration's acknowledgment that it would seek legislative authorization ('I would ask Congress, and probably get it,' Trump said) sets up a major tariff legislation fight that will test Republican unity in both chambers.

 The 2026 G7 summit under France's presidency, the July USMCA review, and the 150-day expiration of Section 122 tariffs will together constitute the next three critical decision nodes in this evolving strategic game. At each node, the prior beliefs, updated by today's ruling, will shape the dominant strategies of all players. What is certain is that the United States has hit its constitutional ceiling — and that ceiling, in reshaping the architecture of coercive economic statecraft, is itself a form of structural power in the global game.

THE PERSIAN GULF GEOPOLITICAL LANDSCAPE

A Bayesian Analysis of the Strategic Role of Arab Gulf States in the Iran-US  Conflict

Executive Summary

The Persian Gulf stands at an unprecedented strategic inflection point. The Twelve-Day War of June 2025—culminating in the American Operation Midnight Hammer strikes on Iran's core nuclear sites at Fordow, Natanz, and Isfahan—radically altered the region's threat calculus without resolving its underlying tensions. Eight months on, Iran has not been defeated; it is rebuilding, dispersing, and hardening its nuclear infrastructure while navigating a domestic legitimacy crisis of historic proportions. The January 2026 engineered riot, unfolding amid deepening economic unrest and resulting in the deaths of scores of security personnel, rioters, and protesters, has generated a volatile internal dynamic. Reports that some participants received external financial support from foreign actors have further complicated the crisis. The upheaval has simultaneously weakened the regime under the strain of sanctions-induced pressures and, paradoxically, may harden its nuclear resolve as a central pillar of political survival.

Against this backdrop, the rivalry between Saudi Arabia and the United Arab Emirates has crossed from structural competition into open confrontation, most visibly in Yemen, where Saudi airstrikes targeting Emirati arms shipments in late December 2025 marked the first direct coercive signalling between nominal GCC partners. This fracture undermines the coherence of any unified Gulf response to Iran and complicates Western security architecture in the region.

Ongoing indirect US–Iran nuclear talks, resumed in Oman and Geneva in February 2026 with American envoys Steve Witkoff and Jared Kushner and Iranian Foreign Minister Abbas Araghchi, remain highly fragile. On February 17, 2026, Iran temporarily closed the Strait of Hormuz for live-fire naval exercises even as talks proceeded—a coercive signalling manoeuvre that illustrates the simultaneity of diplomacy and deterrence that will define Gulf geopolitics for the foreseeable future. This report applies Bayesian Game Theory to map the evolving belief structures, risk tolerances, and policy options of the key actors.

 

I. Introduction: The Persian Gulf as the Decisive Strategic Hinge

The Persian Gulf has re-emerged as the central geopolitical hinge of the international system. It remains the world's most critical hydrocarbon corridor, the primary artery of maritime trade through the Strait of Hormuz and Bab el-Mandeb, and the decisive arena in the strategic competition between the United States and China. The escalation cycle that culminated in the Twelve-Day War of June 2025—Israel's Operation Rising Lion, launched June 13, followed by the American Operation Midnight Hammer strikes on June 22—triggered calibrated retaliatory posturing from Iran that has continued through the opening months of 2026. Under such conditions, Gulf Arab states are no longer peripheral actors reacting to external shocks; they are autonomous strategic players whose probabilistic assessments of risk, alliance reliability, and regime survival shape the trajectory of regional order.

The strategic environment is best understood not as a deterministic rivalry but as a dynamic belief-updating process in which Saudi Arabia and the UAE weigh competing risks: escalation versus restraint, alignment versus hedging, economic integration versus geopolitical confrontation.

The importance of this environment extends far beyond regional security. Gulf sovereign wealth funds—including the Saudi Public Investment Fund, Abu Dhabi Investment Authority, and Mubadala—collectively control assets exceeding $3 trillion, linking Middle Eastern stability to Western capital markets, emerging technology sectors, and energy-transition financing. Normalization initiatives between Israel and Arab states, formalized under the Abraham Accords framework, have created overlapping security architectures that intersect with Iran's deterrence posture and its network of non-state partners. Any miscalculation among Gulf actors could reverberate through oil markets, global shipping insurance rates, financial risk premia, and great-power alignments.

Methodologically, this study applies Bayesian Game Theory to model decision-making under uncertainty. Unlike static balance-of-power frameworks, Bayesian analysis captures how states update beliefs based on new signals—military deployments, diplomatic overtures, proxy engagements, and external guarantees. Following the 2025 escalation cycle, Gulf capitals have reassessed prior probabilities regarding US security commitments, Iranian retaliation thresholds, Israeli preemption doctrines, and—crucially—each other's intentions.

II. The Saudi–Emirati Rivalry: From Cold Competition to Open Confrontation

II.i. The Structural Foundations of the Rivalry

What the document's original draft described as a 'restrained but consequential strategic competition' has, as of early 2026, crossed into direct confrontation. The roots are structural and long-standing. Saudi Arabia's Vision 2030 transformation agenda—under Crown Prince Mohammed bin Salman—seeks to reposition Riyadh as the financial, logistical, and technological nucleus of the Arab world. Flagship initiatives, including NEOM, Riyadh Air, and the 'Program HQ' requirement compelling multinationals to base regional headquarters in the Kingdom, directly challenge Dubai's status as the Gulf's pre-eminent commercial gateway. Meanwhile, the UAE's 'Projects of the 50' framework seeks to consolidate Emirati leadership in trade, fintech, artificial intelligence, advanced manufacturing, and renewable energy. What were once complementary economic models have become directly competitive.

The character of the rivalry is also ideological. The UAE's foreign policy is anchored in a consistent antagonism toward Islamist political movements, viewing them as existential threats regardless of their formal legitimacy. Saudi Arabia, by contrast, has pursued a de-risking posture—seeking to insulate Vision 2030 from geopolitical volatility by restoring relations with former adversaries including Qatar, Turkey, and, via the 2023 China-brokered deal, Iran itself. These divergent strategic philosophies translate into incompatible end-state visions for Yemen, Sudan, Somalia, Libya, and Syria.

II.ii. Yemen: From Divergence to Direct Coercive Signalling

The Yemen theatre provided the flashpoint that transformed latent rivalry into observable confrontation. On December 29, 2025—one day after GCC summit leaders met in what was publicly framed as a demonstration of Gulf unity—Saudi forces conducted airstrikes on the port of Mukalla, targeting what Riyadh described as an Emirati weapons shipment to the UAE-backed Southern Transitional Council (STC). The timing was read in Riyadh as deliberate provocation: the STC had launched its advance into Saudi Arabia's strategically vital border provinces of Hadramawt and Mahra on December 3, the very day of the GCC summit.

The Saudi response was decisive. Saudi-backed forces recaptured the seized provinces within days. Under intense diplomatic and military pressure, the STC agreed to talks, its leader Aidarous al-Zubaidi was expelled from Yemen's Presidential Leadership Council, and on January 7, 2026, al-Zubaidi fled the country. The STC was effectively dissolved. The UAE announced a full withdrawal of its forces from Yemen by December 30, 2025—a move interpreted as de-escalation under duress. Saudi Arabia separately announced plans to allocate approximately $3 billion to Yemen's reconstruction in the wake of the UAE's exit, signalling its intention to consolidate control over the post-war political settlement.

The Yemen confrontation signals that the Saudi–Emirati rivalry has moved beyond economic competition and proxy friction into direct coercive signalling—a qualitative threshold with implications for GCC coherence and regional order.

The rivalry's geographic theatre extends well beyond Yemen. In Sudan, Riyadh backs the Sudanese Armed Forces while the UAE is widely documented as a primary supporter of the Rapid Support Forces. During Crown Prince Mohammed bin Salman's visit to Washington in November 2025, he reportedly urged the Trump administration to increase pressure on the UAE over its Sudanese role. In Somalia, Saudi Arabia has rallied support for national unity following Israeli recognition of Somaliland—a move perceived as connected to Emirati strategic interests in the Horn of Africa. In Libya, Saudi Arabia coordinated with Egypt to restrict UAE access to airspace and logistical routes used to supply the RSF. The rivalry has, in effect, become a pan-regional contest.

II.iii. Military Balance and Strategic Risk Tolerance

A conventional military comparison still favours Saudi Arabia in aggregate capacity. The Royal Saudi Armed Forces field approximately 250,000 active-duty personnel, compared with roughly 65,000 in the UAE. The Royal Saudi Air Force operates one of the largest and most modern fleets in the region, including over 280 advanced fighter aircraft, supported by extensive air defence networks and missile capabilities. The UAE maintains a smaller but highly professional force, often described as technologically sophisticated and operationally integrated. In qualitative domains—particularly missile defence, cyber operations, and AI-enabled surveillance—the UAE has invested heavily in next-generation capabilities, including cooperation with Israel facilitated by the Abraham Accords normalization framework.

Saudi Arabia signals deterrence through magnitude and endurance; the UAE signals through precision, technological edge, and coalition agility. The Yemen episode demonstrated, however, that Saudi Arabia retains the capacity and political will for direct coercive action against Emirati interests when its core security perimeter is threatened. That willingness to escalate alters Emirati probability assessments regarding the costs of continued regional activism.

Fiscal capacity introduces a complicating variable. Saudi Arabia faces mounting fiscal pressures as low oil prices and Vision 2030's massive capital requirements strain the Kingdom's budget. The dismissal of Saudi Investment Minister Khalid al-Falih in late 2025, following his public acknowledgement of the need to reassess certain megaprojects, underscored the tension between geopolitical ambition and fiscal constraint. The UAE, meanwhile, allocates smaller but more efficiently deployed resources, focusing on niche superiority, portfolio diversification, and technology leverage.

II.iv. Implications for Gulf Coherence

For G7 policymakers, the Saudi–Emirati fracture has three immediate consequences. First, it undermines GCC solidarity as a collective security framework at precisely the moment when coordinated Gulf signalling could most influence Iranian behaviour during nuclear negotiations. Second, it creates information asymmetries that complicate Western security planning—Gulf capitals may be pursuing incompatible objectives simultaneously. Third, it generates spillover risks across the Red Sea, Horn of Africa, and Indian Ocean littoral, affecting maritime security corridors of global importance.

III. Operation Midnight Hammer and Its Aftermath: Bayesian Updating in the Gulf

III.i. The Strikes and Their Immediate Consequences

On the night of June 21–22, 2025, the United States executed Operation Midnight Hammer—the largest B-2 Spirit operational strike in American military history. Seven B-2 bombers flying from Whiteman Air Force Base, Missouri, executed an 18-hour mission requiring multiple mid-air refuellings, dropping 14 GBU-57A/B Massive Ordnance Penetrator bunker-buster bombs on the Fordow and Natanz nuclear enrichment facilities. Simultaneously, a US submarine launched more than two dozen Tomahawk cruise missiles against above-ground infrastructure at the Isfahan Nuclear Technology Center. The strike package involved over 125 aircraft in total, including F-22 and F-35 fighter jets deployed in a deception and suppression role. No Iranian aircraft took to the skies; no Iranian surface-to-air missiles were launched against the strike package.

Iran retaliated by striking Al Udeid Air Base in Qatar—the regional headquarters of US Central Command, hosting approximately 10,000 American personnel—with short- and medium-range ballistic missiles, causing no reported US casualties. President Trump declared a ceasefire on June 24, 2025, bringing the Twelve-Day War to its formal end. Iran has not acknowledged the ceasefire. Supreme Leader Khamenei, in his first televised remarks on June 26, declared victory and vowed further strikes on US bases in response to any future attack.

A July 2025 Pentagon damage assessment estimated that Iran's nuclear programme had been set back approximately two years. However, independent analysts—including the Institute for Science and International Security—offered a more cautious assessment: above-ground infrastructure was severely damaged but the extent of damage to deeply buried facilities, particularly at Fordow, remains uncertain. Iranian Foreign Minister Araghchi stated publicly that Iran had 'reconstructed everything that was damaged,' a claim satellite imagery partially corroborates.

III.ii. Iran's Reconstitution Strategy

The most significant strategic development of the post-Midnight Hammer period—and one with profound implications for Gulf security—is Iran's accelerating nuclear reconstitution programme. Satellite imagery from November 2025 through February 2026 documents a consistent and deliberate pattern: Iran is not simply rebuilding; it is dispersing, concealing, and hardening its nuclear infrastructure against future strikes.

At the Pickaxe Mountain (Kuh-e Kolang Gaz La) site south of Natanz, excavation has intensified, with tunnelling estimated to reach 80–100 metres under hard granite—a depth calculated to defeat the GBU-57 MOP bomb used in Operation Midnight Hammer. At Isfahan, all three tunnel entrances to the nuclear complex have been buried under soil since February 2026. New satellite imagery shows concrete being poured over tunnel entrance extensions to provide additional protection. At a surface site in Isfahan destroyed in June 2025, a new structure with architectural features identical to the centrifuge production facility in Karaj was erected between December 2025 and January 2026, apparently to conceal resumed centrifuge-related manufacturing activities from satellite observation.

Iran's reconstitution strategy reflects a fundamental lesson from the June 2025 strikes: depth and dispersion, not passive deterrence, are the foundations of nuclear programme survivability. The Islamic Republic is rebuilding a programme specifically engineered to resist the weapons that destroyed it.

The January 2026 orchestrated unrest, emerging against a backdrop of intensifying economic hardship and culminating in the deaths of numerous security personnel, demonstrators, and rioters, has materially altered Iran’s internal political equilibrium. Allegations that a subset of participants benefited from external financial backing have further deepened official suspicions of foreign interference. Together, these developments have significantly reshaped the Iranian leadership’s threat perception. As many analysts observe, the nuclear program has assumed heightened strategic centrality—viewed increasingly as a guarantor of regime continuity—particularly in light of explicit statements by U.S. policymakers expressing support for political change in Tehran.

III.iii. Bayesian Belief Updating by Gulf States

For Gulf Arab states observing the Midnight Hammer strikes and their aftermath, the primary lesson was not about Iran's vulnerability but about the nature and limits of American protection. The strikes confirmed US capacity for decisive kinetic action at operational reach unprecedented in the post-Cold War era. Yet they also revealed the bounded character of US intervention: punitive, time-limited, designed to avoid prolonged entanglement, and constitutionally contested within Washington—congressional leaders were notified only after the aircraft were safely out of Iranian airspace.

From Riyadh and Abu Dhabi's perspective, this generated a consequential posterior belief update: the United States is no longer an unconditional, open-ended security guarantor but a powerful and transactional protector whose engagement is contingent on alignment, burden-sharing, and Washington's shifting domestic political constraints. Both Gulf states have responded by intensifying hedging behaviour—expanding economic and technological engagement with China, exploring BRICS+ mechanisms, and diversifying defence suppliers—not as realignment but as risk distribution.

Kuwait's role as a barometer of US credibility has been further clarified by events. Kuwait's dual status—as host to US military logistical facilities and as a nation geographically exposed to Iranian missile forces and Iraqi militia networks aligned with Tehran—makes it a high-sensitivity node in any escalation scenario. The parliamentary constraints on Kuwaiti executive authority reinforce its consistent preference for de-escalation frameworks and mediation diplomacy. Within GCC deliberations, Kuwait functions as a 'low-voltage stabiliser,' moderating collective signalling and complicating any effort to portray the Council as a unified anti-Iranian bloc.

IV. Internal Dynamics: The UAE Federal Bargain Under Stress

For G7 policymakers assessing Gulf stability, it is essential to recognise that the United Arab Emirates is not a monolithic strategic actor but a federal polity sustained by an implicit distributional and security compact among its seven emirates. Since its founding in 1971, the UAE has operated under a carefully calibrated 'federal bargain': Abu Dhabi provides hydrocarbon wealth, defence guarantees, and foreign policy direction; Dubai and the Northern Emirates contribute commercial dynamism, demographic scale, and diversified economic activity.

The Yemen confrontation of late 2025 has introduced new stress into this equilibrium. Abu Dhabi, under President Mohamed bin Zayed Al Nahyan, engineered the Emirati intervention strategy in Yemen and cultivated the STC as an instrument of maritime influence over Aden, Mukalla, and critical Red Sea chokepoints. The forced withdrawal of December 2025—executed under Saudi coercive pressure—represents the most significant reversal of Emirati regional strategy in the post-2015 intervention period. Its impact on Abu Dhabi's strategic confidence and domestic legitimacy is not fully visible but analytically significant.

Dubai, led by Vice President and Prime Minister Mohammed bin Rashid Al Maktoum, has historically prioritised stability, capital inflows, and insulation from geopolitical volatility. The Yemen confrontation, combined with ongoing Iran-related uncertainties, has generated measurable commercial anxiety. Insurance premiums for shipping through Emirati ports, aviation risk assessments for Dubai International, and real estate capital flight concerns create a channel through which geopolitical confrontation translates into domestic economic strain. Abu Dhabi bears strategic risk; Dubai and the Northern Emirates bear the economic spillover.

The Northern Emirates—particularly Sharjah, with its more conservative orientation and cultural affinities closer to Saudi Arabia's model—add further differentiation. While no overt institutional opposition to federal foreign policy has emerged, the Saudi–Emirati confrontation in Yemen has introduced visible intra-federal discomfort. The federation's resilience rests on Abu Dhabi's redistributive fiscal capacity, integrated federal defence forces, and centralised intelligence architecture. Its vulnerability lies in the asymmetric distribution of geopolitical risk: should a sustained Saudi–Emirati confrontation or an Iranian retaliatory strike impose material damage on Dubai's economic model, the durability of the federal bargain would face its most serious test since the federation's founding.

V. Qatar and Turkey: Mediation Architecture and Security Depth

V.i.Qatar as Bridge Node

Qatar has re-emerged as the Gulf's principal diplomatic intermediary following the 2021 GCC reconciliation that ended the blockade crisis. Leveraging its hosting of the US Combined Air Operations Center at Al Udeid—the command hub for Operation Midnight Hammer—long-standing communication channels with Tehran, and active mediation portfolios from Afghanistan to Gaza, Doha positions itself as a strategic 'middle power broker' whose value derives precisely from its willingness to maintain dialogue with adversarial networks simultaneously.

In the Iran nuclear negotiation process of 2026, Qatar has played a structurally important facilitative role. The Atlantic Council noted in February 2026 that the foreign ministers of Turkey, Qatar, Egypt, Oman, the UAE, Saudi Arabia, and Pakistan were all engaged in the Istanbul diplomatic framework that provided the context for the Witkoff–Araghchi talks. Qatar's utility in this architecture is its capacity to transmit signals across adversarial networks without formal alignment—a function that lowers the probability of miscalculation and reduces informational asymmetry.

Qatar's strategy is not ideological alignment but regime security through indispensability. In Bayesian terms, it functions as a bridge node in a networked strategic game: the more critical its mediating role becomes, the higher the cost for any major power to marginalise or coerce it. Its maintenance of pragmatic economic ties with Iran—particularly around shared North Field/South Pars gas infrastructure—simultaneously enhances its credibility with Tehran and complicates Western pressure campaigns.

V.ii. Turkey as Security Anchor

Turkey's regional role reflects a transformation from ideological rival to pragmatic security partner for key Gulf states. Under President Recep Tayyip Erdoğan, Ankara recalibrated relations with Riyadh and Abu Dhabi following a period of sharp tension in the late 2010s. The 2025–2026 period has witnessed deepening defence-industrial cooperation, including drone technology transfers, joint training, and intelligence coordination. Turkey's globally recognised unmanned aerial vehicle capabilities—refined in multiple operational theatres—provide Gulf partners with scalable deterrence tools against both state and non-state threats.

An emerging trilateral security alignment among Turkey, Saudi Arabia, and Pakistan—informally described in regional security circles as a developing strategic architecture—illustrates Ankara's repositioning as a 'security anchor.' For Riyadh, Turkish defence technology offers diversification beyond Western suppliers at a moment when the transactional character of US security provision is increasingly apparent. For Ankara, Gulf capital supports domestic defence industries and macroeconomic stabilisation. Turkey's posture in the Iran context is carefully calibrated: Ankara continues importing Iranian oil and gas—a point Turkish Foreign Minister Fidan affirmed publicly following the January 2026 riots —while quietly reinforcing Gulf defensive capacity. The effect is to raise the cost of Iranian escalation without overtly formalising an anti-Iran bloc.

VI. The Iran Crisis of January–February 2026: Internal Fragility and External Hardening

VI.i.The Protests and the January Orchestrated Riot

In late January 2026, amid escalating economic distress and mounting U.S. military deployments in the region, a wave of protests culminated in what Iranian authorities described as an orchestrated riot. The unrest—occurring against the backdrop of sanctions-induced contraction, currency instability, and high inflation—resulted in the deaths of numerous security personnel, protesters, and bystanders. The episode intensified the regime’s perception of internal vulnerability while reinforcing its conviction that external actors were actively seeking to exploit domestic grievances.

In a January 28, 2026 podcast interview with Professor Jeffrey Sachs, hosted by Professor Glenn Diesen, Sachs argued that recent U.S. and Israeli actions toward Iran reflected a long-standing regime-change strategy. He contended that military pressure, economic sanctions—described by U.S. officials as “economic statecraft”—and diplomatic maneuvers were components of a broader hybrid campaign aimed at weakening and ultimately overturning the Iranian government. Sachs maintained that the objective was not negotiation per se, but structural political transformation in Tehran, pointing to the collapse of the Joint Comprehensive Plan of Action following the U.S. withdrawal under Donald Trump as evidence of limited American commitment to sustained diplomacy.

Similarly, in a January 14, 2026 interview with Daniel Davis, Professor  John Mearsheimer advanced a parallel thesis. He described the unrest as fitting within what he characterized as a four-stage regime-change playbook: first, the systematic use of sanctions to generate economic distress; second, the encouragement and amplification of protest movements; third, an international information campaign framing the unrest as purely indigenous and inevitable; and fourth, potential direct military intervention should internal destabilization reach a decisive threshold. Mearsheimer further suggested that technological enablers—such as satellite internet access reportedly used during communication blackouts—illustrated the degree of external facilitation.

Whether one accepts these interpretations in full or in part, their analytical relevance lies in how they mirror Tehran’s own threat perceptions. Iranian officials have repeatedly framed the January unrest not as spontaneous dissent but as externally catalyzed destabilization. Allegations that some participants received foreign financial or logistical support—though difficult to independently verify—have reinforced elite suspicions of coordinated interference. The result has been a paradoxical dual dynamic: acute internal fragility coupled with intensified external hardening. The leadership, confronting domestic strain, has simultaneously doubled down on deterrent capabilities as insurance against perceived regime-change efforts.

VI.ii. The Nuclear Reconstitution and February 2026 Negotiations

As of mid-February 2026, the U.S.–Iran diplomatic channel remains active yet precarious. An initial indirect round of talks took place in Oman on February 6, mediated through Omani intermediaries, with U.S. envoys engaging separately from Iranian Foreign Minister Abbas Araghchi. A second round convened in Geneva on February 17. On that same day, Iran announced the temporary closure of the Strait of Hormuz for live-fire naval exercises—an unmistakable signal that diplomacy would proceed in parallel with calibrated coercive leverage.

The substantive divide between the parties remains profound. Washington’s position, articulated by Secretary of State Marco Rubio, reportedly calls for a permanent end to uranium enrichment, stringent limitations on Iran’s ballistic missile program, and the curtailment of support for regional proxy networks—conditions acknowledged even by U.S. officials as likely incompatible with Tehran’s baseline demands. Iran, for its part, insists that negotiations be confined strictly to the nuclear file and maintains that enrichment constitutes a sovereign right under the Non-Proliferation Treaty framework. Tehran has also resisted expanded inspections of sites struck during the June 2025 conflict, while the International Atomic Energy Agency has indicated that it cannot fully verify the disposition of approximately 400 kilograms of uranium enriched to 60 percent prior to the war.

The February naval exercises—and the temporary disruption of traffic through the Strait—carry substantial strategic implications. Roughly one-fifth of globally traded oil transits that narrow maritime corridor. By demonstrating its capacity to threaten this chokepoint, Iran signaled that escalation would not be geographically contained. The costs of diplomatic breakdown would reverberate through global energy markets and the Gulf economies whose fiscal stability depends on uninterrupted export flows.

From a Bayesian perspective, these moves represent deliberate signaling under uncertainty. Tehran appears to be updating its assessment of U.S. intentions in light of military deployments and regime-change rhetoric, while Washington and its regional partners are recalibrating their estimates of Iran’s escalation thresholds. The resulting equilibrium is inherently unstable: internal pressures push the regime toward consolidation and deterrent reinforcement, while external pressures narrow the diplomatic bandwidth for compromise.

In this environment, nuclear capability is increasingly perceived by Iranian decision-makers not merely as a bargaining chip, but as a structural hedge against systemic overthrow—transforming the crisis from a negotiable dispute into a contest over regime survival itself.

VII. Bayesian Analysis of Escalation Pathways in 2026

Given the developments of January–February 2026, the escalation scenarios sketched in earlier analyses require updating. Three principal pathways remain analytically distinct, though their probability weightings have shifted significantly.

VII.i. Scenario A: Sustained Diplomatic Fragility (Highest Probability)

The most probable scenario—and the modal outcome of the current trajectory—is a prolonged period of diplomatic fragility in which negotiations continue without resolution, Iranian nuclear reconstitution advances, and the military stand-off is managed through episodic coercive signalling from both sides. In this scenario, Iran continues building deeper hardened facilities, retains its HEU stockpile as a bargaining chip, and manages internal unrest through securitisation rather than political reform. The US sustains its naval and air presence in the region as a deterrent—Trump announced on January 28, 2026, that 'a massive Armada is heading to Iran'—without delivering a military strike. Gulf states maintain their hedging posture: formally aligned with Washington, but refusing to provide airspace or bases for offensive action, while deepening economic ties with China as insurance.

For Gulf states, this scenario involves elevated but manageable risk: oil price volatility, insurance premium pressures for Gulf shipping, and continuing uncertainty around US security commitments. The Saudi–Emirati rivalry continues below the threshold of direct military confrontation, though proxy competition in Sudan, Somalia, and Syria persists. Saudi Vision 2030 faces fiscal pressure from the combined weight of low oil prices, geopolitical uncertainty, and the absence of the FDI inflows Riyadh requires to deliver transformative economic change.

VII.ii. Scenario B: Regional Conflagration (Medium Probability, Elevated vs. Prior Estimates)

The medium-probability scenario envisions the breakdown of an already fragile diplomatic process—triggered either by Iran approaching a weaponization threshold that Israel deems unacceptable, or by a proxy escalation that provokes a disproportionate U.S. or Israeli military response. The temporary closure of the Strait of Hormuz on February 17, 2026—officially framed as a live-fire naval exercise—effectively previewed the primary coercive instrument Tehran would likely employ in such a contingency. A sustained disruption of maritime traffic through mines, anti-ship missile deployments, or swarm naval tactics would almost certainly trigger a sharp spike in oil prices, with the potential to reintroduce stagflationary pressures in advanced economies already coping with structural supply constraints.

The regional economic consequences would be immediate and uneven. While oil exporters such as Saudi Arabia might initially benefit from price surges, trade-dependent hubs would suffer disproportionately. Dubai, whose economic model is anchored in logistics, re-exports, aviation, tourism, and financial services, is acutely vulnerable to sustained maritime disruption. A prolonged Hormuz crisis would contract shipping throughput, dampen tourism flows, tighten liquidity conditions, and undermine investor confidence in the UAE as a stable commercial gateway between Asia, Europe, and Africa. The resulting shock could transmit rapidly across Gulf financial systems, amplifying volatility and increasing sovereign risk premiums. The emerging Saudi–Emirati divergence compounds this risk by weakening the coherence of a unified Gulf deterrent posture. A fragmented Gulf Cooperation Council reduces the credibility of collective signaling toward Tehran. If Iran assesses that Riyadh and Abu Dhabi are strategically misaligned—particularly regarding risk tolerance and escalation thresholds—it may conclude that its asymmetric leverage over maritime energy flows outweighs the marginal costs of confrontation. Moreover, if key regional states hesitate to provide basing access or coordinated military responses, the deterrence architecture becomes further diluted. The January 2026 exchange-rate collapse inside Iran adds another layer to this calculus. The rapid depreciation exposed the regime’s acute vulnerability to financial panic, sanctions pressure, and capital flight. That episode likely reinforced Tehran’s determination to prevent a recurrence of currency-driven destabilization. In this light, escalation tools—whether nuclear advancement or Hormuz leverage—serve not only as offensive instruments but as deterrent insurance mechanisms designed to raise the external costs of economic warfare. By increasing the systemic price of confrontation for Gulf economies and global markets alike, Iran may seek to insulate itself against future speculative or sanctions-induced currency shocks. The probability weight of this scenario has therefore risen since late 2025 due to a convergence of factors: intensified nuclear hardening, internal survival-driven strategic recalibration following the currency crisis, and weakened regional deterrence coherence stemming from Saudi–UAE tensions. Scenario B does not assume irrational escalation. Rather, it reflects a structured pathway in which fragmented alliances, economic interdependence, and survival-maximizing behavior combine to produce a wider regional conflagration whose costs would extend far beyond the immediate belligerents.

VII.iii. Scenario C: Regime Implosion in Iran (Low Probability, Structurally Salient)

The low-probability yet structurally consequential scenario involves regime fragmentation within Iran rather than an orderly political transition. Despite the scale of the January 2026 unrest with its foreign component and  ongoing external interference, the security apparatus has thus far remained cohesive. By late January, the state had reasserted effective territorial control, and large pro-regime mobilizations during the anniversary of the 1979 Revolution signaled continued organizational capacity and core-base loyalty. Absent coordinated armed opposition, sustained elite defection, or fractures within the Revolutionary Guard command structure, outright regime implosion remains less likely than continued  consolidation—potentially maintained through intensified effort  to improve economic condition.

For Gulf monarchies, this scenario presents a strategic paradox: long-term geopolitical opportunity coupled with acute near-term instability. The eventual removal of a hostile regime in Tehran could fundamentally reshape regional alignments. However, the short- to medium-term consequences of state fragmentation would be profoundly destabilizing. These could include refugee flows across maritime and land corridors; proliferation risks associated with unsecured nuclear materials; and the reconfiguration of Iranian-backed militia networks operating in Iraq, Syria, and Lebanon into more autonomous, less controllable actors.

Such instability would be particularly alarming for smaller Gulf states. Kuwait and Bahrain would face heightened sectarian and internal security pressures, while unrest could reverberate into Saudi Arabia’s oil-producing Eastern Province. In the current strategic environment, power vacuums inside Iran would not produce a clean geopolitical reset; rather, they would generate a volatile security landscape marked by fragmented authority, contested armed networks, and elevated proliferation risks.

Scenario C therefore remains low in immediate probability but high in structural significance—its consequences, should it materialize, would likely prove more unpredictable and systemically destabilizing than either negotiated détente or managed confrontation.

VIII. Policy Guidance for the G7

For G7 leaders, the central challenge is managing instability without deepening intra-Gulf fragmentation or incentivising Iranian escalation. The following analytical prescriptions flow from the Bayesian framework developed above.

First: Treat Saudi Arabia and the UAE as Distinct Strategic Partners. The Saudi–Emirati divergence is structural, not episodic. Attempting to impose artificial GCC unity risks misreading the region's internal evolution and generating resentment from both capitals. G7 policy coordination should be modular rather than bloc-based, allowing differentiated cooperation in defence, technology, and infrastructure. Washington in particular should avoid taking sides in the Yemen/Sudan/Horn of Africa theatres, where the costs of perceived alignment with either Riyadh or Abu Dhabi are high and the benefits minimal.

Second: Build Supply-Chain and Energy Resilience Through Geographic Redundancy. Investment in the India–Middle East–Europe Economic Corridor (IMEC) is strategically sound, but corridor design should explicitly incorporate Oman as an alternative maritime and logistics node. Diversifying entry and exit points reduces vulnerability to Hormuz disruption—as Iran demonstrated on February 17, 2026—and signals that global trade architecture will adapt rather than collapse under coercion. Such redundancy lowers the expected payoff for any actor contemplating maritime disruption.

Third: Anchor Nuclear Diplomacy in Verified Constraints Rather Than Zero-Enrichment Maximalism. The current US negotiating position—permanently ending Iranian enrichment as a precondition—is, as Secretary Rubio acknowledged, potentially incompatible with any achievable deal. A more durable framework would prioritise verifiable constraints: stockpile caps on enriched uranium, enhanced IAEA monitoring, enrichment-level ceilings, and sequenced sanctions relief tied to compliance milestones. The February 2026 talks in Geneva should be evaluated not as a path to a comprehensive agreement but as a mechanism for reducing the most acute near-term weaponisation risks.

Fourth: Recalibrate Security Guarantees from Rhetoric to Capability. Advanced integrated air and missile defence systems—including updated Patriot and THAAD architectures, counter-drone technologies, and shared early-warning networks—would materially reduce Persian Gulf vulnerability to the asymmetric retaliation Iran has demonstrated it can deliver. Gulf states denied US airspace access during the January–February 2026 stand-off specifically because they assessed that the risk of Iranian retaliation against their territory exceeded the benefits of American offensive operations. Credible defensive commitments that reduce the vulnerability of Gulf infrastructure to Iranian strikes would alter this calculus without requiring Gulf states to cross the threshold of overt anti-Iranian alignment.

IX. Conclusion: Probabilities, Power, and the Future of Gulf Order

The Persian Gulf is entering a phase defined less by fixed alliances and more by probabilistic calculation under conditions of deep uncertainty. The Saudi–Emirati rivalry has crossed from structural competition into direct confrontation. Iran, damaged but not defeated by the June 2025 strikes, is rebuilding its nuclear programme with specific engineering choices designed to defeat the weapons that damaged it—while navigating the most severe domestic legitimacy crisis in its post-revolutionary history. The January 2026 unrest and its externally orchestrated riots have simultaneously weakened the Iranian government's social contract and intensified its nuclear resolve as a survival strategy. Diplomatic negotiations in Oman and Geneva remain fragile, while Iran continues to improve its economic leverage and defence through naval exercises and Hormuz closure threats.

Qatar's mediation architecture and Turkey's security engagement expand the decision-tree confronting Saudi Arabia and the UAE, complicating any simple binary framing of the regional order. Kuwait functions as a credibility barometer for US security commitments, whose assessment by GCC states will shape the intensity of hedging behaviour across the region. The coherence of the GCC as a collective security framework is at its lowest point in decades.

For the G7, the strategic imperative is to reduce uncertainty rather than amplify it. Clear, credible, and narrowly defined security commitments; diversified trade corridors; verifiable and pragmatic nuclear governance; and respect for intra-Gulf differentiation together create a stabilising architecture. The alternative—forcing binary alignments in a region that increasingly resists them, or treating an unachievable maximalist diplomatic position as evidence of strategic resolve—would accelerate hedging behaviour and raise the probability of miscalculation.

Stability will depend on whether successive updates to strategic beliefs push actors toward deterrence equilibrium—or toward the cascading escalation that all publicly claim to wish to avoid. As of February 18, 2026, that question remains genuinely open.

Ultimately, the Israel–Iran confrontation will not be decided solely by military exchanges but by how regional states interpret and respond to evolving signals. Bayesian learning is not an academic abstraction; it is the lived logic of Gulf statecraft. The Islamic Republic's nuclear reconstitution, the Saudi–Emirati confrontation in Yemen, Iran's temporary Hormuz closure on February 17, and the fragile Geneva diplomatic track are all simultaneously unfolding data points in a belief-updating process whose outcome will shape the Persian Gulf order—and by extension, global energy markets, great-power competition, and the future of nuclear non-proliferation—for a generation.