[ExI] Losing the Iran war: The economic front

[John Clark]

*Nobel prize winner Paul Krugman wrote this today: *

*==*

*Losing the Iran war: The economic front *

*        by *Paul Krugman

 "So here, according to Trump and his officials, is the state of the war
with Iran: Iran has been totally defeated and is desperate for a deal  —  Trump
has announced that a deal is imminent on at least six distinct occasions.
Also, because there is no deal, and Iran is intransigent, Scott Bessent,
the Treasury secretary, is preparing what he calls an “economic D-Day,”
economic sanctions that will bring the Iranian regime to its knees — a
tricky proposition since, according to those same officials, Iran is
already on its knees. But whatever.

What you need to know is that this economic campaign will fail as
thoroughly as the military campaign.

The U.S. plan, or maybe just a concept of a plan, appears to be “Blockade
me? No, blockade you!”

On one side, the U.S. is trying to restore the flow of oil through the
Strait of Hormuz despite Iranian threats. At least some tankers are running
the strait “dark,” with their transponders off. Private insurers won’t
cover the risks of these runs, so the U.S. government is providing
insurance instead. And U.S. military forces are providing some protection
against Iranian drones and missiles.

This part of the plan is, dare I say it, not entirely stupid. Clearly at
least some oil is making it out. The Trump administration says 8 million
barrels a day, which would be a significant amount if true. Unfortunately,
that figure is coming from Trump officials, who have zero credibility, so
it’s anyone’s guess how big the number really is.

More important, however, is the fact that even a successful re-opening of
the Strait of Hormuz matters a lot less now than it would have a few months
ago. There are two main reasons ending Iran’s blockade of the Strait, even
if possible, will be ineffective.

First is the sheer scale of the U.S. military failure in the Persian Gulf.
Not only did U.S. attacks on Iran fail to overthrow the regime, Iranian
attacks have forced the U.S. to abandon many of its bases in the region.
The loss of these bases, combined with the depletion of U.S. stocks of
interceptors and other munitions, means that America is effectively unable
to defend its Gulf allies.

So what will happen if Iran feels that its blockade of Hormuz isn’t doing
enough damage? It can and will escalate to attacks on oil facilities all
around the region. And there’s very little America could do to stop it.

Second, energy prices to final users have become increasingly disconnected
from the price of crude oil. Remember, people don’t burn crude, they burn
gasoline and diesel. And the prices of these refined products are up much
more than crude prices.

The huge premium in the prices of refined products over the price of crude
— the “crack spread” — is a result of a global shortage of refining
capacity (partly caused by Ukrainian attacks on Russian
refineries.) So even if Bessent can get more oil flowing through Hormuz and
drive down crude prices, the economic pain that Americans are suffering at
the gas pump will remain high.

What about Bessent’s threat to isolate Iran economically, cutting off both
its exports and imports? There’s a one-word rejoinder: China. As I wrote
<https://substack.com/redirect/89cf72b6-84b2-4cd3-945d-8345ddc396be?j=eyJ1IjoiNngzbm4ifQ.I1PMvYo4mI3PquTDRhL5Dev-9_ouIq3kw6ZhrVNsy8o>
a
few weeks ago, China has been the winner from Trump’s war.

Now it’s true that the U.S. Navy can and has mostly blocked Iranian oil
exports, although maintaining this blockade is harder than it may seem.
After all, we know that the Navy is under severe strain, literally having
trouble keeping sailors fed and the plumbing on their ships working. These
difficulties, in turn, stem largely from the loss of U.S. bases, especially
the base in Bahrain. Still, this means that Iran is losing its main source
of export revenue. In 2025, that revenue amounted to about $45 billion.

That is a lot of money from Iran’s point of view — around 7 percent of the
country’s 2025 GDP. It is, however, only about 0.2 percent of China’s GDP.

Why is China relevant? Well, because the Chinese are obviously enjoying
great geopolitical benefits from Trump’s self-inflicted quagmire in Iran.
And it would cost them very little, from their point of view, to keep us
stuck in the quagmire by supplying the Iranian regime with enough money
to finance purchases of essential imports.

Can’t the U.S. blockade Iranian imports too? No. Lucian Truscott
<https://substack.com/redirect/36b5dc71-d3a5-4da4-bcf1-7a964b945222?j=eyJ1IjoiNngzbm4ifQ.I1PMvYo4mI3PquTDRhL5Dev-9_ouIq3kw6ZhrVNsy8o>
has
a very good article explaining how fundamentally impossible it would be for
the US to close the many, many routes through which goods can get *into*
 Iran.

In his remarks yesterday
<https://substack.com/redirect/03356ad4-036b-4277-be34-822027b4debf?j=eyJ1IjoiNngzbm4ifQ.I1PMvYo4mI3PquTDRhL5Dev-9_ouIq3kw6ZhrVNsy8o>,
Bessent made grandiose claims to the effect that we can isolate Iran by
imposing sanctions on countries and companies that deal with the Iranian
regime. But the Trump administration has already imposed tariffs and other
sanctions on so many countries, for so many alleged purposes, and
backtracked so many times, that its credibility is exhausted.
Moreover, Iran can get much of what it needs from China. So do you really
believe that a weakened U.S. can coerce China into helping
it defeat Iran? And against China’s own strategic interests? If you believe
that I have a few 30-year bonds to sell you.

Yes, the United States still has the capability to impose substantial
economic hardship on Iran. But it’s just another Trump fantasy to believe
that he can intimidate a regime that has already survived decapitation of
most of its leadership, endured months of intense bombing, and that has
successfully retaliated against U.S. allies in the Gulf.

While Scott Bessent is a contemptible sycophant, he isn’t stupid. He surely
knows that this pathetic attempt to pressure Iran will not only not work
but also reeks of desperation. And the erstwhile bond trader in him will
know what happens when those who really have the goods – China, in this
case – smell the scent of desperation. I can safely predict that the
Chinese will make sure that the Iranian regime survives, and that they will
thoroughly enjoy watching Trump slowly twist in the wind over the Strait of
Hormuz."
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