Paul Krugman / Translation iPress
Nobel laureate in Economics, Paul Krugman, argues that the Trump administration’s economic strategy against Iran is doomed to the same failure as the military campaign. Even a partial restoration of shipping through the Strait of Hormuz, in his view, will not alleviate the price pressure, as the main issue is high gasoline and diesel prices due to a shortage of refining capacity. Meanwhile, attempts to economically isolate Iran may falter due to China’s support and numerous supply routes. Ultimately, Paul Krugman predicts that Beijing will help Tehran hold on, keeping the U.S. in an Iranian trap.
So, if you believe Trump and his officials, the situation in the war with Iran is as follows: Iran is thoroughly defeated and desperately seeks an agreement—moreover, Trump has announced at least six times that a deal is imminent. Meanwhile, since there is no agreement and Iran remains unyielding, Treasury Secretary Scott Bessent is preparing what he calls an “economic D-Day”—sanctions designed to bring the Iranian regime to its knees. The task is not easy, as those same officials claim Iran is already on its knees. Nevertheless.
The main thing to understand: this economic campaign will fail as thoroughly as the military one.
The U.S. plan, or perhaps just the “concept of a plan,” seems to boil down to the principle: “Blockade me? No, blockade you!”
On one hand, the U.S. is trying to restore the flow of oil through the Strait of Hormuz despite Iranian threats. At least some tankers are passing through the strait “in the dark,” with their transponders off. Private insurers are unwilling to cover the risks of such voyages, so insurance is instead provided by the U.S. government. And American military forces provide some protection against Iranian drones and missiles.
This part of the plan, I dare say, is not entirely absurd. Evidently, at least some amount of oil is indeed passing through the strait. The Trump administration claims 8 million barrels a day—this would be a significant figure if it were true. Unfortunately, the source of this figure is Trump officials, who are not to be trusted, so the actual amount is anyone’s guess.
But the more important issue is this: even a successful reopening of the Strait of Hormuz now holds significantly less importance than it would have a few months ago. There are two main reasons why ending the Iranian blockade of the strait, even if possible, will not have the desired effect.
The first is the sheer scale of the US military failure in the Persian Gulf. American strikes on Iran not only failed to overthrow the regime, but Iranian attacks also forced the US to abandon many of its bases in the region. The loss of these bases, along with the depletion of American stockpiles of interceptor missiles and other ammunition, means that America is effectively unable to defend its allies in the Persian Gulf.
So what happens if Iran decides that the blockade of the Strait of Hormuz is causing insufficient damage? It can—and will—raise the stakes by striking oil facilities throughout the region. And there is little America can do to prevent this.
The second reason is that energy prices for end consumers are increasingly decoupling from the price of crude oil. Remember: people burn gasoline and diesel, not crude oil. And the prices for these petroleum products have risen much more than the price of oil. The graph below shows the price of Brent crude oil, wholesale diesel prices, and the weighted average of wholesale diesel and gasoline prices:
The large premium in petroleum product prices compared to the price of crude oil, the so-called “crack spread,” is a result of a global shortage of refining capacity (partly caused by Ukrainian strikes on Russian refineries). So even if Bessent manages to increase the flow of oil through the Strait of Hormuz and reduce crude oil prices, the economic pressure Americans feel at gas stations will remain strong.
And what about Bessent’s threat to economically isolate Iran by cutting off its export and import? The answer in one word: China. As I wrote a few weeks ago, China has emerged as the winner in Trump’s war.
Yes, the US Navy can and mostly has blocked Iranian oil exports, although maintaining this blockade is more difficult than it may seem. We know that the fleet is under enormous strain: the fleet literally has issues with feeding sailors and maintaining plumbing on ships. In turn, these difficulties are largely caused by the loss of American bases, especially the base in Bahrain. However, this means that Iran is losing its main source of export revenue. In 2025, this income amounted to about 45 billion dollars.
From Iran’s perspective, this is a huge sum—about 7% of the country’s GDP in 2025. But it is only about 0.2% of China’s GDP.
Why is China important here? Because the Chinese obviously gain significant geopolitical benefits from the trap Trump has set for himself in Iran. From their perspective, it would cost almost nothing to keep us in this trap while providing the Iranian regime with enough money to pay for critically needed imports.
Can’t the USA block Iranian imports as well? No. Lucian Truscott wrote a very good article explaining why it would be fundamentally impossible for the USA to block the many routes through which goods can enter Iran.
In his recent statements, Bessent loudly claimed that we can isolate Iran by imposing sanctions on countries and companies dealing with the Iranian regime. But the Trump administration has already imposed tariffs and other sanctions against so many countries under so many declared pretexts, and then backed down so many times, that its credibility is exhausted. Moreover, Iran can obtain a significant portion of what it needs from China. So do you really believe that a weakened USA can force China to help them defeat Iran? Especially against China’s own strategic interests? If so, I have some 30-year-old bonds to sell you.
Yes, the United States still has the ability to cause significant economic difficulties for Iran. But believing that Trump can intimidate a regime that has already survived the decapitation of much of its leadership, endured months of intense bombing, and successfully struck back at US allies in the Persian Gulf, is just another Trump fantasy.
Scott Bessent is a disgusting sycophant, but he’s not a fool. He probably understands that this pathetic attempt to press Iran will not only fail but also reeks of desperation. And as a former bond trader, he knows well what happens when those who truly have the needed goods, in this case, China, smell desperation. I can confidently predict that the Chinese will ensure the survival of the Iranian regime and will take great pleasure in watching Trump flounder helplessly around the Strait of Hormuz.
