Limits of 'Economic D-Day'

The Donald Trump administration’s announcement of an “Economic D-Day” against Iran may increase hostilities in ways Washington may not have bargained for. On Monday, Treasury Secretary Scott Bessent, who described the project as “Operation Economic Outcast”, announced new secondary sanctions against countries that do business with Iran. Five specific sectors of the Iranian economy have been identified for sanction targets: Digital assets, technology, gold, aviation, and shipping. The United States (US) has sanctioned about 60 entities in multiple jurisdictions, including four from India. It will have to carefully assess the situation. So far, apart from a slide in US market indices and a rise in oil prices, the impact of this fighting talk is unclear. This campaign comes after nearly six months of joint US-Israeli strikes against Iran failing to dislodge Tehran’s ruling regime or prompt it to relinquish its nuclear ambitions and ease the blockade of the Strait of Hormuz. The United Arab Emirates, a US ally, announced an indefinite halt to business and shipping with Iran after two ballistic-missile launches from Iran on shipping in the Gulf, but this preceded Mr Bessent’s announcement by a week. No other major Iranian energy partner — such as Turkey, Iraq or China — has announced suspensions yet. The bigger concern, however, is whether this latest round of secondary sanctions will achieve its aims or provoke a direct confrontation with China. 

Beijing is the customer of almost 90 per cent of Iran’s exports of crude oil and it supplies Tehran much-needed infrastructure support and dual-use technologies. Moreover, Iran and China settle their oil trade in yuan and leverage the financial architecture Beijing has built around its currency called the Cross-Border Interbank Payment System, which enables it to circumvent the dollar system. Beijing also  employs a shadow fleet of old tankers, which turn off their transponders to evade maritime patrols and operate through a network of “independent” buyers — standalone “teapot refineries” (named for their squat shape), which account for about a quarter of China’s refinery capacity — that rebrand oil as coming from Malaysia or Indonesia to mask its origins. 

One index of Beijing’s potential response to “Economic D-Day” can be seen from an imposition by the US Treasury Department in April this year on five teapot refineries. These sanctions initially squeezed supplies, forcing Iran to draw down floating stocks of crude oil and prompting these refineries to explore alternative sources from Brazil and Iraq.  A week later, Beijing deployed its law on anti-foreign sanctions, stating that the sanctions would not be “recognised, enforced, and complied with”, and described the move as safeguarding its sovereignty. In the long run, the US ruse did not work anyway — Iran continues to sell its crude oil to China. But that prohibition order marked a significant shift in geoeconomic nuance on China’s part, from what analysts described as “hidden workarounds” to overt state-backed resistance. 

In that context, the Trump administration’s “Economic D-Day” project could directly provoke Beijing. How this gambit will play out ahead of Chinese President Xi Jinping’s Washington visit on September 23 is an open question. Mr Trump hopes to extend deals on rare-earth supplies for US manufacturers and discuss tariff caps on Chinese goods. Unlike the storied D-Day landings of World War II, the US may find itself on the back foot in this instance.