When U.S. Treasury Secretary Scott Bessent announced the launch of Operation Economic Outcast in late August—an “economic D-Day” campaign to demolish Iran’s economy and war effort—he did not specifically mention China. But the Sino-Iranian trade relationship forms the functional core of Tehran’s global commerce, and after the announcement, the Chinese government said it would take “all necessary measures” to protect its right to engage with Iran. With Chinese President Xi Jinping set to arrive in Washington on Wednesday for the next round of U.S.-China trade talks on Thursday, just over a month before the U.S. midterm elections, Washington has introduced a new point of friction into the troubled relationship.
China buys most of Iran’s oil—more than 90 percent by some estimates. Beijing thus provides a vital source of foreign currency to Iran’s economy, in addition to finished goods, factory parts, and investment in infrastructure. In short, a campaign aimed at “asphyxiating” the Iranian economy, in Bessent’s terms, cannot succeed without targeting Chinese refiners, terminals, shippers, and clearing banks.
When U.S. Treasury Secretary Scott Bessent announced the launch of Operation Economic Outcast in late August—an “economic D-Day” campaign to demolish Iran’s economy and war effort—he did not specifically mention China. But the Sino-Iranian trade relationship forms the functional core of Tehran’s global commerce, and after the announcement, the Chinese government said it would take “all necessary measures” to protect its right to engage with Iran. With Chinese President Xi Jinping set to arrive in Washington on Wednesday for the next round of U.S.-China trade talks on Thursday, just over a month before the U.S. midterm elections, Washington has introduced a new point of friction into the troubled relationship.
China buys most of Iran’s oil—more than 90 percent by some estimates. Beijing thus provides a vital source of foreign currency to Iran’s economy, in addition to finished goods, factory parts, and investment in infrastructure. In short, a campaign aimed at “asphyxiating” the Iranian economy, in Bessent’s terms, cannot succeed without targeting Chinese refiners, terminals, shippers, and clearing banks.
U.S. President Donald Trump’s administration is clearly hoping that time is on its side: Bessent estimated that Iran now only has 30 million barrels of oil left outside the U.S. naval blockade of the Strait of Hormuz to sell to China. But even these projections—which may be an understatement given Bessent’s goal to calm the markets—would still leave Tehran with weeks’ worth of exports before it would have to fall back on other mitigation measures. Given the toll of energy market distress on the U.S. economy, which has led to higher borrowing costs for the government, businesses, and consumers alike, Washington may not be able to wait Iran out.
But any action against China carries risks. A limited sanctions campaign on small to midsize Chinese firms would fall far short of achieving Washington’s goals. A broader campaign directed toward entities essential to Beijing’s financial system might rupture the fragile trade peace between the United States and China and incite Chinese retaliation.
Upon the launch of the latest sanctions against Iran, the United States designated nearly 60 entities, individuals, and vessels, including many in China and Hong Kong. Notably, the campaign spared significant Chinese banking institutions and smaller, independently owned teapot refineries that buy Iranian oil. “The rhetoric was ferocious, but the punch less so,” noted Daniel Fried, a former U.S. State Department official.
The instruments Washington seems willing to employ thus far will not deliver its stated objectives. Sanctions against shipping shell companies registered in Hong Kong and the Marshall Islands, for example, or against independent refiners in Shandong that barely interact with the U.S. financial system impose friction without inflicting cost. Depriving such firms of using the U.S. dollar has a negligible impact on their heavily localized operations.
The announcement was accompanied by a warning to China and others of Washington’s plan to escalate the economic war by expansively targeting Iran’s business partners. The U.S. Treasury Department proposed cutting an Emirati bank off from U.S. banking over its alleged role in laundering Iranian funds and has sanctioned Turkey’s Golden Global bank for transferring Iranian oil revenue from China. The measures will likely have a limited effect in the near term; Iran’s countersanctions infrastructure is vast and highly decentralized, specifically to frustrate such efforts from the United States. However, these actions establish a potential template for targeting mid-tier Chinese banks linked to Iranian oil sales in the future.
The global oil market is under significant distress. To enforce its claim on the Strait of Hormuz, Iran has increasingly targeted ships attempting to sneak by its blockade, which means the amount of oil leaking through the Strait is still substantially lower than pre-war levels—and at much higher cost. Meanwhile, attacks blamed on the Houthis and Iran-aligned militias in Iraq have disrupted Saudi Arabia’s alternative export routes through the East-West pipeline and in Red Sea ports. As a result, the prices of diesel and crude transportation are surging dramatically as a finite number of tankers strain to navigate longer, more arduous missions.
These impacts are particularly painful for the U.S. economy. Diesel plays a key role in manufacturing and transportation, which means that higher diesel prices effectively lead to higher prices of industrial operations, groceries, and much more. The ensuing inflation expectations then create trouble in the bond market and increase borrowing costs for consumers and the government.
If Iran cannot be coerced directly through the U.S. blockade, the Trump administration will face a choice between acknowledging the failure of its war effort and escalating its sanctions campaign against larger Chinese firms. Such actions would create new political risk for China’s entire banking system and elicit retaliation from Beijing, potentially kicking off an entirely separate conflict between the world’s top two economies.
The United States has been aware of Iran’s commercial relationship with mid-tier Chinese banks for almost two decades. But sanctioning China, the primary trading partner of most of the world, is an entirely different proposition than imposing economic measures on Iran.
To be clear, Washington has imposed sanctions against Chinese entities for their commercial links to Iran before—namely smaller, specialized entities that provide services or products to Iran. Even some measures against major Chinese firms, including restrictions on technology giants Huawei and ZTE, were taken based on those firms’ commercial ties to Iran. However, even in China, the Iran nexus was seen as a rationalization, rather than the primary reason, for targeting Chinese firms, especially within the broader competition for tech dominance. While China’s reaction was relatively mute at the time, both its appetite and toolkit for economic conflict have expanded since then.
Beijing has spent years developing a system to protect itself from U.S. economic measures and retaliate when it sees fit. Much like the United States, China can blacklist foreign firms and restrict their ability to sell, invest, or otherwise operate within the Chinese market. Beijing has also established laws that prohibit Chinese firms from complying with U.S. edicts, empowering China to retaliate and deter U.S. sanctions threats in ways that were inconceivable during the first Trump administration.
In May, for example, Beijing for the first time barred Chinese firms from complying with new U.S. sanctions on Chinese teapot refiners over their ties to Iran. The move signaled Beijing’s willingness to defend its commercial ties and strategic autonomy and likely contributed to Washington’s decision to impose far tamer sanctions in August than some expected. If further threatened, China could also increase export restrictions on critical minerals or step up oil purchasing, which would further exacerbate global energy markets and put U.S. firms at a profound disadvantage to global competitors.
Washington’s problem is a familiar one. Economic action against smaller Chinese entities, or even mid-tier firms such as teapot refiners, would be largely ineffective in restraining China’s relationship with Iran. Sanctions against larger entities or significant elements of the Chinese banking system would catalyze a trade war with China and create ripple effects across the global economy, including within the United States itself. Essentially, the easier options would be ineffective; the effective ones carry systemic costs.
The U.S.-China relationship underpins the world order, with key issues such as semiconductors, critical minerals, technology competition, and Taiwan hanging in the balance. Further escalating an economic war against China would compound the costs for both Washington and the global economy.
But the United States has already allowed its Iran quagmire to disproportionately affect Sino-American diplomacy. The spring summit between Trump and Xi was postponed after the war began. The United States issued a Russian oil sanctions waiver in March to manage wartime prices while Russian crude shipments to China rose—which means the war strengthened Beijing’s energy security. The same month, Beijing refused Trump’s request for help in reopening the Strait of Hormuz and vetoed a United Nations Security Council resolution to boost safety in the strait.
In each instance, Iran policy set the terms on which the United States met its principal competitor. And in each instance, the United States ended up with worse terms than those it started with.
Washington has resisted a major escalation against China over Iran thus far—and for good reason. There seems to be a general consensus in Washington that the Iran war should not dictate China policy. But as diesel prices and yield rates climb, the situation could become perilous enough for the Trump administration to resort to an enforcement campaign with an unreachable objective, which would then dictate the tempo of its most consequential relationship. If the consensus collapses by the time Xi lands in Washington on Wednesday, the war against Iran will dominate U.S. foreign policy and the broader geopolitical landscape for decades to come.