Can America Really Isolate Iran? The Limits of Economic Warfare in a Divided World

The United States has entered a new and potentially decisive phase in its economic campaign against Iran. Washington is no longer concentrating only on sanctions against Iranian institutions and companies. It is now threatening countries and businesses that continue trading with Tehran with secondary sanctions and exclusion from the US financial system.

On 24 August, the Trump administration announced what Treasury Secretary Scott Bessent described as an “economic D-Day”, warning countries to reduce their economic ties with Iran or face the consequences. Washington initially stopped short of imposing the most severe penalties on third countries, instead giving them time to comply. Nearly 60 individuals, companies and vessels connected with Iranian oil, weapons and other activities were also targeted.

The objective is clear: to cut what Washington describes as Iran’s remaining economic lifelines.

But can the United States really isolate Iran from the global economy?

The answer is far from straightforward.

Iran Has Been Living Under Sanctions for Decades

Iran is not a country encountering economic sanctions for the first time. For decades, Tehran has developed alternative trading arrangements, intermediary companies, non-dollar payment mechanisms, informal networks and shipping structures designed to reduce its dependence on Western financial institutions.

That experience matters.

Iran’s economy has suffered enormously under sanctions, but the country has demonstrated an ability to adapt. Recent reporting also indicates that Tehran has continued creating new front companies, entities and vessel registrations to evade restrictions.

This means that the United States can make Iranian trade much more expensive and complicated, but completely eliminating Iran’s access to international commerce is a far more ambitious objective.

The real question is therefore not whether Iran can trade.

It is whether Iran can continue trading on a scale sufficient to sustain its economy and government while avoiding the US financial system.

China Is the Biggest Test of America’s Strategy

The greatest challenge to Washington’s strategy is China.

China has been Iran’s largest oil customer for several years. Estimates vary according to methodology and the extent of sanctions evasion, but China has accounted for the overwhelming majority of Iran’s oil exports.

This creates a fundamental dilemma for Washington.

The United States can threaten smaller countries and private companies with secondary sanctions. But imposing the same level of pressure on China’s major banks and financial institutions would have consequences far beyond Iran.

It could trigger retaliation from Beijing and potentially turn the Iran sanctions campaign into another major US-China economic confrontation.

China has already warned that it will take measures to protect its interests and has criticised unilateral US sanctions.

Washington therefore faces a difficult calculation.

If it does not act against major Chinese financial institutions, Iran retains an important economic lifeline.

If it does, the United States risks damaging the wider global financial system and escalating tensions with the world’s second-largest economy.

That explains why the first round of the new measures targeted Chinese-linked entities but stopped short of the most dramatic possible action against China’s financial system.

Russia Provides Another Alternative

Russia presents a different challenge.

Moscow itself has lived under extensive Western sanctions and has consequently developed alternative trade and financial channels. Russia and Iran have also built closer economic and strategic relations, including a long-term partnership agreement.

Russia is not as important to Iran’s economy as China, but it provides Tehran with another route around Western pressure.

The two countries can cooperate through energy, transport, military-industrial links, the Caspian region and alternative payment arrangements. Analysts have therefore warned that China’s and Russia’s existing relationships with Iran could make Washington’s objective of total economic isolation extremely difficult.

This represents a fundamental change in the international economic system.

In the past, cutting a country off from the US-led financial system could come close to cutting it off from the global economy.

Today, that is no longer necessarily true.

A growing group of countries has the economic size, energy resources and financial infrastructure to maintain alternative trading relationships.

What About Pakistan and the Middle East?

Iran’s regional relationships also matter.

Trade with neighboring countries can continue through smaller transactions, local currencies, barter arrangements, energy exchanges and informal border commerce.

Pakistan, Iraq, Turkey and Gulf trading centers have historically provided Iran with important commercial connections, although the ability of these countries to resist American financial pressure varies considerably.

The United States has one enormous advantage: access to the dollar-based financial system.

A bank in another country may have little direct relationship with Iran, but if it depends heavily on dollar clearing, US customers or American financial markets, the threat of secondary sanctions can make Iranian business extremely risky.

This is why US sanctions can be powerful even when Washington does not directly control the companies involved.

The choice for a foreign bank can become very simple:

Do business with Iran, or protect access to the US financial system.

For many international banks, the answer will be the latter.

Will Britain and Europe Join America?

Britain appears firmly aligned with Washington.

The UK government said on 25 August that it had already imposed more than 240 sanctions on Iran and would continue working with the United States and other partners to apply economic pressure. London also linked its position to Iran’s nuclear programme, regional activities and the security of the Strait of Hormuz.

The European Union has also continued to expand restrictions on Iran.

In July, the EU adopted additional measures related to Iran’s military support for Russia, armed groups in the Middle East and Red Sea region, and actions affecting freedom of navigation.

Therefore, Britain and Europe are unlikely to become a major economic escape route for Tehran.

However, there is an important difference between supporting sanctions and supporting every element of American economic warfare.

European governments must also consider their own interests.

They need energy security. They need stable shipping routes. They need to protect European companies and consumers. And they have a strong interest in preventing another prolonged Middle Eastern conflict.

Consequently, Europe may support significant sanctions while simultaneously pushing for diplomacy and a negotiated settlement.

The Strait of Hormuz Changes Everything

The biggest threat to the global economy is not necessarily the loss of Iranian trade.

It is the possibility that economic warfare further disrupts the Strait of Hormuz.

This narrow waterway is one of the world’s most important energy corridors. The IMF estimates that around 20 million barrels a day of crude oil and refined products—roughly one-fifth of global consumption—were affected when the conflict effectively closed the strait.

UN Trade and Development has warned that the disruption is affecting not only energy markets but also global trade, shipping, inflation and financial conditions. It estimates that global merchandise trade growth could slow sharply in 2026, while global growth could fall to around 2.6% if the disruption persists.

This is where the Iran sanctions strategy becomes a global economic issue.

Higher oil prices affect almost everything:

• transport;
• aviation;
• manufacturing;
• chemicals;
• agriculture;
• fertilizers;
• electricity;
• food prices;
• shipping and insurance.

The impact would be particularly serious for energy-importing economies in Asia and Europe.

The Paradox of Economic Warfare

There is a fundamental paradox in the current strategy.

Washington’s intended chain of events is:

Sanctions → lower Iranian revenues → greater economic pressure → Iranian concessions → diplomatic settlement.

But another chain is possible:

Sanctions → Iranian retaliation → disruption of shipping → higher oil prices → global inflation → slower growth → greater pressure on Europe and Asia.

If that happens, the economic cost will not be confined to Tehran.

Indeed, one of the unintended consequences could be to strengthen China’s relative position.

China can potentially purchase discounted energy from countries operating outside the Western sanctions system while European and other Western economies pay higher prices in international markets.

This does not mean China automatically wins. China also suffers from higher energy and shipping costs.

But it does mean that the world economy could become increasingly divided between competing economic systems.

The Rise of a Parallel Global Economy

Perhaps the most important long-term consequence of the Iran confrontation is not the immediate effect on Iranian GDP.

It is the possibility of accelerating the development of a parallel global trading system.

Countries such as China, Russia and Iran increasingly have incentives to conduct transactions outside the traditional Western financial architecture.

BRICS countries are also discussing greater use of local currencies and alternative financial arrangements, although this process remains far from replacing the dollar-based system.

The more Washington uses access to the dollar as a tool of foreign policy, the greater the incentive for countries outside the US alliance system to reduce their dependence on it.

This does not mean the dollar is about to lose its dominant international position.

The US financial system remains extraordinarily powerful.

But there is a difference between dollar dominance and dollar monopoly.

The latter is already disappearing.

Can Sanctions Force Iran to Change?

Sanctions can undoubtedly weaken Iran.

They can reduce investment, restrict access to technology, damage oil revenues, increase inflation and make international transactions more expensive.

But economic pain does not automatically translate into political capitulation.

Iran has lived under sanctions for decades and has developed institutions and networks designed to survive them.

The United States therefore faces a strategic question:

How much additional economic pain can Iran absorb before it changes its political calculations—and how much economic pain can the rest of the world absorb before the costs of isolation become greater than the benefits?

That question has no easy answer.

The Most Likely Outcome

A complete economic isolation of Iran is unlikely.

A more realistic scenario is a prolonged period of economic pressure followed by negotiations.

Iran may eventually make concessions on nuclear activities, regional security or freedom of navigation. In return, Tehran could seek partial sanctions relief, access to international markets and the restoration of oil exports.

Such an outcome would allow Washington to claim that sanctions worked while allowing Iran to avoid complete economic collapse.

That may ultimately be the most practical solution.

A New Economic Cold War?

The deeper issue goes beyond Iran.

The world is increasingly moving from one integrated economic system towards several overlapping economic blocs.

The United States and its allies possess enormous financial power. China possesses enormous manufacturing and trading power. Russia remains a major energy and commodity producer. Iran occupies a strategically important position between Asia, the Middle East and Europe.

The confrontation over Iran therefore represents something larger than another sanctions campaign.

It is a test of whether American financial power can still compel the entire world to follow Washington’s foreign-policy objectives.

The answer may be increasingly complicated.

America can impose enormous economic costs on Iran.

Britain and Europe can reinforce those restrictions.

But China and Russia provide alternative economic channels, while Iran’s own experience gives it considerable resilience.

The greatest danger is that the attempt to isolate Iran could unintentionally accelerate the fragmentation of the global economy.

The world may therefore face a new reality:

not one global economy, but competing economic systems operating alongside one another.

If that happens, the Iran crisis could become a turning point—not because Iran itself is large enough to reshape the world economy, but because the struggle over Iran could determine how much longer the United States can use its financial system as the principal instrument of global economic power.

For policymakers, the lesson should be clear: economic pressure can be powerful, but diplomacy remains cheaper than economic fragmentation and a prolonged energy shock.

The ultimate measure of success should therefore not be whether Iran is isolated.

It should be whether the international community can achieve security and political concessions without turning the global economy into another casualty of the conflict.