The United States is trying to tighten the economic isolation of Iran, but the campaign runs into a problem much larger than Tehran itself. China buys most of the oil Iran still manages to export, and Beijing is warning Washington that attempts to punish major Chinese companies could turn an Iran sanctions campaign into a confrontation between the world’s two largest economies.
Off the southern coast of Sri Lanka, Iranian tankers have been gathering thousands of miles from the Persian Gulf, part of a widening pattern of vessels waiting, rerouting or searching for ways to move crude through an increasingly difficult trading system.
Their presence gives physical form to what is otherwise an argument about sanctions, banking rules and financial jurisdiction. Iran still has oil to sell. China still wants to buy it. Washington is trying to make the transaction harder, more expensive and eventually impossible.
That is where the new American campaign begins to encounter its limits.
Treasury Secretary Scott Bessent announced another round of sanctions this week under Operation Economic Outcast, targeting nearly 60 people, companies and vessels, including businesses in mainland China and Hong Kong. Yet the measures stopped short of China’s major banks and financial institutions, the targets that would matter most if Washington genuinely intends to sever Iran from its largest remaining oil customer.
The omission is significant because sanctioning a small trading company is one thing. Telling one of the world’s largest economies that its banks must choose between Iranian commerce and access to the American financial system is something else entirely.
Beijing has made clear that it understands the distinction.
Chinese Foreign Ministry spokesman Lin Jian said on Tuesday that China would take all necessary measures to protect its rights and interests. Beijing rejects unilateral sanctions that do not have United Nations Security Council authority and insists that its trade with Iran is legitimate.
Behind that legal language is a strategic warning. If Washington wants to isolate Iran completely, it may eventually have to confront China directly.
The China problem
China buys the overwhelming majority of the oil Iran manages to export. Independent refiners, traders, tanker networks and payment arrangements have grown around that trade during years of sanctions, creating an economic route that Washington has repeatedly tried to close without fully succeeding.
The United States still has powerful tools. It can frighten insurers, banks and shipping companies away from Iran, freeze assets under American jurisdiction and exclude designated companies from parts of the international financial system.
Those measures can hurt Iran badly, but hurting Iran is not the same as isolating it.
As long as Chinese buyers remain willing to take Iranian crude, an important lifeline remains open.
The timing makes the dilemma more delicate. Donald Trump and Xi Jinping are expected to meet in Washington next month while their governments try to manage disputes over tariffs, technology and strategic minerals. An aggressive expansion of sanctions against major Chinese institutions could turn Iran from a regional problem into another front in the wider struggle between Washington and Beijing.
China also possesses economic weapons of its own. Its control over important parts of the critical minerals supply chain has already shown how vulnerable American manufacturers can be to Chinese restrictions. Washington can threaten access to dollars and markets, while Beijing can threaten access to materials and industrial supply chains.
Neither side can use those weapons without paying a price.
A dispute over law as well as power
The confrontation also raises a question that is often obscured by the language of sanctions.
Whose law applies?
The United States has broad authority to regulate its own citizens, banks and markets. The legal controversy begins when Washington uses access to those markets to influence transactions between foreign companies outside American territory.
A Chinese company may conduct business with Iran that is lawful under Chinese law, yet Washington can still force it to choose between that trade and continued access to American finance.
The United States regards that as a sovereign decision about who may enter its markets. China sees it as an attempt to impose American policy on commerce between other countries.
That distinction matters because American sanctions are not the same thing as United Nations sanctions. United Nations experts have questioned whether extraterritorial secondary sanctions are compatible with established principles of sovereignty, jurisdiction and non intervention, although those opinions do not amount to a binding international court judgment declaring the American system unlawful.
In practice, the argument is often decided not by legal theory but by economic weight. A Chinese bank does not have to agree with Washington’s interpretation of international law. It may comply simply because losing access to American finance would cost too much.
The larger the target, however, the more difficult that calculation becomes.
Tehran’s answer
Iran is increasingly presenting economic pressure as another form of warfare rather than as an alternative to military confrontation.
Professor Seyed Mohammad Marandi, an Iranian academic close to the political establishment, argues that further American pressure will bring retaliation.
“If the United States harms Iran, Iran is going to harm the United States,” he said, adding that American allies would also face consequences.
His most serious warning concerns energy. If Washington increases economic pressure, he argues, Iran will increase pressure of its own and could threaten the flow of oil from the wider Gulf.
Marandi is not an official government spokesman, and some of his predictions go considerably beyond publicly established Iranian policy. But Iranian officials have also warned that attempts to choke the country’s economy could broaden the confrontation.
The logic behind that position is straightforward. If Iran is prevented from exporting its own oil, Tehran wants neighbouring producers and their Western allies to understand that the rest of the Gulf energy system may not remain untouched.
That places Saudi Arabia, the United Arab Emirates, Qatar and other producers in a difficult position. They rely heavily on security relationships with Washington while depending on the stability of a regional energy system that Iran can threaten.
Yet Iran’s leverage has limits too. China imports large quantities of energy not only from Iran but also from Saudi Arabia, Iraq and other producers. A prolonged disruption of Gulf exports would therefore damage the country whose purchases provide Tehran with its most important remaining market.
The wider consequences
The ships waiting around Sri Lanka show how quickly this contest spreads beyond the countries formally involved.
Every barrel of oil requires a ship, an insurer, a financier, a payment mechanism and a refinery. Washington is trying to disrupt those connections while Iran and its trading partners are trying to preserve them.
India is already feeling some of the consequences. Indian companies have been caught in the latest American measures, while New Delhi must also consider what a prolonged confrontation could mean for crude prices, freight costs and insurance.
That is the defining characteristic of secondary sanctions. They extend an American policy dispute into the commercial decisions of countries that may have little desire to participate in it.
Their effectiveness comes from the power of the American financial system, but repeated use of that power also gives China and other large economies a reason to build alternative payment and trading systems that reduce their vulnerability to decisions made in Washington.
That does not mean the dollar is about to lose its dominant position. Predictions of rapid de dollarisation have repeatedly gone too far. But the strategic incentive is real: the more often access to the American financial system is used as an instrument of coercion, the greater the incentive for rival powers to reduce their dependence on it.
The limits of economic coercion
Both Washington and Tehran risk exaggerating the strength of their positions.
Iran remains economically vulnerable. Restrictions on oil revenues, shipping and finance impose serious costs, and if Washington could persuade or compel China to reduce Iranian purchases substantially, Tehran would face much greater pressure.
But the latest sanctions also reveal the limits of American power.
Washington has targeted Chinese companies, but it has not yet taken the far more consequential step of confronting China’s major financial institutions. That may be deliberate caution rather than hesitation, but the distinction matters.
For decades, secondary sanctions have often succeeded because individual banks and companies concluded that access to the American economy was more valuable than whatever business they might lose elsewhere.
Iran presents a harder test because its most important customer is not an isolated company or a small state. It is America’s principal economic rival.
That leaves Washington with an uncomfortable choice. If it stops short of confronting China, Iran retains an important economic lifeline. If it goes further, an effort to isolate Tehran risks becoming part of the much larger struggle between Washington and Beijing.
The Iranian tankers waiting off Sri Lanka therefore sit at one end of a contest that reaches far beyond the Gulf. Washington is trying to prove that its financial power can still isolate an adversary. Tehran believes the vulnerability of the regional energy system gives it a means of retaliation.
Between them sits China, buying Iranian oil and deciding how far it is prepared to resist.
For the moment, Washington has not forced that decision.