On August 24, four days after President Donald Trump announced an “unprecedented economic war and isolation” campaign against Iran, the U.S. Treasury Department formally launched Operation Economic Outcast, a whole-of-government effort aimed at severing Tehran’s remaining financial and commercial links. The announcement combined nearly 60 new designations with broader exposure to secondary sanctions and warned foreign governments and companies that they would be given specific deadlines to wind down identified Iran-related activities across five critical sectors, including digital assets, technology, and shipping.

Trump’s turn toward economic warfare reflects a broader strategic dilemma confronting Washington. The U.S. finds itself caught between renewed military escalation and a diplomatic settlement that falls short of its fundamental demands. It has so far been unable to exert sufficient pressure on Tehran to compel it to accept U.S. terms. At the same time, Washington appears unwilling, at least for now, to assume the high and unpredictable costs of another large-scale military operation. Economic warfare thus represents an attempt to find a middle course between two options that have become increasingly difficult to pursue.

An agreement largely shaped by Iran’s demands would require Washington to retreat from several of the fundamental objectives it sought to achieve at the outset of the war. Such an agreement would allow Tehran to retain much of its ballistic missile capability and regional influence, as well as its de facto control over the Strait of Hormuz. Moreover, the U.S. has not only failed to achieve its declared war objectives but has also disrupted the pre-war status quo in the Strait, which had remained open to international trade before the conflict. Presenting such an outcome, after six months of war, as a success would carry an exceptionally high political cost for Trump ahead of the midterms.

Yet returning to the military option carries risks no less serious than accepting Iran’s terms. It remains unclear whether another operation could achieve Washington’s political objectives or whether the costs of Iranian retaliation could be effectively contained. Despite the significant erosion of its military capabilities over the past six months, Tehran has retained strategic tools capable of imposing substantial military and economic costs on the U.S. and its allies. It has also demonstrated its ability to retaliate effectively. Repeating the same military strategy would therefore risk reproducing the existing impasse at a higher and far less predictable cost rather than producing a fundamentally different outcome.

This risk has been further underscored by reports of dwindling U.S. air and missile defence stockpiles. According to estimates reported by CNN, approximately 80 percent of the U.S. THAAD interceptor inventory and nearly half of its Patriot stockpile were used during the war. CSIS estimates suggest that restoring these inventories to pre-war levels could take years. An assessment published in the Financial Times further indicates that the problem predates the war with Iran. Large-scale munitions transfers to Ukraine had already significantly depleted U.S. stockpiles, while the American defence industry proved unable to replenish them at a comparable rate. The war with Iran thus compounded an already growing shortfall.

Although President Trump and Defense Secretary Pete Hegseth have strongly rejected claims that U.S. stockpiles have been critically depleted, the Pentagon’s efforts to secure new agreements to expand Patriot and THAAD production, together with the substantial defence budget requested from Congress, suggest that pressure on U.S. inventories is nevertheless significant. Against this backdrop of narrowing strategic options, economic warfare has emerged as a less costly middle course for Washington. It allows the US to maintain pressure on Tehran without either conceding to Iran’s demands or risking another round of military escalation with unpredictable costs and consequences—particularly as U.S. munitions stockpiles run low and the midterm elections approach.

The measures substantially broaden the legal reach of U.S. sanctions. Five key sectoral determinations allow Washington to target foreign actors operating in or providing services to Iran’s digital-assets, technology, gold, aviation, and shipping sectors, supplementing existing restrictions on its financial, petroleum, and petrochemical industries. In parallel, OFAC designated nearly 60 individuals, companies, and vessels linked to nuclear and missile procurement, cyber operations, shadow banking, and oil-revenue networks operating across China, Hong Kong, the UAE, Singapore, Switzerland, and Europe. It also suspended several general licences covering certain remittances and Iranian access to U.S. academic and cultural institutions, while issuing new guidance warning maritime actors against facilitating Iranian demands in the Strait of Hormuz.

Yet the campaign’s most consequential element remains prospective rather than operational. Treasury has threatened faster and wider secondary sanctions but has so far refrained from penalising major foreign financial institutions, particularly Chinese banks involved in Iran’s oil trade. Since China remains the principal buyer of Iranian oil, a serious attempt to enforce Tehran’s isolation would ultimately require Washington to confront Chinese financial and commercial actors, potentially opening a new front in U.S.–China economic relations. The UAE pillar is also decisive. The UAE’s August 18 suspension of commercial and financial transactions with Iran illustrates the potential reach of this pressure, although continued flights, banking activity, and commercial links in Dubai suggest that implementation remains uneven.

How far can economic pressure go?

The new measures are likely to place significant additional pressure on the Iranian economy. Declining oil revenues, reduced access to foreign currency, and the loss of a critical commercial and financial hub such as the UAE would further deepen economic difficulties already aggravated by the war. Yet there is no automatic or linear relationship between rising economic costs and political concessions. The long history of sanctions in U.S.–Iran relations constitute a textbook case of inefficacy of these coercive measures.

Washington should therefore not expect economic pressure to secure quickly what military force failed to achieve. Iran has accumulated considerable experience in transferring the economic costs of sanctions to society, developing alternative trade channels, and creating new entities to replace companies targeted by sanctions. As sanctions experts have noted, targeting individual companies can quickly turn into a “whack-a-mole” game, as new entities emerge to replace those placed under sanctions.

More importantly, Iran can be expected not merely to absorb American economic pressure but to activate its own instruments of counter-pressure. Tehran could further restrict passage through the Strait, increase inspections and insurance requirements for vessels, intensify pressure on shipping around Bab al-Mandab through the Houthis, or increase threats against the energy infrastructure of Gulf states. Unlike during previous periods of sanctions, therefore, Iran does not necessarily have to bear the costs of economic pressure alone. The leverage it retains, particularly in the Strait, gives Tehran the capacity to transfer part of those costs to the U.S., regional states, and global markets.

This is the central limitation of Trump’s emerging strategy. Economic warfare may offer Washington a less costly alternative to renewed military escalation, but it does not necessarily provide a way out of the strategic impasse that produced it. The greater the pressure Washington seeks to impose on Tehran, the stronger Iran’s incentive will be to exploit those areas in which it can impose costs of its own. Economic warfare could therefore become not a substitute for confrontation, but another arena in which the same contest is fought.

Against this backdrop, Trump’s and other U.S. officials claim, that the situation in the Strait has returned to normal and that control has passed entirely to the U.S. can be understood as an attempt to project the image that the war has effectively ended and that, at least for now, the Iran file has been closed. Yet unless free and secure passage through the Strait of Hormuz is permanently restored and an agreement is reached on the underlying issues that produced the conflict, such declarations of victory will remain difficult to reconcile with realities on the ground.

What is emerging, then, is not a stable post-war order but a fragile state of “neither war nor peace.” Washington remains unwilling to accept an agreement largely shaped by Tehran’s demands, yet reluctant to return to a military confrontation whose costs it cannot confidently control. Iran, for its part, remains under considerable pressure but retains sufficient leverage to impose costs on the U.S. and its partners. Economic warfare may postpone the choice between renewed war and a negotiated settlement, but it cannot resolve the underlying strategic impasse. For now, Washington and Tehran remain locked in an uneasy contest over which side can impose greater costs and, ultimately, endure them for longer.