Krugman Warns Trump's Iran Policy Self-Defeating, China Reaps Geopolitical Dividends

China is reaping geopolitical dividends from the ongoing Iran conflict, which economist Paul Krugman describes as a self-made "quagmire" for the Trump administration.

Krugman's view stems from new U.S. sanctions targeting Iran's economy—a move he argues will ultimately backfire, cementing Beijing's strategic advantage.

"Economic D-Day" or Bluff?

In a recent Substack newsletter, Paul Krugman dissected Treasury Secretary Scott Bessent's proposed "economic D-Day" against Iran. Despite administration claims that Iran is defeated and eager for a deal, Krugman points to fundamental flaws in its strategy.

He warns the economic pressure campaign will "fail as thoroughly as the military campaign." Given "the sheer scale of the U.S. military failure in the Persian Gulf," including abandoned American bases and increased naval pressure, maintaining an effective blockade on Iranian exports is becoming increasingly difficult.

China's Geopolitical Windfall

While the U.S. has succeeded in blocking some Iranian oil exports—costing Tehran roughly $45 billion in revenue in 2025—Krugman stresses this amount is trivial for China, accounting for just 0.2% of its GDP.

"China is clearly reaping huge geopolitical gains from Trump's self-made quagmire in Iran," Krugman notes. He argues Beijing can keep the U.S. tied down at minimal cost by financing essential imports for Iran, thereby ensuring the regime's survival.

Threats Built on Exhausted Credibility

The Treasury recently announced expanded sanctions targeting individuals and vessels, threatening to cut countries trading with Iran off from the dollar-based financial system. Yet its initial list notably omitted Chinese financial institutions.

Krugman dismisses Bessent's grand claims of globally isolating Iran, arguing the administration's credibility has been "exhausted" by repeated reversals and tariff abuses.

He predicts those "with real power—in this case, China—can smell desperation."

According to Krugman, Beijing will step in to ensure the Iranian regime's survival, relishing the sight of Trump "squirming slowly over the Strait of Hormuz."

How Are Oil and Equities Performing?

At last check, Brent crude futures fell 2.77% to $88.04 per barrel, while West Texas Intermediate crude futures dropped 3.09% to $82.36 per barrel.

The WTI-tracking United States Oil Fund is up 89.58% year-to-date, down 3.28% over the past month, and up 77.13% over the past year. Similarly, the Brent-tracking United States Brent Oil Fund is up 85.06% year-to-date, up 0.38% over the past month, and up 74.42% over the past year.

The S&P 500 is up 11.58% year-to-date. The Nasdaq Composite is up 11.81%, and the Dow Jones is up 10.41% year-to-date.

On Monday, the SP S&P 500 ETF Trust and Invesco QQQ Trust ETF, tracking the S&P 500 and Nasdaq 100, closed lower. SPY fell 0.29% to $763.47, and QQQ fell 1.00% to $706.32. Meanwhile, the Dow-tracking State Street SPDR Dow Jones Industrial Average ETF Trust rose 0.27% to $533.65.

In Tuesday's premarket, SPY is up 0.41%, QQQ is up 0.87%, and DIA is up 0.45%.