America vs. Iran – Economic, Strategic Conflict Not Physical War

 

This week, war drums seemed ready to beat between America & Iran but did not. Quite possibly, signals were misread or internal combat between different aspirants for power in Iran somehow created the possibility of a misadventure. But the episode showed the new reality of the Persian Gulf. No one wants the conflict underneath to break out into a military war.

The scare went down dramatically with the simple “I hope not” response by President Trump to a question whether a war might erupt in the Persian Gulf. Regardless of what any one else in his administration might say, President Trump does not want a war either in the Middle East or in the Pacific. If one is forced on him, he will respond with massive force but that war has to be visibly & obviously forced on him by a stupid opponent.

Many believe that Iran is a major dominant power in & along the northern coastline of the Persian Gulf. But, like the belief in the inexorable rise of China as a global superpower, this is more image than reality.

1.A Weaker Iran

First & foremost, the so-called Iranian “power” comes from its purse – its ability to send sizable amounts of monies to its proxies. That is being attacked & squeezed inexorably by the Trump administration with economic sanctions. Iran has nothing to sell to the world except oil & petrochemicals. And those exports are being squeezed not by sanctions on governments but on their companies that deal with Iran. 

The Trump Administration is demonstrating to the world that no major corporation can withstand American pressure. Just look at Huawei, the huge Chinese telecom multinational. Huawei is close to Chinese leadership and China is the second largest economy in the world. But despite that, Huawei is being slowly banished from many markets. And the Trump Administration is even forcing Britain to choose between its special relationship with America and Huawei.

That example has to force most global energy companies to minimize their relationship with Iran regardless of what their governments say. That does not mean Iran will collapse. China & Russia will protect the Iranian economy from total collapse but not from a serious economic slowdown.

Secondly, the physical reach of Iran & the much ballyhooed Lebanon-Syria-Iraq-Iran belt is more image than reality. Iran does have a big voice in Lebanon but, reportedly, Iran is now falling behind its financial commitments to Hezbollah, its best proxy. And Hezbollah reportedly is not being able to pay salaries to its fighters. Syria is turning out to be more of a facade than reality. Yes, Iran sent its fighters to fight along side Assad’s army but that was so yesterday. Assad is now safer in power and the Gulf countries are increasing their presence in Damascus. They have known & supported Assad in the past and a known devil is so much safer than an unknown devil. Even Russia is now against Iran’s desire to maintain a large Iranian presence in Syria.

So Iran’s so-called power is being reduced step by step & Iran is being forced into a local posture instead of a pan-gulf posture. And its economy is in shambles with its people struggling financially. Iran’s leaders are neither stupid nor dumb. They might authorize or even permit their militias to undertake small localized sabotage provided plausible deniability is maintained. But they know they invite destruction from the skies on their infrastructure & their organizations.

2. A Smarter America

President Trump has been crystal clear from the day he began his candidacy – no more foreign wars from America. He promised to build an awesome military that would scare others but his preference has been to use that strength to scare potential combatants. He has always seen the global spread of US military as draining American resources instead of helping America’s policy.

So his preference has been to use America’s unique position as the world’s largest market with the world’s reserve currency. Hence his use of economic sanctions and the threat of banishing companies from the American market if they break American rules. That may not work so well against Russia but it is working well against China and other countries. The reality is almost all supply chains end in America regardless of where they begin and the other reality is that much of the the risk capital going into other countries originates in the American market, the Dollar market.

This is asymmetric warfare in its most deadly form. Exports to America are about 18% of all Chinese exports while exports to China are at most 0.5% of US GDP. And look what damage to Chinese economy has done to Germany, the biggest exporter to China. The 10-year German Bund rate fell to minus 10.6 bps or below minus 0.1%, a level that is lower than the Japanese 10-year rate. So mighty Germany is being humbled even without any direct American action against Germany.

This is why President Trump rightly said this week – the whole world has been “using America as their piggy bank for all this time“. His message – that is stopping now.

Iran sees all this & there is no way Iran wants a war with Trump’s America.

3. Approach to Military Combat

But countries & people miscalculate. So it is often important to show what might hit them, not theoretically from afar but physically from near. Reportedly the U.S. began flying “deterrence flights” over the Persian Gulf with B-52s, F-35s and F-15s. And the U.S. is also in the process of deploying an aircraft carrier battle group near the Persian Gulf.

Now, one carrier battle group is not enough for a sustained air campaign against Iran. After all, as we recall, three carrier battle groups were deployed near North Korea when that country was being asked to come to the bargaining table. But one carrier group is enough to focus the attention of all the entities inside Iran.

And that suffices for now.

 

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