Middle East War: Trump at the Crossroads

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Xuetao Macroeconomic Notes

Time isn’t on Trump’s side. A decision needs to be made in the next 1–2 weeks. Going in may not solve the problem; it could instead trigger an escalation. Retreating would certainly cost political reputation and national interests, but the election is still half a year away, so there is still time to repair approval ratings. TACO’s options are still on the table, and the situation will gradually become clearer.

By: Guojin Macroeconomic Song Xuetao / Zhao Honghe

Time isn’t on Trump’s side. Rising oil prices have already seriously impacted Trump’s reelection prospects. The latest poll by Reuters/Ipsos shows Trump’s approval rating has fallen sharply to 36%, a new low since his first term began, matching the level before the 2020 election when Republicans were swept and before the 2024 election when Democrats were swept. Polymarket shows the probability that Republicans will be swept in this year’s midterm elections has risen to around 50%—at the very least, losing the House is all but guaranteed. Every additional day the war continues and every additional day the Strait is blocked increases the crude oil supply-demand gap by tens of millions of barrels. As time goes on, oil prices rise, making Trump’s situation increasingly unfavorable.

At the crossroads, Trump faces a dilemma with no easy way out. If he retreats, he still has time to regain approval ratings through other issues, but it would also cause major damage to national interests. The dollar’s supercycle would be impaired across areas such as oil-dollar arrangements and investments in artificial intelligence, and the geopolitical landscape in the Middle East would also be rewritten significantly. If he goes in, it not only increases the risk of greater casualties for the U.S. military and a sharper hit to Trump’s political prestige, but more importantly, it is likely to lead to further escalation—more countries getting dragged into the conflict—making the war harder to end and dealing greater blows to global shipping, energy prices, and supply chains.

Even so, Trump still needs to step onto his path to break the deadlock as soon as possible. Whether it’s TACO, negotiations, or a landing operation, the next 1–2 weeks will be a critical stage.

TACO could allow him to get out of the current situation as quickly as possible, but the price would be a major loss of personal political prestige and national interests. In the early stage when the war had just erupted and Gulf countries were urgently seeking mediation, Trump’s decision to stop fighting was still somewhat reasonable. Now Gulf states are growing more wary of Iran and hoping the United States will lift the Strait blockade and weaken Iran’s capabilities. Direct withdrawal would undoubtedly tear apart mutual trust. The status of oil-dollar arrangements would be challenged. The tens of billions to trillions of dollars in artificial intelligence investments that Gulf countries have promised could become empty promises. If those were then transmitted to the U.S. stock market and the broader U.S. economy, it would trigger a chain reaction. Fundamentally, this is because the dollar’s supercycle is being affected. In addition, withdrawal means Iran would gain control of the Strait of Hormuz, and the U.S.’s geopolitical influence in the Middle East would fade away much like a military base destroyed by missiles.

The upside is that Trump can extricate himself from the mire as quickly as possible. With the midterm election still half a year away, once oil prices fall, the public’s sense of pain will lessen over time. He would still have time to repair approval ratings through issues such as Cuba, a visit to China, sending money, and lowering interest rates—avoiding being swept.

It’s just that after World War II, successive U.S. presidents投入了大量人物财力，确立了欧洲、远东、中东三块核心利益，尽管页岩油革命后，中东对美国的重要性有所下降。For Trump, taking on this kind of historical responsibility requires both courage and some “winning-study” rhetorical framing.

Negotiations could solve the problem at relatively low cost, but the probability of success is not high—unless a third major power is brought in. In the Arab world, the Gulf states’ mindset has already changed along with the shifting battle situation, making it difficult for them to participate in mediation again. After Pakistan lost strategic value following the Biden administration’s Afghanistan withdrawal in 2021, its relationship with the United States has grown increasingly distant. This mediation is viewed as an opportunity to bring the relationship closer again. Moreover, Pakistan has historically had decent ties with Iran, and it could play an important role in this round of communication. The four-party talks it recently held with Saudi Arabia, Turkey, and Egypt may serve as a prelude to any U.S.-Iran talks.

However, at a fundamental level, the two sides have clearly different understandings of the war situation. From the U.S. perspective, Iran’s navy and air force have been destroyed, and military facilities have been massively destroyed; civilians are living in dire hardship. The balance of power is on their side, and Iran has reason to accept the “15-point plan.” From Iran’s perspective, the United States cannot break through the Strait of Hormuz. High oil prices will stir anti-war sentiment, and time is on Iran’s side. Therefore, any plan must ensure the war will not happen again, and it must also charge for passage through the strait—essentially asserting control over claims.

In terms of the terms, Iran would find it difficult to accept the “15-point” plan based on a template from before the war. In the short term, the war is still ongoing. Hezbollah in Lebanon, Iraqi militias, and Yemeni Houthis play important roles across various fronts—at this moment, it’s impossible to discuss giving up support for proxies. In the medium term, missiles are Iran’s signature capability to deter Israel and make it hesitant to act recklessly—at this moment, it’s impossible to discuss restricting missile programs. In the long term, if any agreement cannot constrain the next invasion, then only possessing nuclear weapons may solve the problem. That is why major concessions Iran made before the war on nuclear, missile, and proxy issues—now become matters of life and death.

As for the extreme-pressure tactics Trump is skilled at, they are now hard to work. With high-prestige figures such as Khamenei and Larijani being assassinated one after another, the Iranian military leadership has already entered, to a certain degree, a “decentralized” state. This means that although Iran can maintain military operations, it is difficult for anyone to hold the influence to steer the overall situation and negotiate with the United States on equal terms.

Overall, it’s said that the skilled in battle have no need for flashy achievements. Yet Trump has been chasing Hollywood-style spotlights and reality-show style theatrics, letting go of the generous pre-war conditions proposed by Khamenei that could now, just like before, likely not be realized.

When you have justification, you can prevail everywhere—but this war was initiated by Trump and a small circle around him, in a situation where the Middle East scenario clearly did not directly affect U.S. national interests. There was no prior briefing to Congress, nor was adequate logistical mobilization carried out. It was also a second time of using negotiations as a guise and launching a sudden attack, so the support it could obtain is very limited. Therefore, the two Marine Corps units currently mobilized by the U.S. military, a parachute division, and the potentially 10,000 troops from the Army are already close to the limit of Trump’s capabilities. This means the options for a U.S. military landing battle are extremely limited. Whether it’s clearing concentrated uranium, occupying islands in the Strait of Hormuz, or occupying Qeshm Island, there will be high risks of casualties, and it could also trigger a series of chain reactions that lead to escalation.

If the choice is to clear concentrated uranium, the advantage is that the problem can be solved without a direct confrontation, especially addressing Israelis’ concerns. The downside is that it is extremely difficult. The 1980 Tehran hostage crisis: then-president Carter launched Operation Eagle Claw, sending troops deep into Iran’s interior to rescue hostages. The result was failure. Not only were the hostages not rescued, but several soldiers and aircraft were lost, contributing to Carter’s failed reelection campaign and Reagan’s rise to power. Concentrated uranium is buried in three underground nuclear facilities after last summer’s bombing. For Trump, it is like repeating Operation Eagle Claw three times—so the difficulty is self-evident. If the mission fails, Trump’s political reputation would be seriously damaged, and all planning would have to be rebuilt from scratch.

If the choice is to occupy islands in the strait, the objective would be to control the strait and restore navigation. The challenge is that even if islands are seized, navigation might not be restored. Instead, there is a risk that the war becomes a prolonged war of attrition, even expanding the scope further.

The key to controlling the strait lies in several important islands on the western side, including Qeshm Island, Abu Musa Island, and the Greater/Lesser Tunb Islands. If you go by sea, when passing the eastern side of the strait you would pass through Iranian territory, facing the risk of being attacked. If you go by land, although you can directly reach the western side of the strait, you would need to rely on the territory of Gulf states such as the UAE and even amphibious vessels. This could lead Iran to view it as intervention in the war. A spokesperson for the Iranian parliament recently said, “Intelligence indicates that Iran’s enemies are planning, with the support of a regional country, to occupy an island of Iran. If the other side takes any action, Iran will attack that regional country’s key facilities.” Given that the UAE has territorial disputes with Iran over Abu Musa Island and the Greater/Lesser Tunb Islands, being pulled into it is possible.

More troublesome is that even if the strait is controlled, it only opens a door. Oil tankers still need to enter the Persian Gulf to refuel. Iran’s coastline in the Persian Gulf exceeds 1,500 kilometers. The U.S. is unlikely to deploy defenses along such an extensive coastline. Meanwhile, Iran only needs to strike tankers near the coastline in the Persian Gulf to continue, in practice, to close the shipping route. At the same time, for U.S. troops landing on the islands, it’s not just a matter of facing depletion from missiles and drones; the logistical resupply on the islands would also be very difficult. If they choose to retreat, they would face even greater casualty risks. In that case, the entire process could easily take more than a month. During that period, strait shipping would be completely disrupted. Iran’s earlier crude oil exports of nearly 2 million barrels per day would become a new supply-demand gap.

If the choice is to occupy Qeshm Island, it could control Iran’s oil lifeline and force it into ceasefire negotiations. The difficulty is that conducting the offensive operations is harder, and it could likewise lead to the war’s spillover scope expanding.

Qeshm Island lies deep in the Persian Gulf. If you go by amphibious ships, capturing the Strait of Hormuz would be a prerequisite. If you use parachute forces, the only available forces right now are 2,000 soldiers from the 82nd Airborne Division, making the difficulty of seizing and holding the island higher. If you go by land, you would need to do so via the territory of Gulf states such as the UAE or Saudi Arabia, which also carries the risk of involving more countries and further escalating the situation. In addition, Qeshm Island is packed with energy facilities such as oil storage tanks and oil pipelines. If the offensive process damages those energy facilities, Iran has threatened to attack the energy facilities of neighboring countries.

Therefore, if you want to achieve de-escalation by relying on Qeshm Island, it would require both the U.S. military to fight a “great battle” and occupy the island without damaging the island’s energy facilities, and it would require Iran to “soften its stance”—to be willing, after losing the island, to hold ceasefire talks with the United States rather than continuously wearing them down with missiles and drones. The outlook remains uncertain. In fact, Carter also considered occupying Qeshm Island in 1980 to force Iran to accept negotiations. But fearing personnel casualties and an energy crisis, he ultimately dropped the idea.

No matter which form of landing battle is used, it could trigger Houthi forces to join the battlefield. If the Houthis attempt to blockade the Bab el-Mandeb strait, it would mean that the shipping route “Gulf of Aden–Bab el-Mandeb–Red Sea–Suez Canal–Mediterranean Sea,” which carries 12% of global maritime trade and connects Europe and Asia, faces the risk of being disrupted. Shipping would need to detour around Africa’s Cape of Good Hope, which would further push up freight rates, increase prices, and reduce supply chain efficiency.

In summary, given the situation today, time is not on Trump’s side. Considering the 60-day authorization limit for military action, the vision of a visit to China in mid-May, and the second Marine Corps arriving in the Middle East in two weeks, he may make a choice in the next 1–2 weeks, at which point the situation will gradually become clear. Going in may not solve the problem; it could instead result in a prolonged war and escalation. Retreating would indeed mean losing political reputation and national interests, but with the midterm election still half a year away, after oil prices calm down he would still have time to repair approval ratings through issues such as Cuba, a visit to China, sending money, and lowering interest rates—avoiding being swept. TACO’s options are still on the table, and this still remains a war of Trump’s alone.

Risk Warning

The Middle East’s geopolitical situation is complex and intertwined. Situations other than the scenario projections above may occur, causing events to exceed expectations; the current situation is highly uncertain and may bring some volatility to domestic economic work arrangements and capital markets