Executive Summary

The United States has significantly reinforced its military presence in Diego Garcia, issuing an ultimatum to Iran for a new nuclear deal. This move raises concerns about a potential military confrontation.

The aim of this report is to assess whether this escalation is a strategic bluff to push Tehran into negotiations or a genuine prelude to military action. The analysis also considers the ongoing US economic crisis, exacerbated by President Trump’s aggressive trade policies, and explores how economic instability might be influencing foreign policy decisions.

Key Points

• The US has deployed strategic bombers, missile defence systems, and additional assets to Diego Garcia, a traditional launchpad for Middle East operations.
• Iran perceives the military build-up as a direct threat and is considering pre-emptive action.
• Trump’s economic policies have triggered financial instability, which may be influencing an aggressive foreign policy stance to deflect from domestic economic woes.

Background Information

In March 2025, President Trump sent a letter to Iran’s Supreme Leader, demanding a new nuclear agreement within two months, threatening military action if Iran did not comply. This ultimatum was met with a firm rejection from Tehran. The Iranian leadership has since signalled a potential pre-emptive strike on Diego Garcia should US threats escalate further. Simultaneously, the US has reinforced its military presence in the Middle East, stationing strategic bombers, missile defence batteries, and advanced fighter jets in key locations.

Parallel to this military escalation, the US economy has entered a period of significant financial turbulence. Trump’s aggressive tariff policies, particularly the “Liberation Day” initiative, have led to market declines, rising inflation, and concerns over stagflation. The administration’s handling of the economic downturn and its potential impact on domestic political stability may be a key factor influencing its foreign policy decisions.

Geopolitical Scenario

The military presence can be seen as a calculated attempt to leverage power dynamics, extending the option of negotiations while maintaining a credible threat. However, the risk of an actual conflict remains high due to Iran’s perception of an imminent threat and the broader geopolitical context. The presence of B-2 bombers in Diego Garcia (at least six – 30% of the US Air Force’s stealth bomber fleet), previously used in major Middle East operations, suggests that military action is being seriously considered, even if it remains a last resort.

From Iran’s perspective, Trump’s threats lack credibility given his historical pattern of aggressive rhetoric, followed by diplomatic overtures. However, the Islamic Republic cannot afford to ignore the possibility of a strike, prompting discussions within Tehran’s high command about pre-emptive actions. If Iran believes an attack is imminent, it may strike first, leading to a rapid escalation.

In past confrontations, particularly during tensions with Israel, Iran has threatened to target regional oil fields if US-aligned Gulf nations were to support an attack against it. A similar scenario could unfold again, with the potential to not only push Gulf countries into a mediating role but also disrupt oil supplies from the Gulf—an outcome that would heavily impact European nations reliant on energy imports from the region. Saudi Arabia and other Gulf states have consequently imposed a ban on US warplanes using their air fields or skies to attack Iran.

Iran was not originally a primary focus of the US agenda, which had prioritised confronting China and resolving the Ukraine crisis. The sudden escalation of tensions with Tehran suggests that Washington may be aligning with Israel’s strategic goals in the Middle East, as has often been the case in the past. Recent events—including the disruption of Iran’s regional influence through Syria and the assassination of key Iranian-backed proxy leaders—may have led Israel to conclude that this is the optimal moment to target the Islamic Republic. Tel Aviv may be leveraging its influence to shift US policy in a more confrontational direction.

Both the US and Iran have carried out significant military manoeuvres aimed at demonstrating strength and deterrence. The US, in coordination with Israel, has conducted large-scale exercises involving strategic bombers and fighter jets, including multiple B-52 flights near Iran as a direct show of force. Meanwhile, Iran has reinforced its military posture by conducting joint naval drills with Russia and China in the Persian Gulf, unveiling underground missile bases, and testing long-range missiles. These actions signal a clear warning to each side and their respective allies, heightening regional tensions.

As of January 2025, the US had trade deficits with several countries, including China($68.8 billion), Mexico ($48.0 billion), the European Union ($38.5 billion), Japan ($17.0 billion), and South Korea ($12.5 billion), Trump imposed tariffs to reduce imports and boost domestic production. However, while tariffs can help improve the trade balance, they may also affect investor sentiment. With the S&P 500 experiencing considerable volatility and the Federal Reserve adjusting its growth predictions downward, the administration may be reluctant to engage in a prolonged military conflict that could further derail economic stability.

Wars have, at times, led to short-term economic boosts, primarily driven by wartime production. However, this growth often comes at a significant cost, as wars typically result in massive government spending, which increases public debt. While the economy may grow during the conflict, the long-term financial burden can ultimately outweigh the immediate benefits. The US military-industrial complex might profit from such conflicts, but in the long run, the American people bear the economic and social costs.

Despite the heightened tensions, a full-scale war remains unlikely in the immediate term. Both Washington and Tehran have reasons to avoid direct conflict: the US is wary of the economic consequences of regional destabilisation, while Iran understands that a war could threaten its government’s stability. Instead, the situation is likely to oscillate between diplomatic manoeuvring and military posturing, with the risk of miscalculation remaining the primary trigger for hostilities.

Conclusion

The US military build-up on Diego Garcia is primarily a show of force aimed at coercing Iran into negotiations, but the risk of escalation is real. Iran’s consideration of pre-emptive strikes increases the danger of conflict, even if neither side actively seeks war.

At the same time, Trump’s economic policies have created a domestic crisis that may be influencing a more aggressive foreign policy stance.

Furthermore, US policy in the Middle East appears increasingly aligned with Israeli interests, as Israel may view the current geopolitical landscape as the ideal moment to strike Iran. While diplomacy remains an option, the interplay between economic instability, military brinkmanship, and regional power dynamics will shape the trajectory of US-Iran relations in the coming months.

Author: Silvia Boltuc

*Cover image: Diego Garcia, British Indian Ocean Territory (Feb. 3, 2025) – The Commanding Officer, Command Master Chief, and Chaplain of Naval Mobile Construction Battalion (NMCB) 3 pose for a group photo with Detachment Diego Garcia personnel in front of the Battalion Equipment Evaluation Program (BEEP) sign outside NMCB-3 spaces (Credits: U.S. Navy photo by Petty Officer 2nd Class Joshua Torres, Public domain, via Wikimedia Commons)

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