The Ultimate Endgame for the Strait of Hormuz?

As Trump sent another key TACO signal last weekend, the current struggle for control over the Strait of Hormuz is expected to enter its final stage. In the short term, if tensions ease and oil prices fall, the Federal Reserve may have the opportunity to avoid a rate hike in September. In the long term, the arrangement for the strait could become a landmark historical event, triggering a series of geopolitical reactions.

1. Why Is Trump Sending a TACO Signal Again?

The midterm election situation is precarious; Trump can no longer afford the standoff.

Economically, on the surface, Trump’s recent stress index has only risen to a relative high since June, remaining below the levels during the previous two TACO signals (late March and mid-to-late May), primarily because the increase in gasoline prices has been limited. However, in reality, the probability of a Federal Reserve rate hike, U.S. Treasury yield levels, and the fragility of the U.S. stock market are all higher than before.

Politically, the probability that the Republican Party will lose at least the House of Representatives exceeds 85%, and the probability of a sweep loss exceeds 45%, with polls consistently hovering near historic lows. "Republican victory in the midterms" has become an out-of-the-money option, retaining only time value. Even if the status quo is maintained, the option’s value will shrink day by day until it becomes worthless paper in three months.

Militarily, the U.S. military has already expended excessive amounts of long-range precision missiles and air defense missiles. If military conflicts continue, offensive operations will have to rely on close-range, low-altitude bombing, while defensive interception efficiency against Iranian missiles and drones will decline. This implies a higher risk of casualties, a burden Trump cannot bear.

2. If Defeat Is Likely, Does Trump Still Care About the Midterms?

He does care; this is not simply a matter of "losing" or "winning."

Since the market’s focus on the midterms mainly lies in Trump’s influence after the elections, including impacts on tariffs, fiscal policy, and impeachment issues, the midterm results can be simplified to a comparison of seat counts between the two parties in both chambers of Congress: whoever has more seats "wins." Since a "loss" is highly probable, the midterms might seem less important to Trump, suggesting he could continue the standoff with Iran.

In reality, the problems Trump faces are far more complex, concerning his intra-party influence and political legacy. The midterms involve elections for members of both houses of Congress, proceeding through primary elections and then general elections between the two major parties. Whether Trump can provide sufficient support to his preferred Republican candidates in both the primaries and general elections not only affects the number of seats held by each party but also concerns the loyalty of party members to him.

Consider this: even if the Republican Party secures a majority, if a large number of lawmakers "sing a different tune" (similar to his first term), it would be better to ensure their loyalty. Even if Trump steps down in two years, he can still retain considerable influence in U.S. politics, which is more closely tied to the fate of the Trump family.

3. What Will the Strait Arrangement Look Like?

It must satisfy Iran’s interests while allowing Trump to save face.

Iran’s primary demand is geopolitical influence, followed by economic benefits. Fundamentally, it seeks control over the Strait of Hormuz, i.e., the ability to influence global energy supply, with international recognition rather than relying on military coercion as it does now. This means forming a standardized agreement on strait transit regulations to fill the gaps in the June U.S.-Iran Memorandum of Understanding.

First, how the strait will be managed. Previously, Oman proposed a joint management plan, the core of which was an equal division of shipping lanes between the two countries, drawing on the Malacca Strait model with voluntary donations/fees and no mandatory charges, which Iran rejected. Iran’s proposal is that inbound routes must be fully controlled by Iran, while outbound routes could be jointly managed, allowing Iran to monitor two-way traffic.

The final outcome may be a compromise. For example, Iran could independently manage inbound routes, while Oman independently or largely manages outbound routes. Nominally, this would be joint management, but in practice, entering the port would require Iran’s permission. Such a scheme would allow Iran to substantively control the strait while nominally preserving Trump’s face.

Second, how the strait will be charged. There are roughly two schemes. One is for the U.S. to directly exchange economic benefits for Iran not charging fees, such as releasing frozen funds to Iran. Currently, Iran’s frozen funds amount to tens of billions of dollars. If the U.S. allows unfreezing in exchange for Iran not charging fees during Trump’s term, the deal would not be a loss. If Trump reneges, Iran could then proceed to charge fees.

The other option is to establish a so-called "voluntary fund," paid for by Gulf states and some European countries, to cover the costs of strait management, environmental protection, search and rescue, etc. Since the U.S. rarely uses the Strait of Hormuz, it would pay almost nothing. Moreover, since participation is nominally voluntary, this would also preserve Trump’s face, although for Gulf and European countries, it constitutes an "undeserved disaster."

4. Will the Houthis Cease Fire?

It should not be difficult, as the Houthis remain Iranian proxies, and Iran holds significant influence.

The Houthis’ involvement in this conflict may trace back to the mutual strategic defense agreement signed by Pakistan and Saudi Arabia last September. Under the agreement, any third-party attack on either country would be considered an "aggression against both." Therefore, if Iran and Saudi Arabia were to go to war, Pakistan would be forced to get involved. Reports indicate that Pakistan mediated an agreement with Iran in late March, allowing Iranian oil to be shipped to Pakistan on the condition that Iran stop attacking Saudi Arabia. This agreement became invaluable after the U.S. initiated a naval blockade against Iran.

Therefore, in the current round of conflict since early July, Iran has been very restrained in directly attacking Saudi Arabia. However, since Saudi Arabia is both an important hub for U.S. military operations in the Middle East and can export energy via the Red Sea, bypassing the Strait of Hormuz, it is reasonable for Iran to mobilize the Houthis to intervene—and even briefly declare a blockade of the Bab el-Mandeb Strait—to restrict U.S. military actions and raise energy prices.

Conversely, since Iran still exerts strong influence over the Houthis, mediating the conflict between the Houthis and Saudi Arabia by offering appropriate economic and military benefits should not be difficult, no harder than Trump restraining Israel.

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