Trump’s Iran Strategy: Hit America in the Pocketbook

Traders work on the floor of the New York Stock Exchange, (NYSE) in New York, U.S., April 10, 2018. REUTERS/Brendan McDermid

President Trump’s decision to withdraw the United States from the Iran agreement may be the most dangerous and destabilizing move yet of his tumultuous presidency.

This difference between the views held by the Americans and the Europeans is almost theological in intensity. There is also a vast difference in their views over the value of multilateral diplomacy and agreements, and over dialogue versus force as the best solution to solving global problems.

And those theological differences are precisely why businesses must be concerned lest they be caught in the crossfire.

A sanctions war is not just government-to-government. Rather, each government impresses its own businesses and citizens and makes them draftee soldiers in the battle. The economic power of private actors is harnessed against the enemy, and actors that violate the sanctions—whether our guys, their guys, or third-country players with no direct interest in the matter—must be summarily punished.

If U.S. sanctions are met with counter-measures (such as a “blocking statute” that would protect European and other actors from U.S. sanctions) or counter-sanctions (aimed at U.S. companies that now refuse to deal with European companies under U.S. sanction), then businesses in effect become hostages. The cold-blooded logic of economic warfare is that these hostages must be punished, often severely. BNP Paribas, the French bank, was fined almost $9 billion by U.S. authorities in 2015 for evading sanctions against Iran, Cuba and Sudan. ZTE Telecommunications, a Chinese handset manufacturer, was fined $ 1.2 billion in 2017 and then more recently barred from using U.S. components because of its forbidden trading with Iran and North Korea. Just this week, ZTE agreed to pay another $ 1 billion fine to the United States to avoid what would have been an effective death sentence. The power of sanctions. In the weeks ahead, we will learn whether we are facing a war of mutually-increasing sanctions, as the Europeans and other signatories react to the American sanctions threat. Russia has enacted legislation to fight back against U.S. sanctions by threatening to punish Russian firms (and foreign firms doing business in Russia) that comply with the United States. China has been and will continue to be the largest purchaser of Iranian crude, and it will be in a position to step into the shoes of international players frightened away by U.S. sanctions. Indeed French oil giant Total, in suggesting it might step away from its proposed $5 billion development of the Pars field in Iran, made clear its Chinese partner would step into its shoes if it did.

The Europeans face a more complex calculus. They are the most wedded to the multilateral diplomacy behind the Iran deal, and to the prospect of positive change in Iran wrought by engagement. They are also most angered by our president’s Trumpian ways. In the words of Donald Tusk, the EU president, “With friends like Trump, who needs enemies?” The French finance minister called for proud resistance: “Do we Europeans want to be vassals standing at attention to obey the decisions of the United States?” On May 18, European Commission president Jean-Claude Juncker proposed a series of measures including a “blocking statute” that would forbid EU companies from obeying U.S. sanctions law and protect them against fines and penalties, as well as a mechanism to permit member states to make direct payments to Iran for oil without using U.S. financial institutions subject to sanction. “[W]e have the duty,” he said, “to do what we can to protect our European businesses, especially SMEs.” On June 6, the EU formally updated its blocking statute to protect against U.S.-Iran-related sanctions.

The Europeans may not be able to live up to these bold promises in the face of withering U.S. economic pressure on their companies. Just this week, the three European signatories and the EU wrote to the Trump administration, urging exemptions for European firms from U.S. sanctions, though expectations for a positive response are muted. But how can it profit the United States to humiliate our closest allies with the strength of our economic might? Already, European leaders are diversifying their relationships. France’s Macron was in Moscow last week meeting with Putin, and Germany’s Merkel was in China.

In the coming weeks, the extent of economic fallout from President Trump’s rash and ill-considered decision will become clearer. European firms will have to face the reality that for most of them, the U.S. market is much more important than the Iranian market. France, for example, traded goods worth just €3.8 billion with Iran last year; with the United States, it was €1 billion per day. European leaders will have to decide how hard to push their own companies to abide by European sanctions rules and to ignore the American threats. And our other trading allies—Japan, Korea, etc.—will have to pick sides when they themselves are being pressed by the United States to accept steel and aluminum tariffs or quotas.

The only clear economic winners flowing from Trump’s decision are Russia and China. They will continue to trade with Iran, and will reap the commercial benefits that might have flowed to U.S. or European firms. Others—Turkey and India among them—will look away as their companies trade with Iran, and corruption and illicit trade will flourish. Meanwhile, Iran will continue to find enough economic sustenance from these sources to help it withstand the U.S.-imposed sanctions, even as it hardens its economy against the impact. They have suffered through worse. Finally, it will threaten a return to its nuclear program, with the rest of the world saying, “Can you blame them?”

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