The U.S. decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the agreement that capped Iranian nuclear ambitions in exchange for its reintegration into the global economy, has yet to take its toll. Given the relative weakness of U.S.-Iran economic ties, the deal — and subsequent rejection by the United States — would never have a profound impact on trade between those countries. Instead, the issue was always secondary sanctions: those that Washington would impose on Iran’s trade partners for their adherence to the agreement. That impact looks set to hurt U.S. allies as much as it does Iran.
U.S. President Donald Trump does not just seek an end to Iran’s nuclear program. He withdrew from the agreement in May because he wants a transformation of the Iranian government’s behavior, from its meddling in regional affairs to the way it treats its own people. Secretary of State Mike Pompeo warned that a failure to do so would result in the “strongest sanctions in history.” Since U.S. trade with Iran in 2017 was a mere $200 million, inflicting pain on the country meant that the impact of sanctions would have to fall elsewhere.
China is Iran’s largest trading partner: Their total trade was €23.8 billion in 2017. The European Union was Iran’s third-largest trading partner, with total trade just under €20 billion; imports grew 89 percent in 2017, while exports expanded 31.5 percent. India was its fourth-largest trade partner (€9.8 billion), and South Korea was sixth (€9.0 billion). The goal of U.S. sanctions is to punish firms in those countries and force them to choose between doing business with Iran and the U.S.
Given that EU trade with the U.S. in 2017 was €632 billion — more than 30 times its trade with Iran — the decision should not be difficult, if made on purely business terms. That is not to the only factor weighing on European decision-makers, however. Europe must worry about the security consequences of its decision and the prospect of the entire deal unraveling.
Japan walks a finer line. The country is Iran’s seventh-largest trading partner. Two-way trade was just €3.6 billion in 2017, most of it oil. The prospect of a U.S. withdrawal from the JCPOA had already clouded bilateral economic relations: Japan and Iran traded $1.09 billion worth of non-oil goods last year, a 35.15 percent drop from the year before. According to statistics from the Ministry of Economy, Trade and Industry, Japan got 5.3 percent of its oil from Iran in 2017, a drop from the previous year and less than half the amount it was importing in 2010.
Japan’s forbearance — the fact that it did not rapidly expand imports following conclusion of the JCPOA — prompted politicians and businessmen here to hope that the U.S. would give this country a waiver when secondary sanctions started in November. Those hopes have been dashed. The U.S. has adopted a zero-tolerance policy; a senior State Department official explained that “we view this as one of our top national security priorities,” and warned that “the predisposition would be no, we’re not granting waivers.”
After meeting a U.S. delegation last week that explained the sanctions and sought Japan’s support, METI chief Hiroshige Seko said the ministry was “carefully analyzing the impact” of the sanctions to make sure they do not hurt the country’s economy and holding discussions “with relevant countries, including the U.S., on the impact on Japanese companies.” In other words, Japan is looking for alternative sources of oil. Primary targets include Saudi Arabia, Kuwait, the United Arab Emirates and the U.S. Importing more oil from the U.S. has the additional benefit of reducing the bilateral trade deficit with the U.S., another of Trump’s concerns.
But sanctions are unlikely to bring about changes in Iranian behavior. There has been some impact on oil exports — Iran’s oil minister acknowledges that some customers are looking elsewhere as a result of the sanctions — but oil is fungible and markets can be opaque. China is little inclined to bow to U.S. sanctions. Indeed, few U.S. moves could be better calculated to inflame Chinese sensitivities than the extra-territorial application of U.S. law. With the U.S. launching a trade war with China, Beijing will look even less favorably on the U.S. policy.
Some observers note protests in Tehran this week — the worst since anti-government demonstrations broke out in December and January — and argue that sanctions could bite. There is concern, however, that instigators of the unrest were conservatives who see an opportunity to undermine the Tehran government, which is, for all the U.S. complaints, actually moderate. That is the great irony in U.S. policy. Washington seeks to weaken and overthrow an Iranian government that is its best partner (among the real alternatives in Iran). It is empowering hard-liners and encouraging them to double down on the most recalcitrant and anti-U.S. policy.
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