Three Views on U.S. Withdrawal from Iran Deal, and Europe and China’s Response
If We Keep Our Cool, We Can Make it to New Negotiations
The United States withdrew on May 8 from the Iran nuclear accord that it joined less than three years ago. Senior U.S. officials have called on America’s European allies to capitulate to the reimposition of U.S. nuclear-related sanctions on Iran, the logic being that European companies cannot risk losing access to the U.S. market and therefore have no choice but to renege on promises they made to Iran. President Trump, who threatened “severe consequences” for anyone who continues sanctionable dealings with Iran, has pushed European leaders into a corner.
To preserve their countries’ independent foreign policies — and an autonomous global role for the European Union — Europeans now have no choice but to stay in the deal and defy, or threaten to defy, the United States. The EU is planning to break U.S. “secondary sanctions,” which target third-country actors for dealings with Iran, and to set up mechanisms to enable and protect European investments in Iran, such as a shared banking, shipping, and insurance facility to enable oil purchases. China and Russia will be happy to help the EU ensure that the effect of U.S. sanctions on Iranian oil sales, investment in Iran’s energy sector, general trade, and financial services is minimized. The removal of sanctions on oil sales is of the greatest economic importance to Iran in the near term. Those exports total over $50 billion per year. Iran currently exports around $10 billion to the EU, with 60 percent going to East and South Asia.
Were the EU to implement these options, it would be a major foreign policy setback for the United States and a serious blow to the transatlantic alliance. The United States will have driven Europe into the arms of Russia and China, ceded the commanding political high ground to Iran, and potentially done long-term damage to the credibility of U.S. coercive diplomacy, with respect to economic sanctions and beyond.
The hope is that a credible EU threat of defiance will force the United States to back down. Fortunately, given the flexibility built into the nuclear-related sanctions and the often-fluid nature of President Trump’s adherence to previously articulated foreign policy views, all is not lost.
Europe and the United States can still work together over the next several months — when the most important nuclear-related sanctions come back into effect — to turn lemons into lemonade. Through some combination of declining to impose secondary sanctions on European companies and limiting any such sanctions to symbolic steps, the United States can declare itself “out of the deal,” Iran can receive the benefits of the accord, and the EU and United States can stay out of direct conflict and restart negotiations with Iran on ballistic missiles, access to military sites, and extended sunset provisions.
Without the EU, the Pressure Will Not Suffice
Europe is the essential element in the U.S. design to inflict “unprecedented financial pressure” on the Iranian regime. China, India, Russia, and most non-OECD countries will continue to do business as usual with Iran, as they have done in the past. It is unlikely that the U.S. sanctions enforcers will go after any significant banks or companies from those countries. Japan and South Korea will largely get in line due to North Korea, but that is not enough to make a difference. The EU is key to applying any kind of real pressure on Iran.
Europe’s options are not easy. The EU needs to resist any effort to sever Iran’s links to the Belgium-based Swift network, the financial messaging system that facilitates cross-border financial transactions. Reviving the EU's "blocking statute" to prevent European companies from complying with U.S. sanctions will send a political message to Washington, but that will not scare U.S. sanctions enforcers.
The EU could set up a central financial body to clear Iranian trade and oil purchases, maybe attached to the ECB that deals only in euros. Given the implications for global financial markets U.S. authorities may pause before sanctioning a body attached to the ECB. The EU could prepare stand-by penalties against U.S. financial institutions to implement if any of theirs (or any Swift board members) are sanctioned, such as withdrawal of licenses for U.S. banks to operate in the EU. The idea would be basically the equivalent of countering U.S. trade tariffs with tariffs of their own.
How does this play out? Ideally the United States and EU keep talking as before about a new Iran framework. The Europeans have warned they will keep doing the business they can with Iran and will likely tell Washington that they will not be reducing oil purchases. As we get close to the date for full reimposition of Iran sanctions in early November, the president will have to decide whether to provide Europe (and others) a national security waiver. Or he could decide the oil market is too tight, that there is not sufficient supply available from other sources to permit a reduction in purchases from Iran (whether that is really the case or not). There are many variables at play, but in the end (assuming the Europeans stand their ground) nothing really changes except that Washington will have greatly diminished the usefulness of the sanctions tool.
China is Ready to Benefit from Splits in the West
The last time there was a sanctions squeeze on Iran, Beijing disappointed Tehran by joining in more actively than the Iranians had hoped. China’s behavior was partly a function of political calculations: They were willing to go along with the international consensus to place economic pressure on Iran as a way of securing the nuclear deal, albeit with a degree of foot-dragging. This also reflected the calculations of their major firms, and particularly their banks, which wanted to maintain their good standing in global financial markets.
With the U.S. withdrawal from the JCPOA, the caution about U.S. Treasury designations will still have an impact on certain Chinese firms and their access to financing but this time, with the consensus among the other P-5 powers aligned against the United States, the political impetus from Beijing will be in the opposite direction. As the largest European energy firms such as Total pull out, Chinese companies stand to be the main beneficiaries, snapping up the contracts and doing so on better terms than when they faced European competition. Iran was already an important focal point for China’s Belt and Road initiative, but Tehran had been careful to avoid a position of excessive dependence on Beijing. That will now be more difficult, and the Chinese government will have few qualms about taking advantage of the opening that the U.S. move presents.
But the most interesting opportunity for the Chinese goes beyond Iran itself. Beijing has long been keen to see an erosion of U.S. capacity to impose sanctions unilaterally, particularly the sophisticated toolkit that the U.S. Treasury has developed over the last decade.
For all of China’s weight as an economic and trading power, tightened capital controls have in many ways seen RMB internationalization regressing in the last couple of years, and no other systemically important economic actor has evinced serious interest in the “de-dollarization” of the financial system. Yet now, splits in the West mean that another economic power is seriously debating how best to ensure resilience against the reach of U.S. sanctions — the European Union. The consultations between the Chinese and the Europeans in the coming months may not be enough to save the JCPOA but they do risk setting in motion a course of action that ultimately weakens one of the most effective U.S. means of non-military coercion.
The views expressed in GMF publications and commentary are the views of the author alone.