Tariffs and the Iran Nuclear Deal: The Transatlantic Divide

14.05.2018

A looming trade war and Donald Trump’s decision to withdraw the United States from the Iran nuclear deal (Joint Comprehensive Plan of Action) have thrown a spotlight on growing tensions in the transatlantic relationship. In recent weeks French President Emmanuel Macron and German Chancellor Angela Merkel traveled to Washington, hoping to obtain exemptions from threatened tariffs on steel and aluminium and to disrupt the Trump administration’s preparation for a new war in the Middle East by saving the Iran nuclear deal.

Macron was granted a lavish state dinner and speech to a joint session of Congress, perhaps as a reward for France’s participation in the recent U.S-led missile strikes against Syria. Merkel, by contrast, received a much cooler reception, a reflection of Germany’s refusal to participate in the missile strikes or to abandon the Nordstream 2 pipeline.

But the European leaders returned home empty-handed. Trump refused to exempt the EU from the tariffs, although he did grant a temporary reprieve until June 1. Led by Macron, the three European members of the P5+1 team that negotiated the Iran nuclear deal attempted to conciliate with Washington, agreeing to restore sanctions if Iran was determined to have come within less than 12 months of producing a nuclear weapon, and to open up new negotiations with Tehran over Iran’s ballistic missile program. However, Trump declared that the deal was “defective at its core.”

The appearance of a European united front is deceptive. It masks growing internal divisions, especially pronounced in trade but also evident in policy towards the Middle East. U.S. tariffs would gravely damage the entire European economy that now appears to be slowing amid global debt levels exceeding those of 2008. They would strike at the heart of the German economy, heavily reliant on exports to the United States, its largest trading partner.   By contrast, the volume of France’s exports to the United States is less than one-third that of Germany, and its trade balance with the United States is roughly equal. Thus France has less to lose from trade conflict: “not a single Citroen gets sold to America while the entire German car industry is exposed.” France along with the EU’s southern tier resents Germany’s trade and budget surpluses, which export unemployment throughout the Eurozone.

The Trump administration wants the EU to impose voluntary limits on exports to the United States, reduce tariffs on U.S. exports, and cooperate with confrontational U.S. moves against China. Berlin advocates concessions to Washington. Economy Minister Peter Altmaier has called for negotiations on a less ambitious and simpler version of the Transatlantic Trade and Investment Partnership, and rejected the EU’s proposed digital tax that would hit U.S. internet companies hard. Paris, however, opposes concessions, fearing that Trump would see them as a sign of weakness, and has countered with proposals to link a more conciliatory EU trade policy to German support for fundamental reforms of the Eurozone.

These policy differences arise out of the general crisis of Franco-German relations. Following his election in April, 2017 Macron has sought to reassert France’s shared leadership status that had been relinquished as a result of years of slow growth and mounting debt. Through his self-proclaimed “Revolution,”-- a frontal assault on the French welfare state-- he seeks at the risk of growing popular resistance to appease Germany’s ordoliberals in return for their acquiescence to Eurozone reforms including a genuine EU budget, a European Monetary Fund, and a banking union. These reforms are necessary to resolve the “existential crisis” of the monetary union but they remain unacceptable to Germany, whose increasingly conservative coalition government firmly rejects a “transfer union.”

Leading Trump administration officials, including Secretary of Defense James Mattis, acknowledged that Iran was fully compliant with the nuclear deal and opposed the decision to withdraw from it. Disagreement reflected tactical differences within the foreign policy establishment. Although the decision certainly revealed the influence of billionaire lobbyists, it was nevertheless consistent with the revisionist foreign policy doctrine set out in a series of official documents at the end of 2017. Trump and his hawkish advisors believe that the clerics in Tehran are weakening as a result of a declining economy and popular mobilizations, and that this presents the possibility of regime change. Iranian militias (and hence Russian forces) can be driven out of Syria. Support for Hezbollah can be cut off either through military actions or new negotiations with Tehran.

Trump’s decision was carefully coordinated with Saudi Arabia, which now reportedly plans to send troops into Syria, and Israel, whose warplanes carried out attacks on Iranian military assets in Syria one hour Trump’s announcement. For now, Iran has indicated that it will remain within the agreement along with the rest of the signatories, but only if its economic interests continue to be served by it. However, it is widely acknowledged that there is no “plan B” if those interests cannot be served, or if hard- line forces in Iran are strengthened.   In either of these cases Trump’s decision to withdraw from the agreement is almost certainly a prelude to war.

The resumption of U.S. sanctions will plunge Iran into deeper economic crisis. It will also drive another stake into the heart of the European economy that has already borne significant costs resulting from sanctions against Russia. Secondary sanctions imposed on Iran’s oil sector are likely to increase oil prices to the benefit of the United States, Saudi Arabia (and Russia) but harmful to Europe.

Ever since Trump’s election the United States has been in de facto non-compliance with the nuclear deal as Western banks and corporations have anticipated future sanctions. Even so, EU-Iranian trade has increased substantially to more than 20 billion euros. German companies account for 60% of EU investment and 40% of total industrial equipment in Iran. French oil giant Total and Anglo-Dutch Shell have made significant investments in Iran. Airbus was scheduled to deliver more than a hundred planes worth $19b to Iran Air. Unilever, Renault, Henkel, and Peugeot have carried out significant investments in Iran. Boeing’s loss of a $20 billion contract is, by contrast, exceptional. In 2017 U.S.-Iranian trade was just $200 million.

Trump declared on May 8 that in the next 90 to 180 days the United States would enact the “highest level” of sanctions against Iran, punishing all banks and companies that continue to do business in all Iranian economic sectors. Hours after landing in Berlin to take up his new post, U.S. Ambassador Richard Grenell warned that “German companies doing business in Iran should wind down operations immediately.” The extent of U.S. structural power and its ability to enforce secondary sanctions cannot be overestimated. Even as EU-Iran trade reached 20 billion euros in 2017, the EU exported $588 billion of goods and services to the United States along with a $2.6 trillion outward stock of foreign direct investment.

Will Trump’s reckless bullying and clear non-compliance with a legally binding U.N. Security Council Resolution persuade the Europeans to overcome their own divisions and devise their own policy towards the region? During the 1990s the EU developed blocking measures in response to U.S. sanctions against Iran, Libya, and Cuba but these were never implemented. The EU could also assist European companies by providing euro financing through the European Investment Bank or national governments. U.S. secondary sanctions will no longer be enacted by a coalition or enjoy the imprimatur of a U.N. Security Council Resolution; they will be entirely unilateral.

If Europe’s divisions make it difficult to pursue an independent policy with respect to either trade or sanctions, there is nevertheless a strong conviction among the remaining signatories that the United States should not be allowed to sabotage the Iran nuclear deal. The EU must seek to protect the interests of European firms while persuading Tehran to abide by an agreement that now contains fewer benefits for the Iranian people but raises the specter of another Middle Eastern war.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.

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