Iran Sanctions Redux

May 21, 2018

Note to readers: I am going to resist the temptation to comment on the weekend’s China events. It’s better to let the dust settle than to say something that will almost certainly turn out to be wrong. If you want my latest thoughts on China, listen to the Trade Guys podcast this week. Now, back to your regularly scheduled column.

I haven’t written about sanctions in a long time, and since they’re back on the front burner again in the wake of U.S. withdrawal from the Iran agreement (the Joint Comprehensive Plan of Action or JCPOA), it’s time to take another look at them. Another reason is that times have certainly changed since I first started working on the issue in the late 1970s.

My then-boss, the late Senator John Heinz (R-PA), was a sanctions skeptic. He viewed unilateral sanctions as the ultimate lose-lose strategy. Because other nations stepped in to fill the gap caused by our limits on U.S. companies, the United States did not achieve its foreign policy goals, and our companies lost their market share. He was also frustrated by the attitude prevalent among some of his congressional colleagues, who knew very well that legislated sanctions would not be effective (and would, in fact, harm Americans), but nonetheless supported them because, as was often said, “We have to do something.” The response that, “well, you don’t have to do something stupid,” did not go over very well.

The analysis is somewhat different for multilateral sanctions. To the extent we can persuade the rest of the world to go along with our approach, sanctions could have an impact. A good example of that is Iran, where both the George W. Bush and Barack Obama administrations patiently constructed a broad coalition to press Iran to abandon its nuclear weapons program. (Others will say the sanctions on South Africa were also effective; although cynics will tell you that kicking them out of the World Cup probably had a bigger impact than anything else.)

In the process of coalition building against Iran, however, something else important happened. Implementation of sanctions transitioned from the meat ax approach of broad export embargoes to the more surgical approach of focusing on financial sanctions against specifically targeted individuals and corporations. This was based on the simple maxim of “follow the money,” which turned out to be a far more effective way of isolating an uncooperative country than an export embargo. It brought Iran to the table, and it appears, so far, to have brought North Korea as well, although it is not having the same effect on Russia.

This approach is not without its drawbacks. It is labor intensive. Stuart Levey, under secretary of the treasury in both the Bush and Obama administrations, and his successors spent an enormous amount of time and energy meeting with foreign financial institutions to persuade them to follow our course. That took patience, diplomacy, and dexterity, things that seem to be in short supply these days.

There is also a surprising amount of collateral damage. “Humanitarian” transactions—largely involving food and medicine—are carved out of sanctions programs, though a license from the Treasury Department’s Office of Foreign Assets Control (OFAC) is required. Many banks, however, under U.S. pressure, simply decide not to support any transactions with the target country rather than try to parse which are legitimate and which are not. The result is the blocking of authorized humanitarian transactions.

These problems will recur if President Trump resumes the Iran sanctions that had been waived while the United States was a party to the JCPOA, and there will be others as well. First, these are largely secondary sanctions, meaning they apply primarily to foreign entities, since U.S. activity in Iran is already severely restricted. The European Union decided last week to activate its 1996 blocking statute, which prohibits European companies from complying with the U.S. sanctions, thus putting those companies in the untenable position of violating somebody’s law—ours or the European Union’s—no matter what they do. This has produced a diplomatic crisis every time it has occurred in the past: once when President Ronald Reagan backed down in the face of a very irritated Prime Minister Margaret Thatcher and once in the Bill Clinton administration when Stuart Eizenstat, then under secretary of state for economic, business, and agricultural affairs, salvaged the situation by negotiating what was effectively a cease-fire. If the European Union persists, I think a new crisis is inevitable.

Second, the return of sanctions will mean the return of efforts to evade them. At best this is a difficult enforcement problem as U.S. authorities try to deal with evasion by people over whom they have no direct control, who are not in the United States, and whose home governments are not interested in cooperating. More important for the long term, it will encourage efforts to develop full-fledged alternatives to dollar-denominated transactions that are harder for the Treasury Department to reach. The dollar has been the world’s reserve currency for a long time, and that is not likely to change in the short run. But we have already been seeing non-Western economies who have no built-in affection for U.S. currency (a polite way of saying China) trying to develop alternative bases for international transactions, and renewed sanctions will add urgency to that effort.

These are not all immediate consequences, but over time they accumulate and, along with the rest of our trade policy, will have the effect of marginalizing the United States in economic terms. We may be the lead dog right now, but the challenges will grow, and the policies we are pursuing, including renewed sanctions, will eventually put us back in the pack rather than out front.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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