Realigning Post-JCPOA Diplomacy: Breaking off European Players

Today’s report that President Trump is to impose a complete ban on all German luxury cars comes as a shock, particularly since today his aluminum and steel tariff on some of the US’s closest allies – Europe, Canada, and Mexico – takes effect. While there has been no official announcement, President Trump supposedly made comments to this effect to France’s President Macron during his visit last month. The comments did not allege any particular policy consideration, and if actually imposed, could spark market collapse, and cost the US thousands of jobs.

However, even if accurate, such a ban is unlikely to enjoy popular support, and equally unlikely to be instituted for that reason.  German luxury cars are a superior brand to most US cars, and no amount of negotiation will change the difference in pricing. And negotiating a level playing field on taxes, even across entire industries, is not the same as threatening to ban entire brands, while putting US workers at risk of job loss. Such tactics work when there is sufficient leverage that one side can simply walk away from the negotiation table. This, however, backfired with China, where the administration buckled on a major national security issue, while recouping only a modest advance on trade.

For that reason and other reasons, it is doubtful that the comments were well thought out even if accurately reported, or that the White House would be able to implement the outright ban. It’s entirely possible that the administration is on the brink of a serious trade war with China, Europe, and with the other North American counterparts. Or it may be playing games with hopes of increasing leverage in renegotiating a more level playing field. Only time will tell just how far the White House is willing to go, and what consequences that will entail. The  US and European officials bothered leaking these privately made comments on the day the tariffs were imposed because they were made in the context of the discussion on aluminum and steel tariffs raises.  Viewed in that context, this threat seems at best naive, and more likely inappropriate as the Europeans are well aware that ultimately, the US would be punishing itself by denying its citizens the right to own new German luxury cars, whereas Germany will simply increase its relationship with China, Iran, and other countries. \More interesting is to consider how these comments could actually be useful to the administration’s agenda of getting its European partners on board with reimposing sanctions against Iran.

Earlier in May, National Security Adviser John Bolton stated that European countries doing business in Iran may suffer the consequences of their actions: the US is ready to impose secondary sanctions on anyone doing business with Iran, which would force these companies to choose between being part of the US financial system and Iran. Many major brands have already withdrawn from participation in agreements with Iran. Though Germany has doubled down on its intention to continue business in Iran, and other European counterparts have been working out schemes to protect the investments of their companies, the reality is that US is simply a much more lucrative market than Iran could be anytime in the foreseeable future given the level of government corruption and expenditures on terrorism and foreign adventurism. Furthermore, Russia and China can prop up the regime only for so long. With the prices of oil falling, Iran is not producing anything that is of any use to other countries, and the Islamic Republic could soon find itself on the verge of collapse of natural causes.

Recently, Saudi Arabia announced restrictions (and outright bans) on doing business with Germany over its pro-Iran policies. KSA and Germany have had strained relationship ever since the Hariri debacle in November, when the Saudis recalled their ambassador from Germany over what they perceived as an undue interference into the actions related to Lebanon. Hizbullah, a terrorist organization, is an Iran proxy, and its dominance in Lebanon is considered a regional security threat by the Saudi government. The current move is said to have been under consideration for several months; however, it’s likely that the government was holding out hope the United States would persuade its European partners to significantly reform the JCPOA or else join the US in withdrawal at the eleventh hour. None of that came to fruition; instead the Europeans doubled down on their positions, while trying to persuade Iran to agree to additional restrictions on ballistic missile activity.

Doing business for a foreign company in KSA is already onerous; additional restrictions will slow down, and possibly end the process altogether. KSA and Germany had considerable trade in healthcare and other industries; however, Germany had banned the sale of weapons to Saudi Arabia over its allegedly anti-humanitarian role in Yemen. Germany hypocrisy must have irked the Saudi government; at the same time as Angela Merkel took that position, she continues to invest in Iran, which supplies Houthis with weapons in Yemen, and is behind many of the ongoing political conflicts all over the Middle East.  However, the US withdrawal from the JCPOA gave muscle to the move to restrict German companies. The loss of business with Germany likely will not be too painful for the Saudi economy; furthermore, it may grow trade with other countries. Germany, however, may be squeezed from both sides by the US imposition of secondary sanctions and now, the total ban on trade by Saudi Arabia.

Until this point, Germany, one of the key players in the JCPOA, has been able to play both sides benefiting from trade with Iran and Saudi Arabia, even as it took hardline position on arms sale to KSA while supplying Iran with technology used in Syrian chemical attacks against civilians. Germany was betting on Iran’s markets, despite the fact that KSA has a far more robust economy.  Now it has little choice in the matter, and may likewise lose business with the United States. The Gulf backing of any potential secondary sanctions on European countries may prove to be instrumental in bringing the relevant parties to the table. Indeed, it is possible, even likely, that European states have been turning the blind eye on Iran-related investments in various parts of the world. The same players have also been greatly enmeshed with Russia, one of Iran’s closest military allies. However, their presence in Iran itself emboldened and propped up the regime.

Although UK and France are likewise working to maintain relations with Iran, Germany is being singled out for its particularly blatant favoritism.  By contrast, UK and France have concluded major investment, humanitarian, and cultural development deals with Saudi Arabia, and UK has been supportive of the Arab Coalition in Yemen. Separately, Germany implied that Netanyahu’s presentation revealing the extent of Iran’s duplicity may be inaccurate and misleading and vowed to “investigate”. Indeed, Germany took a defensive stand and even claimed it will continue to do business with Iran even if the US imposes sanctions. German companies in Iran have been embedded there for a long time, and preparing for the possibility of secondary sanctions, effectively cut the US out of any possibility of investment. Since the implementation of the JCPOA Iran-Germany trade has increased from 2.7 billion to 3.5 billion euros.

Furthermore, Germany expressed commitment to aiding Iran’s economic development, knowing full well that all of the development aid has been going the same way as the money released by the Obama administration: toward terrorism and invasions. Recently the Iran Energy Minister visited Germany for talks. Germany’s banks likewise may be affected by the fallout. The bigger banks have avoided engagement due to past penalties for breach of silence; the smaller banks mostly benefited from the JCPOA – but they may feel the brunt of secondary sanctions. Stil, however, they remain interested in pursuing deals. Iran, despite having a corrupt, burdensome system, is more flexible towards investment than Saudi Arabia that is looking towards reforming its system and getting rid of the corrupt “fixers”, who make introductions to particular interested senior officials at a price.  However, all of these reforms are going to take time; meanwhile, Germany still finds doing business in Iran easier in the short term. If sanctions hit, Germany looks to shift its business from the United States to China. The two countries recently discussed the importance of maximizing opportunity for free trade. However, China’s recently concluded deal with the US, meant to address the trade deficit, may negatively affect Germany, leaving it in the dust.

When all is said and done, however, Germany is left at a disadvantage.  The strategy of breaking off Europeans from Iran by squeezing each country separately, may ultimately leave the triumvirate of China, Russia, and Iran with limited options. It remains to be seen, however, how much pressure the US is willing to put on China and Russia over their support for Iran’s most malignant activity. Some of Saudi Arabia’s economic engagements with Russia have been empowering that country, and by extension, Tehran benefits. Moreover, wider international considerations may begin to bear fruit. Some Europeans remain unhappy with Germany’s projection of support for liberal democratic values at home, contrasting with the selective (at best) projection and support for those values at board.

They see Germany succumbing to mercantilism and losing its place as one of leaders of the free world. Although the European countries have long ignored much of the terrorism, including Iranian assassinations of Ahwazis and Kurds on their territory, the bloodshed in the Middle East and the consequences of the refugee crisis are making these matters harder to ignore and funneling populist reactions throughout the continent. Merkel’s policies recently cost her seats; if she is seen as being frozen out by the United States, and perhaps, with time by the entire Gulf Region, she will lose her legitimacy as a leader. In the short term, however, some may think that Saudi Arabia’s imposition of the business ban on German firms will ultimately punish only its own consumers. Indeed, it is unclear whether and how this policy will carry over into the other sectors of relations between the two states. Only a few days before the announcement, German diplomats were boasting of strong cultural ties with Saudi Arabia, and a joint celebration of the cinema and other arts at the German Embassy, as Saudi Arabia is modernizing and looking at greater cultural engagement with other countries.

This development, nevertheless, presents an opportunity to view President Trump’s startling comments in a different context. Whether or not such threats will ultimately give him any leverage in negotiating trade deals with Europe remains to be seen.  But if he were to tie this ban to Germany’s intransigence over doing business with Iran, it would at a minimum signal that the US is serious enough about its national security considerations that it is willing to sacrifice business and luxury goods if it means putting pressure on its European counterparts to abandon the rogue regime. Indeed, excising luxury products is a good way to show displeasure, as by definition these goods are the least in demand and ultimately hurt the influencers who on their own can put on pressure for businesses to make different decisions. If one’s quality of life is affected over another country’s decision to engage with a bad actor, other private resources will mobilize to apply additional pressure. It is true that Germany can simply increase business with China, Russia, and others, but all of these developments will also take time to build up, and if China and Russia themselves are targeted for their contributions to Iran, everyone engaging with these two countries will find it significantly less advantageous.

Sanctions require commitment. It is hard to compensate for one’s own losses if one’s closest counterparts are choosing their pockets over one’s own understanding of national security. However, short term thinking and greed of government officials who have failed to make the case for better options to their own populations is not a reason for the United States to sacrifice its interests in the matter.  The populist wave across Europe is not ideal. In some ways, it is destabilizing, coopted by Russia, and promoting values that are as illiberal and alien to US’s understanding of freedom as the European Union’s stagnant, progressing statism.  Perhaps it is time for US to take note of the situation, and look closely towards building better markets and closer relations elsewhere – Europe’s actions are increasingly solipsistic; it decries the allegation that US is refusing to play by the rules, but simultaneously engages in reckless games where anyone who participates can get hurt and anyone who refuses for self-protection is ostracized. Iran’s global reach has not, however, stopped growing and developing countries from setting an example of adult behavior when the country’s sovereignty is compromised. One needs look no further than Morocco, which severed its relations with Iran altogether over the sort of activity Europe turns a blind eye on. Perhaps, no one needs to suffer from taking principled, courageous, and prudent actions to curtail rogue regimes and their facilitators. Perhaps it’s time for countries which share similar values and concerns in practice, and not just in rhetoric, to stand together – against foe and fake friends alike.

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