Trump's Iran nuclear deal exit may spark a sanctions battle with Europe that Uncle Sam already lost once

Key Points
  • The U.S. withdrawal from the Iran nuclear deal threatens to reopen a long-dormant dispute over Iranian sanctions between the United States and Europe.
  • The last time Europe and the United States went head-to-head on the issue, the sitting U.S. president was forced to back down.
  • Analysts warn the EU could once again threaten to use so-called blocking statutes to prohibit European companies from complying with U.S. sanctions.
Trump talks Iran and North Korea at cabinet meeting
Trump talks Iran and North Korea at cabinet meeting

President Donald Trump's move to withdraw the United States from the Iran nuclear deal and restore sanctions on Tehran threatens to reopen a long-dormant dispute with Europe and inflame trade tensions with the Continent, analysts and sanctions experts warn.

History is not on Trump's side. The last time America and Europe went head-to-head over Iranian sanctions, Europe pushed back and the United States was forced to back down.

Market watchers are now questioning whether the European Union will deploy the same legislative weapons it used 20 years ago, when the Clinton administration threatened sanctions against European companies. In response, the EU passed so-called blocking statutes that prohibited European companies from complying with U.S. sanctions, giving them cover to continue with business as usual.

It is going to be nightmarish to convince the Europeans to back our sanctions effort now without them actually being supportive of it politically.
Richard Nephew
former lead sanctions expert for the Obama administration

Then as now, the Europeans had a lot to lose. The EU exported €10.8 billion in goods to Iran last year, while its imports from the country totaled €10.1 billion. The union is one of the largest markets for Iranian petroleum products. European multinationals like French oil major Total and aircraft maker Airbus have announced billions of dollars in deals since sanctions ended in 2016.

The EU could use the blocking statutes to protect these companies if Trump threatened sanctions, EU Ambassador to the United States David O'Sullivan said last year.

The result of the late 90s standoff was a sort of cold war that simmered for a decade, in which the Clinton and George W. Bush administrations kept the sanctions on the books, but did not enforce them for fear of sparking a trade war with Europe. But it remains to be seen whether Trump, a president prone to brinkmanship and trade tariffs, would also back down.

U.S. President Donald Trump (R), French President Emmanuel Macron (L) and German Chancellor Angela Merkel (C) at the start of the first working session of the G-20 meeting in Hamburg, Germany, on July 7, 2017.
John MacDougall | AFP | Getty Images

If both parties stood their ground, the trans-Atlantic partnership would be in uncharted territory. The United States has never imposed Iran-related sanctions against European companies in a far-reaching way. Likewise, the EU has never had to enforce the blocking statutes, and it's uncertain European firms would continue doing business with Iran even if politicians seek to protect them from sanctions.

"We have seen Britain, France, Germany and indeed Iran pledge themselves to keep the agreement going. I think what we've done here is just open the door to what will be a pretty tumultuous period ahead," said former U.S. Ambassador Ryan Crocker, a diplomat who has served in several Republican and Democratic administrations.

"It may result in some other options or modifications that would ease all of this. It may not. But it's going to be playing out over a number of weeks before we can really measure what happens," he told CNBC's "Squawk Box" on Wednesday.

Relations with Europe are already frayed over Trump's threat to slap tariffs on the Continent's goods and his withdrawal from the Paris climate agreement. The president's nuclear deal exit will "amplify the crisis in trans-Atlantic relations" and prod France and Germany to look for ways to fire back, according to risk consultancy the Eurasia Group.

Iran deal fallout will take weeks to measure, former ambassador says
Iran deal fallout will take weeks to measure, former ambassador says

"These nations and other U.S. allies now facing renewed sanctions will both explore U.S. intentions on implementation and at the same time consider adopting blocking legislation and/or other ways of hitting back at the Washington," Eurasia Group analysts said in a briefing Tuesday.

In pulling out of the Iran nuclear deal on Tuesday, Trump ignored the pleas of European leaders and announced his administration would immediately restore the full range of sanctions against Iran that were in force prior to 2016. That means European companies cannot enter into new business deals with Iran and must wind down existing contracts in three to six months.

Immediately afterward, the leaders of Britain, France and Germany — as well as Iran's president — said they would try to preserve the deal without the United States. The European leaders called on Trump not to take any action that would get in the way of that goal.

But that is exactly what U.S. sanctions would do. In order for the U.S. sanctions to be successful, European companies must stop doing business with Iran. And if European companies stop doing business with Iran, the nuclear deal will almost certainly collapse.

US to re-impose sanctions on Iran
US to re-impose sanctions on Iran

"This is back to 1997," said Richard Nephew, the lead sanctions expert for the U.S. team that negotiated the Iran nuclear deal.

"It is going to be nightmarish to convince the Europeans to back our sanctions effort now without them actually being supportive of it politically," he said.

The EU and United Nations only got on board with sanctions beginning in 2006 after evidence surfaced that Iran was running a secret nuclear weapons research program.

Those sanctions led to years of painstaking negotiation among Iran, Britain, China, France, Germany, Russia and the United States. The talks culminated in the 2015 nuclear deal, which lifted sanctions on Iran in exchange for Tehran limiting its nuclear activity and submitting to international inspections.

European cooperation was critical to the success of the nuclear sanctions. Reductions in Iranian oil purchases from Europe alone accounted for half of the drop of roughly 1.4 million barrels a day in Iranian crude exports.

That action also came swiftly. The EU adopted sanctions in 2012 that curtailed all purchases of Iranian oil by member countries within six months.

Could be unintended consequences for energy trading with Iran deal exit, says expert
Could be unintended consequences for energy trading with Iran deal exit, says expert

"There are critical differences between where we are today and where we were then," said Amos Hochstein, who coordinated Iran oil sanctions for the Obama administration.

"The first and most important is that Europe is not following with their own embargo, their own sanctions on energy, which means that for the first part of the sanctions implementation, you won't have this big takeoff of Iranian oil — 650,000 barrels — that will come off the market even if the European companies do comply," Hochstein told CNBC's "Squawk on the Street" on Wednesday.

U.S. law allows countries to continue buying Iranian oil so long as their home country significantly cuts overall crude imports from Iran. The Obama administration asked countries to reduce oil supplies by 20 percent every six months.

If the Trump administration follows that model and European countries do the bare minimum to comply with the sanctions, it would take six years to shrink European purchases to zero, Nephew estimated in a recent report.

It is possible that another event could head off a trade dispute between Europe and the United States. Iran could grow frustrated and abandon the deal.

Europe and the United States could also find a face-saving way to revise the nuclear deal. Trump's demands include placing permanent restrictions on Iran's nuclear activity, expanding inspections, sanctioning its ballistic missile program and addressing its role in Middle East conflicts.

Some analysts say that is simply too much for the Europeans to concede.

"We're asking for the moon across a whole range of activities and we're giving them very, very little," Nephew said. "I can't believe that that's not going to backfire at some point."