Trump and Europe are entering a 'game of chicken' over Iran nuclear deal sanctions

Key Points
  • Europe is putting in place measures to protect its companies from U.S. sanctions that can punish foreign firms for doing business with Iran.
  • The European Union is trying to save the 2015 nuclear deal while Washington seeks to isolate Iran despite the objections of its closest allies.
  • The dispute puts the two sides in uncharted territory that could shake the trans-Atlantic alliance and undermine U.S. authority in ways that are difficult to predict.
French President Emmanuel Macron (L) and German Chancellor Angela Merkel (2nd L) speaks as US President Donald Trump (C) arrives for a family picture during the NATO (North Atlantic Treaty Organization) summit at the NATO headquarters, in Brussels, on May 25, 2017.
Eric Feferberg | AFP | Getty Images

European leaders are assembling a playbook to preserve the Iran nuclear deal that puts the Continent on course for direct conflict with the United States.

Analysts are deeply skeptical that the measures under consideration will embolden big European multinationals to continue doing business with Iran in the face of powerful U.S. sanctions. However, the dispute puts the two sides in uncharted territory that could shake the trans-Atlantic alliance and undermine U.S. authority in ways that are difficult to predict.

The root of the disagreement is President Donald Trump's decision to abandon the 2015 nuclear accord that Iran negotiated with the Obama administration, Britain, China, France, Germany and Russia. European leaders tried to persuade Trump to leave the deal intact while the allies addressed Tehran's role in Middle East conflicts and ballistic missile tests. But the White House ultimately decided to leave the deal and restore a punishing slate of sanctions against Iran.

I think that the real geopolitical problem is when you have not an unpredictable opponent or enemy or partner. The problem is when your closest friend is unpredictable.
Donald Tusk
European Council president

Last week, the European Commission announced it would update laws prohibiting the bloc's companies from complying with U.S. sanctions, first adopted in 1996 to counter American sanctions on Cuba. It is also considering making direct transfers from EU governments to the Iranian Central Bank and allowing the European Investment Bank to guarantee projects in Iran, an EU official told Reuters.

The Eurasia Group, a risk consultancy, forecasts that Iran will back out of the deal within months when it becomes clear that these and other measures cannot keep enough business flowing into the country to make it worth Tehran's while to continue making nuclear concessions.

On Wednesday, Iran's supreme leader, Ayatollah Ali Khamenei, issued tough demands that Europe must meet in order to save the deal. Iranian diplomats meet on Friday with their counterparts from Britain, China, France, Germany and Russia to discuss the nuclear deal.

Behnam Ben Taleblu, research fellow at the Foundation for Defense of Democracies, also doubts the measures will offer Iran much relief. However, he is concerned that the United States and Europe are entering a "game of chicken" that Washington should instead be playing with Tehran.

"I'm more concerned about what they represent: a European willingness to basically stare down American secondary sanctions," he told CNBC.

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In his view, the EU measures are a clear indication that Europe is not yet on Trump's side. The administration needs to prioritize getting Europe on board before the expiration in November of a 180-day grace period for companies to wind down business with Iran, he added.

"A lot of Europeans are caught in economic realities which should remind Washington of why they are still upset. There's a strong political disagreement they have with Washington over the JCPOA, and continuing to frame the trans-Atlantic dispute over the JCPOA as legal or economic forgets there's a political disagreement," he said, using an acronym for the deal's official title.

Cooperation vs coercion

At the heart of the problem is an issue of cooperation versus coercion.

The administrations of George W. Bush and Barack Obama patiently built international support for sanctions, leveraging concern over Iran's illicit research into nuclear weapons development. That resulted in a robust multilateral sanctions regime — essentially a web of sanctions developed by the Americans and Europeans that complemented one another.

However, the Trump administration is not pursuing a multilateral approach. Instead, it is seeking to leverage the size of the U.S. economy and its influence over the global financial system to coerce European companies to follow Washington's lead. It is doing that through so-called secondary sanctions, which allow Washington to deny foreign companies access to the U.S. market if they do business with Iran.

In many cases, turning to this type of secondary sanction shows that the campaign to secure multilateral sanctions failed, said John Forrer nonresident senior fellow at the Atlantic Council's Global Business and Economics Program.

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Europe and the Trump administration fundamentally differ on "what is a good, acceptable resolution" of the dispute, according to Forrer. That difference was made even more clear by Secretary of State Mike Pompeo's speech this week, in which he said sanctions relief will now depend not only on Iran making more nuclear-related concessions, but on overhauling its foreign policy, ceasing ballistic missile tests and releasing U.S. citizens in captivity.

"What Pompeo articulated is very different than what the EU would articulate," said Forrer. "Where does it end? Because the, quote, solution for the U.S. is not the same solution for the EU."

The ultimate impact of the rift could be difficult to measure, according to Forrer. It could, for example, be hard to tell to what degree European frustration over the Iran nuclear deal influences ongoing trade talks with Washington, he said.

European leaders did not hide their frustration at a summit in Bulgaria last week after the U.S. exit.

"I think that the real geopolitical problem is when you have not an unpredictable opponent or enemy or partner," said European Council President Donald Tusk. "The problem is when your closest friend is unpredictable. It's not a joke now. This is the essence of our problem today with our friends on the other side of the Atlantic."

Sanctions' history of diplomatic crisis

Europe has tested the United States in the past, and in each case, Washington has blinked. President Ronald Reagan lifted secondary sanctions meant to block a pipeline project from Russia to Europe during the Cold War. Presidents Bill Clinton and George W. Bush left sanctions aimed at disrupting business with Cuba and Iran on the books, but did not enforce them for fear of sparking a trade war with Europe.

"This has produced a diplomatic crisis every time it has occurred in the past. ... If the European Union persists, I think a new crisis is inevitable," William Alan Reinsch wrote in a commentary for the Center for Strategic and International Studies, where he is now the Scholl Chair in international business.

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Beyond such a crisis, Trump's go-it-alone approach could have long-term implications for American influence and authority, said Reinsch, a former Commerce Department undersecretary for Clinton. Those include encouraging nations like China to develop alternatives for international transactions currently denominated in dollars.

Already, market watchers warn that Shanghai's new yuan-denominated crude oil futures could become a means for Iran to sell its oil without relying on greenbacks.

"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," Reinsch said.