Iran Is Right, but Also Wrong!

A woeful sign of the Trump administration’s bankrupt foreign policy is that, in the dispute with Iran over the Obama-era nuclear deal, the Iranians are in the right and the United States is in the wrong—politically, diplomatically, and even legally.

I take no joy in sharing this fact, as the ruling regime in Tehran ranks among the world’s most detestable and oppressive. It’s a sad day when America’s president and his top officials outdo the mullahs in evil!

But from an economic standpoint – might the United States be doing the right thing? If so, Why?

The truth is, isolating and vilifying Iran pays dividends. It has in fact paid huge dividends for over the past 40 years, why stop now? In the wise words of deep throat, follow the Money! Trump is a whore!! And as bad, if not worse, than the Mullahs. He doesn’t care about the law; he is only interested in money.

The current dispute concerns Iran’s recent breach of two provisions of the deal—exceeding the limits, first, on how much nuclear fuel it can stockpile, then on the degree to which it can enrich uranium.

U.S. officials say that the moves put Iran on a path toward resuming a nuclear-weapons program, a path that the accord—formally known as the Joint Comprehensive Plan of Action (JCPOA)— blocked in several ways. Technically, the officials are right. But a few things are worth noting.

First, and most obviously (though it’s surprising how few news stories mention this, if at all), Iran was not the first country to breach the deal’s terms. In May 2018, President Donald Trump withdrew the U.S. from the deal, for no good reason other than he didn’t like Obama, even though international inspectors had repeatedly attested that the Iranians were following its terms. Then Trump not only re-imposed economic sanctions, which had been lifted with the signing of the deal, but also imposed “secondary sanctions” on any country that did business with Iran—even the five powers (Britain, France, Russia, China, Germany, along with the European Union) that had co-signed it.

Second, even in its (quite delayed) response to Trump’s withdrawal, Iran did not violate the accord. Paragraph 36 of the JCPOA states that if one signatory of the pact believes that some others “were not meeting their commitments” under the deal, then, after certain meetings and consultations, it would have “grounds to cease performing its commitments.”

It’s an open and shut case. By pulling out of the deal and re-imposing sanctions, Trump announced that the United States would no longer meet its commitments. By falling under Trump’s secondary sanctions, despite efforts to avoid them, the European countries reluctantly did the same. And so, under the terms of the deal, Iran no longer has an obligation to meet its commitments.

Third, Trump was in violation of the deal well before he withdrew from it. As far back as July 2017, at his first G-20 summit, Trump pressured allied leaders to stop doing business with Iran. This pressure was a direct violation of Paragraph 29 of the accord, which states that the U.S. and the other signatories will refrain from any policy specifically intended to directly and adversely affect the normalization of trade and economic relations with Iran inconsistent with the commitments not to undermine the successful implementation of the JCPOA.

Even before the G-20 meeting, going back to the start of his presidency, Trump’s frequent threats to pull out of the deal marked a violation of Paragraph 29, as U.S. and European firms hesitated to get involved in “the normalization of trade and economic relations with Iran,” fearing that a U.S. withdrawal—and the resumption of sanctions—would force them to shut down their investments, losing them money.

Fourth, leveling secondary sanctions against other countries doing business with Iran is a violation of the spirit, and possibly the letter, of international law. It is permissible and even proper to punish countries or companies that violate sanctions imposed by, say, a U.N. Security Council resolution. But the JCPOA is a Security Council resolution— No. 2231 —enshrined as international law in July 2015, around the same time the U.S. and the other five countries signed it as a multinational deal with Iran.

In other words, Trump is using U.S. economic power—specifically, the primacy of the dollar in global finance—to bully U.S. allies into breaking international law. This is tantamount to banditry, and if the Europeans or Chinese ever displace the dollar’s primacy with their own currency, historians may date their desire to do so to their frustration over Trump’s Iran policy.

But the reality is, Trump and his “Neo-cons” and allied regimes in the Middle East need this Iranian regime as it is. They need an enemy to justify illiberal policies at home and provide a reason to keep spending money on arms. The “Neo-cons” basic argument is that US Corporations need to justify sanctions to keep a dangerous competitor out of many markets (such as Oil, Aviation, etc.) ; and that the U.S. has much to gain in terms of arms sales with this treatment of Iran. This saber rattling exercise will go on if it will be useful economically and if it helps galvanize support and further crush dissent among the people in the Western world and the Middle East.

It’s just a game. But sadly, this analysis is very short-sighted.

In terms of arm sales, according to the Center for Strategic and International Studies Iran spent only $16 billion in 2017 while Saudi Arabia spent $76bn. and the UAE $30bn. One estimate for 2015 calculated the overall value of American weapons deals to the Saudi-led coalition in Yemen since March 2015 totaled about $67.4bn. Riyadh makes up 18% of the total US arms sales between 2013 and 2017. The tiny UAE, which some reports have called “little Sparta” was buying 7% of total US arms sales in the same year.

Put this all together, and you have Saudi Arabia and UAE accounting for over $100 Billion in arm sales yearly. And their purchases have doubled in the past few years (during Trump’s administration). By contrast, Iran’s total imports of all goods is $16bn. US arms exports are almost an order of magnitude higher than value of Iran’s total imports – most of which is with China. Even if trade with Iran was legal, US market share would be minimal. Trump is merely following the path to greatest revenues for the US economy.

Then consider the value of ‘eliminating’ Iran from global oil markets. This, by the way, is NOT the first time this has happened. When North Sea and Alaskan Oil came on stream in the 1980’s, something close to 6 million barrels of oil production had to be eliminated to make room for US/UK production. And oil prices needed to stay high in the ‘80s to support ‘expensive’ North Sea and Alaskan production. The Iran-Iraq war had the effect of shutting down both Iran and Iraq’s oil! We now know that Saddam Hussein was ‘pushed’ into invading Iran! While Iran and Iraq’s oil exports crawled to virtually nothing both US and UK’s fledgling economies were reinvigorated.  And the rest, as they say, is history.  

But specifically, in 2019, US is now a net exporter of Oil and Gas. High oil prices help the US, Russia, Israeli and Saudi economy – and puts pressure on emerging US competitors like China and (mainland) Europe that import energy! (Yes, Israel is an oil and gas exporter too now. The largest oil field discoveries in the 21st Century are off Israel’s coastline). 

So far, it is estimated that sanctions on Iran are removing up to 2 million barrels of oil per day from international markets. Prices have risen modestly. The AAA reported this week that U.S. gasoline prices average $2.84 a gallon, compared to $2.76 a gallon a year ago. Rising prices are “coming at a time when consumers are relatively well positioned to handle it,” said a major oil industry analyst. “Job growth is strong. Wage growth is healthy. We can absorb higher oi prices!”

Thus, there are many reasons why a modest increase in prices would fit US strategic goals. Most global, major energy companies have seen a roughly 20% increase in revenues and profitability since Trump has been in the Whitehouse.

But, an excessive increase in Oil prices (which would result from a war in the Persian Gulf), would have devastating economic impact.

The same economic arguments apply in many other critical global markets, where Iranian participation (as a competitor) would not be helpful to Western economies.

Take the case of Air travel and aerospace products. This is another major global industry like energy, and arms. Iran sits 1000 kilometers closer to Europe, India and China as an air hub. Yet, all the intercontinental traffic now heads through Dubai and other ‘allied’ (i.e. non-Iranian) air hubs! In turn, Arab airlines like Emirates, Etihad, etc. suck up hundreds of billions of dollars of Boeing and Airbus products annually and run with minimal profits. Opening Iran would destroy all this business. Iran has a massive competitive advantage in air travel, but its only through sanctions that it can be kept out of this industry.

This same anti-Iran analysis has concluded that if Iran opens up, Iranians would be making cars, home appliances and flooding the region with their products, and undermining sales by Western auto and home appliance companies. This analysis suggests that it is in western interests for Iran to be kept isolated and sanctioned – but NOT – frightened to a point of war. Iran basically needs to appear rabid and dangerous to promote regional arms sales, kept sanctioned to be kept out of global markets.

But this analysis is very short-sighted, because it does not consider many crucial economic factors, that would suggest that in fact the US would gain even more from an economic engagement with Iran.

First, overall trade with Iran could be several orders of magnitude higher given Iran’s population, income from oil, and current sanctions. You can’t use today’s economic statistics to assume trade with Iran will stay low or continue at the same pace after opening.

Second, Iran is a regional hub. Many countries in the region such as Afghanistan, Turkmenistan … all the ‘stans’ rely on Iran for goods and services. Opening Iran would open the whole region to trade and economic advancement. The Chinese get it. The U.S. does not. Its about much more than Iran. Its about the future of central Asia.

Thirdly, this analysis assumes a digital relationship with US Arab allies, when in fact, the US could carve out Iran and Central Asia as a separate economic and political zone and engage with it completely separately. It’s as if its okay for the Chinese to sell appliances to Dubai, but its NOT okay for Iranians to do so!? One competitor is fine, but its NOT okay for it to be an Iranian competitor.

The point is, that the economic opportunities in engaging with Iran are significant, and more significant than gains from arms sales or keeping Iran out of global markets. From a simple, first order analysis of regional populations (over 200 million in Iran’s sphere), and resources, the economic opportunity with Iran and its central Asian region could be in the Trillions of dollars. US policy is undermining US economic opportunity.

But as we all know, it doesn’t matter if Iran is right politically, diplomatically, and even legally. It doesn’t matter. US elite will follow ONLY their perceived economic interests.

The only way Iran can ever come out of this mess is if they find a way to make opening ‘Iran’ of greater value to ‘sanctioning ‘Iran. If the West doesn’t appreciate the massive value of engaging with Iran, there is a flip separate strategy that could be employed. Put another way, the Mullahs should make the opening of Iran, a much lower cost option than sanctioning Iran! By making the cost of sanctions higher for the West.

Iran could flip this and ‘sanction’ the West. Make sanctions expensive (and ineffective).

The case of the oil tanker in Gibraltar is a good one. If Britain seizes one Iranian boat, why shouldn’t Iran seize at least one British boat, or even several them. Or even shut down the straits of Hormuz to British shipping?

If the West is sanctioning Iran, why should Iran not work with Chinese drug manufacturers to develop and rapidly test copycat versions of US drugs not being sold to Iran due to sanctions. In product after product, Iran could sponsor a competitive product to US products being shut off to Iran’s market due to sanctions. Sanctions could become very expensive if it leads to reduced markets and opportunities for the West across the globe with competing products.

If the West is sanctioning Iran, why should Iran not create its own global banking system and enable others to trade in non-western denominations.

Iran could sponsor a global stampede away from Western products and Western economic systems being used to attack ordinary Iranians. By simply making the costs of Western actions much higher than the West perceives, Iran can break the stalemate. Iran should make the cost of sanctions ‘rise’ for the West and maybe this can end.

Iran is right legally, diplomatically … and now Iran needs to be right in the way it responds to Trump’s aggression. Iran and Iranians are not powerless, and it should exercise its power. This nonsense has gone on long enough.

As much as I dislike the regime in Tehran, I also believe Trump’s strategy is a failed one and will create much larger issues for both Iran and U.S. It’s very simple, an open Iran is the best outcome for both the U.S. and Iran. Eventually Iranians will break free. Iranians can not be subjected to this type of humiliation, along with economic and political torture forever. And, Iranians have long memories.

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