America faces real threat from Europe to block Iran sanctions

America faces real threat from Europe to block Iran sanctions
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European leaders have sharply criticized President TrumpDonald John TrumpSupreme Court comes to Trump's aid on immigration Trump is failing on trade policy Trump holds call with Netanyahu to discuss possible US-Israel defense treaty MORE’s decision to withdraw from the landmark 2015 nuclear agreement with Iran. France, Germany, the United Kingdom and the European Union have opened negotiations with Iran to see if they can keep Iran in the agreement, and European diplomats began meeting this week to discuss strategies to insulate European companies from the U.S. sanctions that the Trump administration plans to reimpose later this year.

Administration officials and many experts in Washington have dismissed Europe’s ability to block U.S. sanctions, arguing that European companies are far more invested in the United States than Iran and will generally comply with U.S. sanctions regardless of developments in Brussels. French energy giant Total, for example, announced this week that it would stop investing in an Iranian gas field unless it can win an exemption from renewed U.S. sanctions.

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But the Trump administration’s confidence in European acquiescence to renewed U.S. sanctions may be misplaced. While officials are correct that large European companies will generally comply with U.S. sanctions absent countervailing measures by Brussels, if the European Union is prepared to risk a major rift with Washington over Iran, member governments have tools to block U.S. sanctions. The administration should seek a diplomatic resolution to the brewing conflict if the alternative is watching Europe take steps that will undermine U.S. sanctions around the world.

Take, for example, the U.S. sanctions directed at SWIFT, the financial services company based in Belgium that banks use send and receive financial transaction information. In 2012, due to Europe’s concern about Iran’s nuclear program and under the threat of U.S. sanctions, the European Union required SWIFT to cut major Iranian banks off from its network, a measure that severely impacted Iran’s access to the global financial system. SWIFT resumed offering services to Iranian banks in 2016 after the nuclear deal came into force.

Faced with renewed U.S. sanctions, SWIFT management will probably again cut Iran off from its network. But if Europe decides to fight with Washington, European governments could enact laws to legally require that SWIFT provide services to Iranian banks as long as the banks complied with European law. While the Trump administration would doubtless vociferously oppose this, the Treasury Department would find it virtually impossible to actually sanction SWIFT for providing services that SWIFT was legally required to offer under controlling European law.

Europe could also effectively block sanctions on the Central Bank of Iran (CBI) that are designed to restrict purchases of Iranian oil. Renewed U.S. sanctions on the Central Bank of Iran will likely dissuade major European banks from handling payments for European imports of Iranian oil, given that the payments are ultimately made to the CBI. But Europe could blunt these sanctions by directing the European Central Bank (ECB) or a major European government’s Finance Ministry to handle oil-related payments to Iran. Although U.S. sanctions technically apply to the operations the ECB and European finance ministries, in practice both the ECB and major European finance ministries are effectively sanctions-proof, given that a U.S. decision to impose sanctions on them would have catastrophic adverse impacts not only in Europe but to the United States.

Europe could also implement measures to insulate Europe’s business with Iran more generally. For example, European leaders are discussing using government-sponsored lending facilities to ensure that European companies doing business with Iran will continue to have access to finance for Iranian projects. Europe could also revive 1990s era “blocking legislation” that generally prohibits European companies from complying with non-European sanctions, though in practice such general legislation proved difficult to implement and enforce. Finally, Europe could try to deter the United States from actually imposing sanctions on European companies doing business in Iran by announcing that Europe would impose tariffs on imports of U.S. goods if the United States actually sanctioned a European company over Iran.

For the last two decades, U.S. sanctions have relied on the cooperation of allies and foreign companies to magnify their impact. Even when allies have been unwilling to match U.S. sanctions in their domestic laws, they have generally tacitly agreed to U.S. measures and allowed U.S. officials to encourage companies to comply. But if a major ally like the European Union decides to actively fight U.S. sanctions, it will set a pattern of opposition and risks demonstrating that U.S. coercive economic power can be blunted. That will not only undermine the Trump administration’s strategy of renewing pressure on Iran, it will do lasting damage to the credibility of sanctions as a U.S. foreign policy tool.

Hopefully, Trump can persuade Europe to back down on threats to block U.S. sanctions. But if Europe does not, the Trump Administration needs to take Europe’s threat to block U.S. sanctions on Iran seriously. It should be prepared to negotiate with European leaders to reach a joint approach to combating Iran’s ongoing malign activities across the Middle East. This will mean aggressively demonstrating to Europe that renewed U.S. sanctions are targeting Iran’s malign activities across the Middle East, an issue where Europe generally agrees with the United States, and do not simply reflect changed U.S. policy on the nuclear deal. The Trump administration has already begun making this argument, using recent sanctions actions to highlighted the Central Bank of Iran’s involvement in supporting Tehran-backed terrorist groups.

Diplomacy will also mean showing flexibility toward reimposing sanctions on European companies, and committing to continue serious negotiations regarding an improved nuclear deal, even if Trump is not able to achieve 100 percent of his objectives. The administration will surely resist making compromises with Europe over Iran. But a strong compromise with Europe that heads off any measures designed to undermine U.S. sanctions is a much better deal over the long run than the United States learning the hard way the limits of America’s coercive economic power.

Peter Harrell is an adjunct senior fellow at the Center for a New American Security. He previously served as deputy assistant secretary for counter threat finance and sanctions at the U.S. Department of State.