Potential US Export Losses if Congress Kills the Nuclear Agreement with Iran

September 1, 2015 1:30 PM

Congress will soon vote on the diplomatic agreement reached in July 2015 between the five Permanent Members of the UN Security Council plus Germany (the P5+1) and Iran, formally titled the Joint Comprehensive Plan of Action (JCPOA). Legislation signed by President Obama in May 2015, the Iran Nuclear Review Act of 2015, gives Congress a vote on US participation in the JCPOA. Since Obama promises to veto any congressional disapproval of JCPOA, two-thirds majorities in both the House and the Senate will be required to prevent the United States from lifting sanctions in accordance with the JCPOA. In other words, 290 Congressmen and 67 Senators must vote against the JCPOA to kill US participation.

Without speculating on the outcome of the congressional vote, this post sketches the consequences for US exports if Congress rejects the JCPOA by veto-proof majorities. US economic sanctions against Iran have two big layers, and each layer contains a mix of legislative and executive measures.

The first sanctions layer, dating from the early 1990s, is aimed at Iran’s sponsorship of terrorism—notably the Hezbollah organization, entrenched in Lebanon, which regularly attacks Israel and supports the Assad regime in Syria. This layer also targets Iran’s human rights abuses and money laundering practices. Apart from a handful of humanitarian products, this layer prohibits practically all direct commerce between the United States and Iran. These sanctions are not affected by the JCPOA.

However, the administration can use its executive powers and waiver authorities to permit a certain amount of trade that would otherwise be prohibited by the anti-terrorist and human rights layer of sanctions. Even if Congress kills US participation in the JCPOA, President Obama could, for example, still permit the sale of Boeing and Cessna aircraft parts to Iran and US purchases of consumer goods from Iran, such as pistachios and carpets. Currently US exports to Iran are less than a million dollars annually, but with generous use of presidential powers, this figure might increase to tens of millions of dollars annually. That would matter to a few US firms, but the potential magnitude is inconsequential when compared with total annual US exports of $2.3 trillion. Moreover, the president is unlikely to invoke his executive powers and waiver authorities on a large scale if Congress kills US participation in the JCPOA.

The second layer of US economic sanctions, the “nuclear-related secondary sanctions,” resulted from the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). These are the sanctions that crushed Iranian commerce with the world because they instructed the Obama administration to sanction banks and industrial firms in Europe, Asia, and elsewhere that conducted prohibited finance or trade with Iran. Put bluntly, the threat of CISADA sanctions gave foreign financial and industrial firms a stark choice: Do business with the United States or do business with Iran, but not with both. CISADA sanctions were backed up by UN Security Council resolutions 1929 (2010) and 2224 (2015) that called on UN members to curtail their financial and trade ties with Iran.1 These are the sanctions that will be dismantled if the JCPOA is implemented—in other words, sanctions imposed on Iran’s customers, suppliers, and financial partners.

If a veto-proof majority of Congress kills US participation in JCPOA, the Obama administration will confront hard choices. The UN Security Council will in any event repeal resolutions 1929 and 2224, along with several others, and countries in Europe and Asia will rapidly dismantle their own financial and trade sanctions. 2 Firms based in those countries are already sending exploratory missions to Iran. In the event JCPOA is disapproved by Congress, will the United States enforce secondary sanctions against foreign banks and industrial firms in Europe and Asia that are doing business with Iran?

Because President Obama and Secretary of State Kerry took the lead role in negotiating the JCPOA, it seems unlikely that they would vigorously enforce secondary sanctions. To do so would put the United States at odds not only with Iran but also with US allies and trading partners abroad. However, the next administration might take a different view and selectively threaten and apply secondary sanctions.

According to recent World Bank estimates, the lifting of financial and trade sanctions could lead to an increase in Iranian exports—mainly oil but also foodstuffs and industrial products—of $17 billion annually.3 Iranian imports would probably increase by a similar amount.4 In addition, foreign direct investment in Iran might reach $3.5 billion annually, about double current levels.

If the United States invokes secondary sanctions to curtail these prospective trade and investment flows, two reactions can be anticipated from European and Asian countries. First, they will enact “blocking statutes,” instructing firms under their jurisdiction (including local subsidiaries of US multinational corporations) to ignore the US sanctions. Second, they will retaliate against US exports of goods and services.5

Thus, if selective US secondary sanctions could stifle roughly half of the anticipated gains in Iranian exports and imports, some $8 billion annually, it seems likely that retaliation will cost US exporters a similar amount of lost sales, about $8 billion annually. This is not trivial, but compared to annual US exports of some $2.3 trillion, a loss of $8 billion is small. The far bigger cost to the United States would take the form of frayed relations with allies and trading partners: They would strenuously object to the extraterritorial application of US sanctions for objectives that they no longer share.

Notes

1. Earlier UN Security Council resolutions also addressed the nuclear issue, but in less forceful terms.

2. Indeed, the European Union has already approved the terms of the nuclear deal in July 2015.

3. World Bank, Economic Implications of Lifting Sanctions on Iran, July 2015, MENA Quarterly Economic Brief, Issue 5.

4. Iranian total global exports are currently about $100 billion annually, and imports about the same.

5. There are many precedents for resistance to so-called extraterritorial sanctions by the United States. As early as the 1960s and through the 1980s, US efforts to block the supply of energy equipment to the Soviet Union for oil pipeline development were resisted by several countries and forced an eventual lifting of sanctions. The European Union adopted blocking statues and other countermeasures, including WTO dispute settlement, in the wake of the Helms Burton Act and Iran and Libya Sanctions Act (ILSA) of 1996, making it illegal for European companies or individuals to comply with the terms. Again in 2001, the European Union adopted a blocking statute, when the ILSA was extended by the US Congress. Canada and Mexico enacted similar statutes in relation to sanctions targeting Cuba. For a more detailed overview of these measures, see Clark and Wang (2007).

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Gary Clyde Hufbauer Senior Research Staff

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