EUROPE MUST LOBBY AGAINST US SANCTIONS ON IRAN

Trump’s abandonment of the JCPOA is a major blow, but it need not be a fatal one. The agreement, after all, is not a bilateral deal between the United States and Iran — European countries as well as Russia and China also struck the deal and now have the opportunity to preserve the deal.

By abandoning the JCPOA, European leaders have reason to question Washington’s commitment to their shared interests. As a result, Europe should make clear that cooperation on any future sanctions regime will be at serious risk

Europe can also act to mitigate the consequences of a reimposition of U.S. sanctions by revitalizing an EU regulation forbidding European compliance with American extraterritorial sanctions. This regulation — which has fallen into relative disuse — prohibits European companies from acting in compliance with the Iran Sanctions Act, which, at the time, threatened sanctions on foreign energy giants investing in Iran’s energy sector. The EU should amend this regulation to add all U.S. sanctions lifted under the JCPOA.

The practical effect of this move will be twofold. First, it will provide European countries with confidence that their home governments will protect them from the extraterritorial application of U.S. sanctions. Second, it will deter the United States from effectively applying its sanctions to European companies. Europe would do well to note that the United States failed to enforce the Iran Sanctions Act during the entirety of its first decade in existence as a result of this regulation.

Europe also needs to think in the long term. The potency of American sanctions stems from the power of the U.S. dollar: Most international trade is conducted in dollars, and financial transfers related to such trade need to be processed through the United States. Efforts to create offshore dollar-clearing facilities to avoid the United States have been tepidly pursued thus far, but Brussels can take a big leap forward by announcing its intent to encourage and promote the development of such a facility.

Finally, Europe can encourage its international partners to enact measures ensuring that any reimposed U.S. sanctions have a limited effect on the Iran deal. It has done so before: When the United States first sought to aggressively impose extraterritorial sanctions on Iran in the late 1990s, Europe was not alone in resisting those efforts. Japan, South Korea, Canada, Mexico, and other countries either imposed or threatened to impose similar blocking statutes that prohibited home companies from complying with U.S. sanctions.

European business leaders and policymakers have grown more vocal about the possibility that the European Union would employ blocking regulations to protect European businesses from the reach of US secondary sanctions on Iran. These regulations would penalize European companies for complying with secondary sanctions since the Trump administration has decided to withdraw from the Iran nuclear agreement. Total CEO Patrick Pouyanné became the first high-profile European executive to publicly call for such measures to be considered, disclosing that Total has been in discussions with French and European authorities about means to protect investments already made in Iran, even in the case of the return of sanctions. But even if the European Union finds the political will to reinstitute blocking regulations in the event of snapback, it is unclear whether they are fully effective as a standalone measure to protect European trade and investment in Iran. Blocking regulations are a legal mechanism which seeks to mitigate the extraterritorial effects of sanctions under Public International Law (PIL), the body of law that governs relations between sovereign states and their unions, such as the European Union. Under international law sovereign states are expected to exercise moderation and restraint if their legal acts may affect vital economic and commercial interests of another state. But sometimes states violate the principle of restraint for their own national security considerations. The snapback of secondary sanctions by the Trump administration would represent once such case. In such situations, there is no efficient and universal legal avenue under PIL to challenge such non-compliance.

While the World Trade Organization (WTO), which was established under the authority of PIL, may seem a venue to challenge extraterritorial sanctions which restrict trade in goods and services, it is unlikely Europe would be able to successfully challenge the snapback of U.S. sanctions under the WTO’s legal authority.

Article XXI of the General Agreement on Tariffs and Trade (1994) declares that nothing in WTO rules will prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests. This exemption means that member states can depart from WTO commitments on trade in goods and services but while there have been several attempts to bring to WTO adjudication disputes on the application of national security exemptions, none of the cases ended with conclusive guidance.

In 1996, the European Union began a dispute process against the United States with regard to extraterritorial sanctions against Cuba. This dispute reached the state of WTO consultations. But ultimately, the EU and US reached a political solution in which the US assured that its secondary sanctions would not be enforced upon European companies. The WTO case was suspended.  The political solution was necessary for a simple reason. Even if the WTO had found in the favor of the EU, deciding that the national security exemption did not apply, the United States was never going to agree with a WTO’s interpretation of its national security requirements. The idea that the United States would comply with WTO recommendations in such a situation is hard to believe.

Given the dead end presented by the WTO dispute avenue, the EU has sought legal mechanisms that rely on the legal authority of the union and its member states.

The legal act is the 1996 EU Blocking Regulation. This regulation was established in response to US sanctions on Iran, Cuba, and Libya. The regulations prohibit EU entities and courts from complying with foreign legal acts, such as sanctions laws, listed in an annex. In principle any new extraterritorial laws of any third country may be added to the Annex and indeed help EU persons to continue business with a sanctioned third country. However, the past success of such regulations in enabling European companies to continue conducting business in these jurisdictions such as Iran was the result of political rather than legal influence.

The blocking regulations cannot provide full protection from secondary sanctions because if the EU persons doing business in the US start economic activities in the Iran, they are at risk of being penalised under the US sanctions regime. Even if the European Union seeks to penalize its companies for complying with US sanctions, it is clear that a lot of EU companies would simply face a dilemma between doing business in the US or Iran and where to accept the penalty. Given the fact that the US market both frequently offers more attractive economic opportunities and poses more severe penalties and consequences for non-compliance with US law, most companies are likely to wind down their Iran operations and pay any penalties that the EU or their national governments may levy under the blocking regulations.

However, the discussion about blocking regulations is nonetheless worthwhile. The prospect of such regulations has in the past played an important role in bringing about an acceptable solution. The regulations are secondary to the political process between the US and EU and its member states that will hopefully lead to an understanding on Iran business. The threat of reviving the EU blocking regulation in itself can be a useful political tool for Europe. Moreover, while the blocking regulations may only be partially effective for major multinationals, they can provide an avenue for smaller-medium sized companies in Europe and Asia that have little or no US exposure to continue conducting business in Iran in non-dollar currencies. Multinational executives seem to agree. Assuming Iran remains committed to the nuclear deal, blocking regulations, which would protect companies from U.S. penalties, would positively affect the decision to invest in Iran. 

Blocking regulations can serve an important role as part of the suite of political, legal, and commercial measures that can be employed by European governments to protect their businesses from the consequences of snapback.