Attention has rightly focused on risk of actual war, but the harmful economic consequences of Trump’s action should not be overlookedby Duncan Weldon / May 10, 2018 / Leave a comment
The United States’s unilateral withdrawal from the Iran deal is a geopolitical disaster for the Middle East. But whilst most attention has, rightly and understandably, been focused on the potential for the deal’s unravelling to lead to actual war it also has the potential to seriously escalate the developing trade war. Indeed, from a strictly economic point of view, the timing looks catastrophic.
Back in March the Trump administration placed a 25 per cent tariff on imported steel and 10 per cent tariff on aluminium but granted a temporary exemption to Canada, Mexico, Brazil, the European Union, Australia, Argentina and South Korea. That exemption was due to expire in May but has since been extended to 1st June.
If the EU exemption is allowed to lapse, Brussels has pledged to respond in kind with a package of measures hitting imports of iconic American goods such as Harley Davidsons, Levi jeans and bourbon whiskey. Whilst it might sound like the European Commission is aiming to hit those going through a midlife crisis, the measures are actually carefully targeted to cause maximum pain for the President ahead of November’s midterms—they would disproportionately hurt manufacturers based in swing states.
In the past few days most of the immediate economic analysis of the end of the Iran deal has focussed on the oil price. The price of crude has advanced to a three and half year high, above $71 a barrel, on fears of a reduced supply from the Islamic Republic and the potential for wider disruption to supplies across the Arabian peninsula. But the real economic pain will come if the division between the EU and the US over Iran spills over into the wider trade conflict.
Even after the end of US sanctions on Iran in 2015, US companies have (in general) been wary to do much business in the Islamic Republic. By contrast several large European companies have invested heavily, French oil giant Total has embarked on a multi-billion dollar project in the South Pars gas field, Renault and Volkswagen began exporting cars to Iran last year and Airbus struck a deal to sell 100 jets in the country. Last year European exports to Iran hit $11bn, a 66 per cent rise over 2016 and around one hundred times higher than US exports to Iran.