Argument

How Europe Can Block Trump

After Washington exits the Iran deal, U.S. secondary sanctions could harm European companies. EU leaders should retaliate by reviving a tool used successfully in the 1990s.

Angela Merkel, Emmanuel Macron, Donald Trump, and other leaders depart after posing for the group photo at the G7  summit on May 26, 2017 in Taormina, Italy.
Angela Merkel, Emmanuel Macron, Donald Trump, and other leaders depart after posing for the group photo at the G7 summit on May 26, 2017 in Taormina, Italy. (Sean Gallup/Getty Images)

President Donald Trump’s hard exit from the 2015 Iran nuclear deal was followed by a hard message for Europe: The United States will use sanctions to coerce its allies to shut their economic doors to Iran. Trump not only chose to violate a multilateral agreement, but his administration now aims to implode it by obstructing European business ties with Iran. In addition, the United States has also vowed to impose harmful trade tariffs on European allies. Trump is in effect threatening a trade war with Europe through tariffs and the weaponization of U.S. sanctions. Europe is now forced to respond and faces a dilemma of balancing its fundamental right to sovereignty against the risk of further damaging the trans-Atlantic alliance.

Following Trump’s announcement, background briefings from the State Department and statements from the U.S. Treasury Department made it clear that Washington intended to reimpose the U.S. sanctions eased under the nuclear deal and strictly enforce U.S. secondary sanctions against global companies trading with Iran. The newly appointed U.S. ambassador to Germany duly tweeted an undiplomatic warning to German companies to wind down operations in Iran “immediately.”

Rejecting the threats of the new U.S. ambassador, Germany’s economy minister, Peter Altmaier, stated that his government was “ready to talk to all the companies concerned about what we can do to minimize the negative consequences” of the U.S. withdrawal. And French Finance Minister Bruno Le Maire summed up European sentiment, arguing that “the international reach of U.S. sanctions makes the U.S. the economic policeman of the planet and that is not acceptable.” The EU and Iran are now working on a nine-point plan intended to help Iran maintain its ability to sell oil and gas, protect European companies, and develop special financial channels. But moving beyond such public statements and finding practical solutions will take political will.

As Europe and the United States enter a new phase in talks over how to go their separate ways after Trump’s withdrawal from the Iran deal, there are two possible pathways. In one scenario, Europe will achieve an amicable separation as the United States exits the deal without unduly obstructing European companies. This would require guarantees against onerous enforcement of U.S. secondary sanctions and the establishment of wide-ranging legal exemptions covering specific companies or whole sectors. European companies operating within these exemptions could be permitted to continue doing business in Iran without facing U.S. penalties, or they could structure their Iran operations to avoid any contact with U.S. entities, persons, and U.S. dollar transactions.

However, the far more likely scenario, given the tenor of Trump’s announcement, will force Europe to contend with a U.S. effort to weaponize secondary sanctions and penalize European firms in order to harm Iran’s economy.

Faced with the second scenario, Europe will have to add teeth to its negotiating posture in order to mitigate damage to European interests while ensuring that Iran continues to adhere to the nuclear deal. This means putting in place legal mechanisms that could help reduce the impact of U.S. secondary sanctions and threatening to impose countermeasures that inflict a political, legal, and economic cost on the United States.

Among the first responses proposed by a number of European leaders is to revive the EU “blocking regulation,” a move that hasn’t been used in more than two decades. France’s Le Maire has suggested that the revival of the regulation is at the top of the agenda. The original purpose of the regulation, as outlined in its preamble, was to abolish restrictions on international trade.

The last time Europe had to push back against the overreach of U.S. sanctions was in 1996, when President Bill Clinton’s administration signed into law the Iran and Libya Sanctions Act and the Cuban Liberty and Democratic Solidarity Act. Political consensus in Europe at the time, much like today, reflected a belief that the United States was illegitimately forcing Europe to accept a foreign-policy decision at odds with its own security and economic interests. The Americans, on the other hand, favored economic coercion and sought to penalize the activities of non-U.S. companies active in these target countries to ensure maximum economic harm.

In response, EU member states unanimously introduced Council Regulation No. 2271, which was intended to protect companies against the “effects of the extra-territorial application of legislation adopted by a third country.” In practice, the regulation does something counterintuitive — it prohibits EU entities and courts from complying with and enforcing the foreign sanctions laws listed in its annex, raising the prospect of financial penalties for those companies that do comply.

The regulation also contains a “clawback provision.” For example, if an American entity or regulator takes legal action against an EU company for its business with an entity sanctioned by U.S. rather than EU law, the European company is entitled to sue in Europe in order to recover damages and expenses. This would be done through the “seizure and sale of assets held by those persons, entities, persons acting on their behalf or intermediaries” — meaning that EU firms could technically seek damages by seizing the European-based assets of the U.S. entity that brought the case against them.

Undeniably, the law puts companies in an awkward position, leaving them to pick between enforcement action in the United States (for noncompliance with U.S. sanctions) and fines in Europe (for complying with the U.S. law). Most companies faced with this legal dilemma will simply choose not to enter the Iranian market. Moreover, the possible European fines are dwarfed by those typically imposed by the U.S. Treasury — for example, under German law, companies that violate the blocking regulation can be punished by a maximum fine of 500,000 euros (about $600,000); the U.S. Treasury recently fined the French bank BNP Paribas almost $9 billion.

But to focus on the legal mechanism misses the larger point of the blocking regulation. Back in 1996, the regulation was introduced as part of a broader European campaign, which also included a dispute process against the United States at the World Trade Organization. Taken together, these actions served to boost Europe’s leverage in negotiations with the Clinton administration. Ultimately, the two sides reached a political solution in which U.S. authorities did not actively enforce extraterritorial sanctions on European companies.

Recourse to the blocking regulation today would be primarily about political leverage. Yet this is precisely why the regulation, updated and paired with countermeasures, is still a desirable option for Europe as it faces down Trump’s abuse of sanctions powers.

If EU leaders agree to revive and amend the annex of the blocking regulation to include the pending U.S. secondary sanctions targeting Iran, this will send a clear political signal to the Trump administration that Europe is willing to defend its interests and intends to influence how the United States implements its sanctions. This could trigger a more serious negotiation with U.S. interlocutors, who have a clear mandate to reimpose sanctions but who retain leeway in the specifics of implementation.

On a practical level, the blocking regulation could make a tangible difference for some European companies as they decide whether to wind down their business in Iran. In a survey of 60 multinational executives conducted in January, more than half of the senior executives indicated that “assuming Iran remains committed to the nuclear deal,” the revival of the blocking regulation would positively affect the “decision to invest in Iran.”

Over the past year, European business executives have sought to mitigate political uncertainty surrounding Trump’s position on the agreement by securing letters of comfort or token licenses that can help companies demonstrate the ongoing permissibility of their activities in Iran. For some European companies, the revival of the regulation could serve as the legal expression of European support for commercial engagement with Iran. Executives could also cite the regulation to demonstrate to wary board members, shareholders, suppliers, and clients that the European commitment to Iran is durable. This could tip the balance in favor of continued business with Iran for smaller European companies that have minimal exposure to the U.S. market.

The regulation may also strengthen the hand of major multinationals, which have both exposure in the United States and interests in Iran, as they grapple in their own negotiations with the Treasury’s Office of Foreign Assets Control (OFAC) to formulate licenses that exempt these companies from U.S. secondary sanctions. Companies that were able to sustain operations in Iran in the pre-2015 sanctions period include German consumer goods giant Henkel, the Swedish truckmaker Scania, and the Swiss pharmaceutical firm Novartis. The regulation will provide a concrete legal measure for these and other European companies to cite when undertaking negotiations with OFAC to argue that such exemptions are necessary for them to comply with both U.S. and EU law. The goal for European protective measures should not be to seek protections that satisfy all companies, which is impossible, but rather to ensure that the most committed companies can maintain operations in Iran.

The disagreements between the United States and Europe today are more significant than their differences during the 1990s on Cuba, Libya, and Iran sanctions that led to the creation of the blocking regulation. To effectively respond to Trump on Iran, Europe must first make clear that seeking to weaponize U.S. sanctions against EU companies is an unacceptable abuse. The blocking regulation offers a decisive way to involve European legislatures, courts, and enforcement authorities (of the EU and its member state governments) in the assertion of European legal prerogatives, rather than limiting the discussion of Iran and countermeasures to Europe’s diplomatic corps and trade bodies alone.

Additionally, France has outlined it willingness to consider further countermeasures against U.S. secondary sanctions, including establishing a new EU regulatory body, akin to OFAC, that is “capable of following the activities of foreign companies and checking if they are respecting European decisions.” While the notion of a European OFAC remains hypothetical, the suggestion speaks to a growing concern that without the right legal mechanisms, Europe will be unable to exert influence in today’s globalized economy. Le Maire’s suggestion — pointing to a future where the EU could punish U.S. companies for violating European sanctions — would have been unthinkable before Trump’s abrogation of the Iran nuclear deal.

Trump clearly believes escalation is necessary to get his way in almost any circumstances. However, his recent tweet announcing that he was willing to work with Chinese President Xi Jinping to loosen restrictions on ZTE, a Chinese telecommunications company that had come under crippling sanctions due to repeated sales to Iran and North Korea, suggests that there may be some willingness in the White House to de-escalate and compromise. It also hints at the possibility of a compromise with Europe over sanctions enforcement.

The EU member states, whose combined GDP is roughly equal to that of the United States, must first demonstrate that they are willing to undertake measures to protect their interests and, if necessary, impose direct costs on the United States when Washington overreaches. As in the 1990s, this toughened stance from Europe is more likely to deter the Trump administration from enforcing looming U.S. sanctions against America’s closest allies and instead offer carveouts and exemptions that limit the damage to trans-Atlantic ties.

Ellie Geranmayeh is a senior policy fellow at the European Council on Foreign Relations.

Esfandyar Batmanghelidj is the founder of the media company Bourse & Bazaar.

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