America’s China Policy Is Not Working
The Dangers of a Broad Decoupling
The United States and international partners have signed a historic agreement with Iran on its nuclear program, but they still face important choices about just how far to go in allowing Iran back into the global economy. In the short term, U.S. companies will be limited in their ability to join the corporate march back to Iran when sanctions are lifted, and many in the West who have advocated for Iran’s isolation for decades do not want to see their nations’ companies and banks participate in Iran’s economic reintegration. Keeping Western companies on the sidelines, however, would be a strategic mistake. Allowing—or even encouraging—Western companies to invest in Iran provides Tehran with incentives to abide by the deal and gives Washington more leverage over Iran in the future.
The new nuclear accord lays out a path for international companies to initiate broad new trading and investment activities once Iran meets key nuclear commitments. For the private sector, this relaxation presents significant opportunities as well as a minefield of commercial risks. The sanctions on Iran for state-sponsored terrorism, regional destabilization, and human rights violations will remain in place. Investors thus face tremendous uncertainty in balancing an emerging market opportunity with the potential for expensive, damaging business losses if they inadvertently violate remaining sanctions. Over the past few years, regulators in the United States have already imposed billions of dollars in fines against Western companies for violating sanctions, even when they have done so unintentionally. This precedent might lead many European and Asian businesses to conclude that Iran’s potential financial rewards are simply not worth the risks. U.S. corporations are even more cautious. For many global companies and banks, hanging back will be the easiest and safest course of action.
U.S. policymakers should take a more strategic approach to Iranian sanctions relief and encourage the international business community to pursue commerce in the nation. It is not the United States’ job to rehabilitate the Iranian economy, of course, but clarifying the legal pathways toward Western investment in Iran is an important and necessary task. Doing so will increase Washington’s credibility as a good-faith actor, strengthen the nuclear deal, and, most important, provide future economic leverage with Iran. Clarifying the new rules for would-be investors would also limit Iran’s ability to claim that the United States has violated the agreement by stymieing much-needed relief.
The U.S. Treasury Department has offered little guidance for companies on how to navigate Iranian sanctions in the past—what it has offered was often vague, contradictory, and not legally binding.Likewise, streamlining Iranian investment policy will also pressure Tehran into becoming a better financial actor. Iran’s financial system has been blacklisted for its lack of integrity, and it received a horrendous report card from the Financial Action Task Force, the preeminent global standard-setting body against money laundering and terrorism financing. Western companies can begin business activities in Iran once sanctions are lifted, and this can provide an effective form of commercial diplomacy. Iran will have to accelerate its nascent efforts to reduce corruption and illicit financing if it is to make deals with the reputable international companies it is courting.
Opening financial channels between the West and Tehran may mitigate—although not remove—concerns that Iran could use a revitalized economy to increase its support of terrorism and destabilization throughout the Middle East. If the country’s economic institutions have a financial interest in being responsible actors within the global economy and international financial system, they will be less likely to participate in illicit activities. There is also a strategic advantage for the West in having a broad array of international companies operating within the Iranian energy, infrastructure, and manufacturing markets. U.S. policymakers should ensure that Western companies receive equal footing with their Chinese and Middle Eastern counterparts, who will be quick to enter Iran once sanctions are relaxed. This will help ensure that Iran’s new commercial relationships do not pivot exclusively to Asia.
Facilitating U.S. and European commercial investments in Iran should involve three key components. First, U.S. President Barack Obama has to instruct U.S. regulators to provide the private sector with detailed guidelines on how to do business in the country. The U.S. Treasury Department has offered little guidance for companies on how to navigate Iranian sanctions in the past—what it has offered was often vague, contradictory, and not legally binding. If the Treasury Department provides inadequate guidance, companies will be unable to navigate a broad rollback of the most complicated sanctions regime in history.
Second, the U.S. government must establish a better, institutionalized system to engage with the business community. To do so, the Treasury Department should create a dedicated “Iran sanctions” hot line, host monthly public meetings with the business community, and release legal opinions and specific licenses for permitted activity with Iran. This will go a long way to make clear which types of activities Washington will and will not support, thereby allowing the business community to begin working within Tehran sooner.
Third, the Treasury Department should allow U.S. companies to engage in targeted investment in Iran by expanding the issuance of general licenses. As demonstrated by the recent relaxation of certain Cuban sanctions, general licenses can allow U.S. banks and investors to fund development in Iran—thereby empowering the nation’s youth, entrepreneurs, and civil society through new projects and businesses. This approach could, in turn, help advance U.S. interests by promoting positive changes in Iran. Moreover, a connection between Iran and Western business sectors will provide essential economic leverage in the future. If the nuclear deal breaks down, U.S. policymakers will be best positioned to impose punishing new sanctions if large sums of foreign investment are at stake.
Implementing any deal would be fraught with challenges. But if the United States is to uphold credible nuclear diplomacy with Iran, it will need to chart a clear course for the private sector to navigate the changing landscape of sanctions. Promoting the return of European and U.S. business in Iran is a smart new way to advance U.S. interests within the country.
Neither Pressure Nor a Narrow Nuclear Deal Can Succeed on Its Own