BY BRAHMA CHELLANEY
How to navigate America’s new extraterritorial sanctions targeting Iran has become an important diplomatic test for Japan and a number of other important democracies concerned about U.S. President Donald Trump’s pursuit of aggressive unilateralism. Many of these countries have already taken an economic hit, in the form of higher oil-import bills, from Trump’s unilateral pullout from the multilateral nuclear deal with Iran. The United States has also imposed extraterritorial sanctions to punish the Kremlin for its alleged interference in the 2016 U.S. presidential election. The new Countering America’s Adversaries Through Sanctions Act, or CAASTA, which came into effect on Jan. 29, seeks to stop other countries from making “significant” defense transactions with Russia, a leading arms exporter.
However, with Trump seeking a nuclear deal with North Korea, much of the weight of America’s punitive approach is likely to fall on Iran. Trump, whose main aim is to topple the Iranian regime, said ominously on June 1, “You are going to see how powerful the sanctions are when it comes to Iran.”
The U.S. — armed with not just unmatched military might but also unrivaled financial power from the role of the American dollar as the world’s reserve currency — has the capacity and will to coerce allies and adversaries alike. As the world’s dominant currency that greases the wheels of the global financial system, the dollar equips America with tremendous economic leverage while conferring important advantages to its economy.
By imposing extraterritorial — or, as it likes to euphemistically portray them, “secondary” — sanctions, the U.S. seeks to effectively extend its jurisdiction far beyond its borders. Such sanctions, however, run counter to international law, including the United Nations Charter and the rules of the World Trade Organization.
It is one thing for the U.S. to invoke national security or other grounds as a rationale to impose punitive trade sanctions on a country, including prohibiting American persons and companies from engaging in transactions with the designated state. It is quite another for the U.S. to use extraterritorial sanctions to block trade and financial activities by non-U.S. parties with that country — in other words, to coercively turn national actions into global measures, in breach of the sovereignty of other states.
Through extraterritoriality, the U.S. aims not only to sharpen the impact of its sanctions, but also to advance its own geopolitical and commercial interests. One example is how the U.S. today is ingeniously employing the sanctions threat under CAASTA to wean countries as diverse as India and Turkey off their craving for Russian weapons so as to boost its own arms sales. The U.S. is already the world’s No. 1 exporter of weapons, accounting for 34 percent of all global sales between 2013 and 2017.
In the past, few international players were willing to flout U.S. extraterritorial sanctions for fear of being locked out of the U.S. financial system and barred from doing business with American entities. But Trump’s aggressive unilateralism on matters extending from trade and global warming to Iran and Israel has prompted calls for defiance even by U.S. allies, a number of whom have now been slapped with U.S. steel and aluminum tariffs.
The European Commission has decided to revive its “blocking statute” to prevent European firms from adhering to the new U.S. sanctions against Iran. Originally created in 1996 to counter a U.S. trade embargo on Cuba, the blocking statute bars European Union citizens and companies from complying with the extraterritorial aspects of U.S. sanctions. It also grants EU entities the right to “recover any damages, including legal costs,” from the application of such sanctions and nullifies the effect of any foreign court judgment.
The commission hopes its blocking law will be approved by member-states and take effect before Aug. 6, when the first batch of re-imposed U.S. sanctions against Iran kick in, including on trade in precious metals, coal, aluminum and steel. Trump’s shipping- and petroleum-related sanctions — the second set — are scheduled to enter into force on Nov. 4. But global shipping operators and tanker owners are already pulling back from Iran-related business.
Under Trump’s predecessor, Barack Obama, foreign companies were held hostage by America’s Iran-related extraterritorial sanctions, forcing them to cease or cut oil and other business dealings with Tehran between 2012 and 2015. But the U.S. at that time secured wide support from an international community keen to block Iran from developing nuclear weapons.
This time the U.S. is acting alone. It is seeking to tighten the screws on Iran after having reneged on the Iran deal, despite the International Atomic Energy Agency certifying that Tehran was in compliance with its terms. Indeed, the other signatories to the 2015 Iran deal — France, Germany, Britain, Russia and China — have affirmed their intent to preserve the deal without the U.S.
In this situation, the Trump administration will not find it easy to coerce the rest of the world to comply with its Iran-related sanctions regime. Even Washington’s extraterritorial jurisdictional claim in relation to the Russia-centered CAASTA is being challenged. Turkey, a NATO ally, has threatened reprisals if the U.S. cancels the F-35 fighter-jet deal with it in response to its contract with Moscow to buy the S-400 long-range air and anti-missile defense system. India also appears all set to import the lethal, interceptor-based S-400 system.
On Iran, even if the U.S. succeeds in browbeating some vulnerable countries into abiding by its new sanctions, it will likely find it difficult to secure broad international compliance.
The main buyers of Iranian crude oil and petroleum products are all located in Asia: China, India, Japan and South Korea together account for almost three-quarters of Iran’s oil exports.
China, ever ready to swoop in to exploit opportunities in sanctions-hit countries, will find ways to circumvent the new sanctions, as it did in the previous round, including by boosting imports of Iranian fuel oil. It used the earlier sanctions to deeply penetrate the Iranian economy.
Successive U.S. presidents have helped out China — from aiding its economic rise to making it the key beneficiary of their actions elsewhere. Now it is Trump’s turn: His new sanctions are a diplomatic boon for Beijing, including making a reluctant Iran enter into a tighter Chinese embrace and forcing Russia to pivot to China.
In this light, Japan, India and South Korea, instead of simply succumbing again to America’s Iran sanctions or seeking waivers, should push back with full diplomatic strength, including putting the U.S. on notice that they will challenge its extraterritorial sanctions before the WTO dispute-resolution body.
Seeking deal-related or rolling waivers would be tantamount to adhering to the sanctions. And any waiver will come with conditions that crimp their latitude further.
Past experience indicates that when the U.S. is internationally isolated, it ultimately caves in to the demands of its friends who show resolve to defy its sanctions threat. For example, in 1997, the U.S. reached agreement with the EU to suspend enforcement of the extraterritorial dimensions of its Cuba-related sanctions after the threat of an EU complaint to the WTO.
Today, the U.S. is acting counterproductively to its own interest to safeguard the dollar’s centrality: It is leaving other countries with little choice but to work around its sanctions by using non-dollar currencies so as to avoid the American banking system, besides making alternative arrangements for shipping insurance. This development, and Trump’s other actions, could ensure that the dollar’s days as the world’s reserve currency are numbered.
Make no mistake: International adherence to the new extraterritorial sanctions will only embolden the Trump administration’s defiant unilateralism, which is redolent of China’s unilateralist actions. Broad compliance will not only further weaken the WTO, the U.N. and other international institutions, but also allow Washington to dictate international rules and other countries’ choices. Instead of a rules-based world order, the U.S. and China are seeking to impose a power-based Group of Two order founded on unilateralism.
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