Boeing is among the 1st casualties of the hard line on Iran, but the U.S. may find ways to get around that
Boeing's $20-billion US deal to sell jets to Iran's national airline, Iran Air, is in jeopardy
Consequences are funny things. Donald Trump and an increasingly hawkish foreign policy team tore up the landmark nuclear agreement with Iran this week, as Trump's anti-globalist support base back home cheered the move.
Yet among the first victims of the decision is not Iran's hardliners, nor even Iran's economy.
It was instead the American aerospace firm Boeing that lost. Washington has said it will now revoke Boeing's licence to sell $20 billion US of aircraft to Iran.
"[There is] a great deal of rattling of the markets," said Bessma Momani, a senior fellow at the Centre for International Governance and Innovation in Waterloo, Ont.
"That will continue, particularly as a lot of companies start to recognize how much they're going to lose."
In 2015, Iran signed a breakthrough agreement with the United States, Britain, France, China, Russia and Germany. Under the deal, Iran would limit its nuclear activities and allow inspections in return for the lifting of crippling economic sanctions.
Inside Iran, a coalition of moderate forces pushed the deal through.
"[The moderates] said we need to do this so we can bring in Western investment, Western trade ties and this will help benefit our people," said Momani. "But they haven't seen the fruits of that, to be honest."
Few Western companies ended up investing in Iran, she said. Many were likely concerned this very scenario would unfold.
Below is Momani's interview about the risks of Trump pulling out of the Iran deal. She says Boeing will "suffer tremendously."
Those Western firms that jumped into business with the newly opened Iran are now facing severe punishment. And firms — including international firms — that don't sever connections to Iran could be blocked from doing business back in the U.S. through so-called secondary sanctions.
So as Boeing faces a potential loss and the price of oil soars, it's still quite unclear what impact all of this will actually have on Iran's domestic economy.
Trump's political base pushed for this move, intending it to be a blow to Iran and its hardliners, but also as a shot at globalists who they feel have dragged America in the wrong direction for too long. Instead a major U.S. manufacturer takes a hit and Iran's major allies find an opportunity.
Rory Johnston, a commodity economist at Scotiabank, says it will take a while to see what sanctions may be put in place and what effect they may have.
"The U.S. will lean heavier on financial sanctions and dollar sanctions — potentially sanctions on insurance, which will complicate shipping," he says.
The previous sanctions regime prohibited American and European insurers from indemnifying ships carrying Iranian oil — a move aimed at hindering the country's exports and cutting off its main source of foreign income.
Who benefits from U.S. absence?
For the moment, Iran benefits from cash freed up when the sanctions were lifted and now has to figure out what its response will be. One sure bet: it will do its level best to define this new landscape itself.
"When there's a vacuum created, it tends to get filled," says Goldy Hyder, president and CEO of Hill and Knowlton Strategies. The United States may be pulling out of the deal, but he says the Europeans are trying to keep it alive.
And if there is a vacuum, he says it's pretty obvious who will step in to fill it.
"Ironically the actions here could well benefit Russia and China," said Hyder.
Russia will happily jump at the opportunity to sell planes to Iran, while China will gobble up as much Iranian oil as it can get.
Meanwhile, there's no end of uncertainty in the U.S.
The Trump administration has established a fairly regular pattern of making serious threats, then not following through. Take the steel and aluminum tariffs as one good example. Trump imposed steep tariffs on metals from a series of countries, including Canada. Then, one-by-one, provided exemptions and delays to those countries.
What happens to those companies that have started doing business with Iran since the deal was signed? The panel discusses below:
Now it's Boeing's turn to sit in limbo, waiting to see if exemptions are on offer and how long they may last.
"There will be a lot of exemptions and fine-tuning of all this," says Bill Robson, president and CEO of the C.D. Howe Institute. "The U.S. — especially under Trump — they're very mercantilist; they don't want to get in the way of their own export interests."
Ripping up the Iran deal speaks to a larger, but more domestic, phenomenon. Trump was propelled to the American presidency on a wave of anti-globalism. His supporters were tired of their leadership spending time and money fixing the world's problems without addressing growing concerns at home.
Ian Bremmer, founder of the risk-assessment firm Eurasia Group, just published a book specifically looking at what fuels Trump's base. They were promised free trade would help them, he says, but for vast chunks of the country, things are worse. Employment may be sharply rising, but wages have been flat for decades.
"The global economy is growing at four per cent," says Bremmer. "The U.S. economy is growing at three per cent. We've got all this free trade but the average American feels that all that globalism did nothing for them and they really oppose it."
Trump's decision to scrap America's involvement in the Iran nuclear deal may win him applause at rallies back home. But geopolitics are risky and the global economy is deeply interwoven. As Canada knows all too well, any time a country as big and powerful as the United States makes a move, its effects — and unintended consequences — are amplified.
Follow Peter on Twitter: @armstrongcbc
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