June 7, 2017
Bringing Iran Back into the Global Economy Will Bolster the JCPOA
By Matthew F. Calabria, Shavonnia Corbin-Johnson, Kimberly Zangardi Heyne and Winwit Li
Instead of adding new sanctions, we believe bringing Iran back into international economic markets will have a moderating effect on Iran’s regional and domestic policies. To do so, we recommend allowing US banks to resume processing dollar-clearing transactions involving Iran. This would send a strong signal to Tehran that Washington intends to adhere to the letter and spirit of the JCPOA. Additionally, it would facilitate deal making between Iran and Western countries, increasing Iran’s ties to the international market.
We also recommend building a consensus around a Chairperson for Iran’s World Trade Organization (WTO) Accession Working Party. This would allow Washington to lead Iran’s WTO accession, as it has done with many other members, to ensure that Iran’s banking sector reforms meet US expectations. Participation in Iran’s WTO accession process would also loosen the Iranian government’s control over its economy and people. WTO accession is a multiyear process. So, during that time the United States could establish a dialogue with Iran through the Working Party while building trust.
The JCPOA is a notable exception to our nearly 40-year history of antagonistic relations with Iran. The agreement obliged the US to waive nuclear-related sanctions in return for verified curbs on the Iranian nuclear program such that there would be at least a 12-month timeframe before Iran could “break out” and develop nuclear weapons. Nonetheless, many sanctions remain in place, preventing investment and trade with Iran by most US firms and creating potential hurdles for investment by firms of major US allies which fear exorbitant fines if they conduct business with Iran.
Revised thinking about relations between Iran and the United States is critical to our national interest. The potential of Iran’s energy sector and the appetite for Western products in Iran offer mutual opportunities for growth in both the United States and Iran, the second largest economy in the Middle East. While the JCPOA has temporarily restrained Iran’s nuclear program, the current sanctions regime has not curbed Iran’s support for groups the US regards as terrorist, reduced Iran’s desire to develop ballistic missile capabilities or improved its adherence to human rights norms. Additionally, non-nuclear sanctions are unlikely to alter Iran’s behavior. They have had little effect to date. Why expect them to work as intended now, particularly when hardliners are searching for reasons to discredit reform in the wake of President Hasan Rouhani’s electoral victory? Our recommendations seek to provide a new approach.
Given the absence of bilateral ties, Washington lacks sufficient leverage to push Iran in one direction or another to advance core US regional interests—peace, security, prosperity, and stability. Unless the United States changes course, Iran will continue supporting anti-American aims, turning to European, Russian and Asian sources of investment and trade.
We recommend that the Trump administration issue a general license through the US Treasury’s Office of Foreign Assets Control to allow US banks to complete dollar-clearing transactions for Iranian entities, except for those individuals and organizations on the Specially Designated Nationals and Blocked Persons List.
A license for dollar-clearing transactions would signal that the United States intends to go beyond the letter of its JCPOA commitments and honor the spirit of the accord, which promised Iran major economic benefits in return for long-term restrictions on its nuclear activities. Licensing would also undercut anti-US rhetoric from Iranian hardliners who maintain that the United States does not want to improve relations with Iran. Iran has a sizeable young, well-educated and pro-Western population that supports relations between Washington and Tehran. The United States should strive to maintain the goodwill of the younger generation; improving Iran’s economy is crucial to this goal.
Approving dollar-clearing transactions would also facilitate increased trade between Europe and Iran. Generally, the more ties Iran has to international markets and to Western countries, the more willing Iran should be to abide by international norms. If the United States facilitates Iran’s integration into international markets, Iran would have more to lose by violating these norms. Moreover, it would lessen the possibility that the European Union or other countries would lobby to have their currency replace the dollar as the global reserve standard.
Some may argue that the United States is providing something for nothing by reinstating these transactions, which were allowed until 2008. However, reintroducing bans on dollar-clearing transactions was only part of a larger strategy to compel Iran to curb its nuclear program. Given this strategy’s success, the US should relieve Iran from this ban. Sanctions are only effective as a tool of foreign policy if countries believe the United States will execute them and provide relief from the sanctions if the target changes the policies that were the impetus for the sanctions in the first place. In addition, the long-term advantages of integrating Iran into the Western-led international order would outweigh any short-term perception that the United States was providing excessive benefits to Iran.
We also recommend that the US Trade Representative build a consensus with allies and other members of the WTO to support Iran’s membership and designate a Chairperson to Iran’s WTO Accession Working Party. Per the guidelines for WTO accession, “consultations on the selection of a Working Party Chairperson normally begin as soon as all documents necessary for holding the first Working Party meeting are in circulation.” Iran submitted and circulated its necessary documentation in 2009; it answered members’ questions regarding the document in 2011 and revised its Memorandum on the Foreign Trade Regime (MFTR) in 2015. This document delineates and summarizes the state of the Iranian economy, as well as laws and economic policies applicable to international trade. Accordingly, Iran has done its due diligence to proceed with accession. The Chairperson is typically the head of delegation of a third-party country for its WTO mission in Geneva. He or she would be “required to direct the discussions in their Working Parties on an impartial and objective basis” as well as visit Tehran and meet with the Iranian government. Therefore, the issue of selecting a Chairperson is not hindered by the question of who should be selected, but rather by a lack of momentum and political will.
Facilitating Iran’s entry into the WTO is in Washington’s interest, as it gives the United States the opportunity to influence Iranian economic policies as Iran seeks to reform its economy as a criterion for membership. In addition, introducing competition through trade would weaken Iran’s state-owned enterprises and the Iranian government’s control over trade and the labor market, ideally reducing corruption. In combination with a strengthened Iranian private sector, this should help engender a liberal, pro-business interest group within Iran that favors engagement with the West.
Some, especially in the US Congress, may argue Iran’s entry into the WTO would put Iran on an equal footing with the United States and allow it or other countries to use the Dispute Settlement Body (DSB) to retaliate against US sanctions. In the short run, actual use of the body against US sanctions is unlikely. For instance, Cuba, a member of the General Agreement on Tariffs and Trade (GATT) since 1948 and a member of the WTO since its inception, has never challenged the US trade embargo through the DSB. In 1996, the European Community filed a trade dispute against the Helms-Burton Act that targeted non-US companies doing business with Cuba, but later withdrew its claim. The reason is because the United States would likely invoke the “national defense” clause in Article XXI of the GATT to defend its use of sanctions. Members have never used the clause because of uncertainty over how to define what goods contribute to “national defense.” Use of the clause could create a slippery slope and allow members to erect barriers to trade under the guise of “national defense,” thereby starting a trade war and dismantling the international trade system. Russia, a WTO member since 2012, has faced similar obstacles in challenging US sanctions. In 2014, then Prime Minister Dmitry Medvedev indicated that Russia would bring a complaint to the WTO over “illegitimate” US sanctions. However, in 2016, Russia decided to drop the complaint when a Russian official met with the WTO Director-General and agreed that, as an economic body, the DSB was not appropriate to dispute “politically-motivated” sanctions. Keeping lines of communication open worked with Moscow. It would with Tehran as well.
In the long run, although Iran wishes for an expeditious accession process, it would take several years to a decade to complete. By the time Iran enters the WTO, the United States will be under a different administration, possibly with a different approach to US-Iran relations. Assuming continued mutual compliance with the JCPOA, several provisions of the accession process may already have been completed. Long-term compliance with the JCPOA is a trust-building measure and further proactive measures could be initiated to improve relations. By that time, US sanctions could be loosened or lifted and there would be no need to for Iran to file a trade dispute against the United States.
Matthew F. Calabria, Shavonnia Corbin-Johnson, Kimberly Zangardi Heyne and Winwit Li took part in a joint project in spring 2017 on enhancing Iran’s engagement with the global economy as part of their graduate degree program at the George Washington University’s Elliott School of International Affairs.
World Trade Organization, “WT/ACC/22 Accession to the World Trade Organization: Procedures for Negotiations Under Article XII,” August 1, 2014.
World Trade Organiation, “Dispute DS38: The United States – The Cuban Liberty and Democratic Solidarity Act.”
John A. Spanogle, Jr., “Can Helms-Burton be Challenged Under WTO?,” Stetson Law Review, 1998, 1314-1315.
Russia Today, “Russia brings WTO complaint over ‘illegal’ US sanctions – Medvedev,” June 20, 2014.
Sputnik International, “Russia Rules Out Appealing to WTO Over Western Sanctions,” April 22, 2016.