Trump's Iran oil embargo: What if China ignores it?
The White House announced on 22 April that it will terminate in early May an exception to the US secondary sanctions that had enabled 8 countries, including China and India, to import crude oil from Iran without risking the imposition of US sanctions in response.
In the roll-out of its decision to scrap the so-called Significant Reduction Exception (SRE), the Trump Administration presented the decision as a fait accompli, as if oil importing countries no longer had the option of importing from Iran but rather would necessarily have to find other sources, in particular Saudi Arabia and the UAE, to fill the gap.
But the secondary sanctions have no binding effect. Unlike the primary sanctions, which prohibit Iranian transactions that involve US persons, the US financial system and other US jurisdictional elements on penalty of severe fines and/or imprisonment, the secondary sanctions instead seek to deter entirely non-US transactions by providing the Trump Administration with brass knuckle tools of diplomacy and retribution. Non-US companies that refuse to cooperate can be put on the same US sanctions lists as their Iranian counterparties, thereby prohibiting the involvement of US elements in any of their future business.
Although the White House has authority under US domestic law to deploy these extraterritorial measures, other nations contest their legitimacy. It is the United States, not Iran, that renounced its obligations under the Joint Comprehensive Plan of Action (JCPOA) through which Europe, China, Russia and the UN Security Council removed the international sanctions on Iran in 2016. Although Saudi Arabia, the UAE and Israel applauded the reimposition of US secondary sanctions in 2018, the rest of world sought workarounds and exceptions, including the SRE, to enable at least some of their entirely non-US business with Iran to continue.
What the rest of the world has not done to date is openly engage in sanctionable activity that could trigger the imposition of US secondary sanctions. No reputable company globally has yet had the stomach for this game of chicken with the Trump Administration. In November 2018, the SRE gave the oil importing countries what they most wanted, which was continued access to Iranian oil, thereby deferring the predicate for a confrontation. Of the 8 countries granted the SRE, 5, Japan, South Korea, Taiwan, Greece and Italy, appear to have no interest in an actual confrontation and can be expected to meekly accept the US invitation to buy Saudi and UAE crude oil at whatever price the market will command. The other 3 SRE countries, China, India and Turkey, provide a more combustible mix, each with their own political, diplomatic and nationalistic incentives to push back.
China in particular appears the least likely to submit to US intimidation, not only for reasons of ideology and face, but also because in a game of chicken you need a credible deterrent to prevail. As demonstrated by its counter-measures against unilateral US tariff increases last year, China's economy and economic influence is now so big that it has the ability to inflict substantial pain on US economic interests by retaliating, combined with the demonstrated political will to do so. Moreover, unlike in the current trade war, the EU and other important third countries would take China's side in a dispute over US secondary sanctions against Iran, with the EU having already imposed its own (albeit ineffective) blocking regulation. Unlike the EU, China might go much further, and impose its own tit-for-tat sanctions on US oil majors if the Trump Administration puts Chinese oil importers on a US sanctions blacklist for continuing to import oil from Iran. If China pushes back hard, and the Trump Administration blinks, US secondary sanctions could deflate quickly, as other countries with credible retaliatory capabilities decide to call the same bluff.
The Trump Administration cannot be ignorant of this dynamic or of the global hostility to its extraterritorial sanctions measures. Do not be surprised if China continues to import oil from Iran but does so quietly while the Trump Administration, to avert a showdown, ignores this slight and focuses instead of shutting off imports of Iranian oil by more pliable countries.