EU Faces Tough Decisions On Iran Trade

President Trump's decision to pull out of the 2015 nuclear deal with Iran and reimpose sanctions is likely to accelerate Tehran nation's turn toward China, Russia and the European Union, and exacerbate trade tensions with the EU, a traditional US ally.

The 2015 accord, negotiated by the US, UK, Russia, France, China and Germany, reestablished normal trade ties with Iran in exchanging for curbs on its nuclear program.

Trump pulled out of the deal on May 8, saying Iran has violated terms, and calling it "one of the worst and most one-sided transactions the United States has ever entered into." Trump said the US would relaunch sanctions, and the US has said it will penalize companies that do business in Iran.

The European Commission has responded by saying it would reactivate a law that prohibits European firms from pulling out of business with Iran because of US sanctions. Some companies, such as shipping line AP Moller-Maersk, have said they'll have to withdraw from Iran to protect their US business.

"We have the duty, the Commission and the European Union, to do what we can to protect our European businesses," especially small and medium-sized firms, said European Commission President Jean-Claude Juncker.

The US threatened to sanction European companies doing business with Iran. Europeans "will see that it's in their interest ultimately to come along with us," said US National Security Adviser John Bolton. It's unclear how the differences between the US and EU over trade with Iran will be resolved.

There's a reason for Mr. Juncker's insistence. EU firms have expanded their presence in Iran this decade, and shrinking it could cost Europe thousands of jobs and billions in lost export revenue.

Iran, a $1.6 trillion economy that has valuable oil resources and is geographically close, is a natural fit for commerce with Europe. Four of Iran's top 10 trading partners are European.

Among the world's major economies, Germany likely has the most to lose from a disengagement with Iran, according to an analysis of the IHS Markit Global Trade Atlas database. Berlin runs the world's biggest trade surplus with Iran, and three of the world's top five surpluses with Iran are European.

Iran's biggest trade deficits. 2017

• Germany $2.9 billion
• Brazil $2.5 billion
• Russia $922.7 million
• Belgium $520.3 million
• Sweden $493.5 million

Germany's booming manufacturing sector ships TVs, cars, and electric machinery to Iran, and should be able to continue if the EU meets its goal of putting legislation in place by early August, when sanctions are scheduled to take effect.

Germany's top exports to Iran, 2017

• Electric machinery $1.1 billion
• Medical, optical equipment $337.8 million
• Sound, TV, electronics $260.1 million
• Pharmaceuticals $259.2 million
• Cars, trucks $227.2 million

Despite the EU's push, it's competing for market share with China, India and South Korea, Iran's largest trading partners. In particular, Tehran and Beijing have been ramping up their commercial ties. Total trade between China and Iran rose to $37.2 billion in 2017 from $2.5 billion in 2000.

Total trade with Iran, 2017

• China $37.2 billion
• India $13.6 billion
• South Korea $12 billion
• Turkey $10.8 billion
• Italy $5.8 billion
• Japan $4.5 billion
• France $4.3 billion
• Germany $3.8 billion
• Brazil $2.6 billion
• Spain $2.2 billion

In return for shoes, iPhones, bicycles and other goods, Iran sends oil to China, but it's also been developing a thriving export industry of petroleum derivatives, such as plastics, fertilizers and rubber. The top category of exports that is not industrial is coffee, tea and spices, worth a mere $11.4 million in 2017.

Top Iranian exports to China, 2017

• Fuel $12.2 billion
• Plastics $2.3 billion
• Ores, Slag, Ash $2.1 billion
• Organic chemicals $1.3 billion
• Salt, sulfur $297.2 million
• Copper $230 million
• Fertilizers $26.6 million
• Aluminum $15 million
• Rubber $14.9 million
• Coffee, tea, spices $11.4 million

Iran runs big trade surpluses with countries that buy oil and don't ship back much in return, such as India, Turkey and South Korea.

Iran's biggest trade surpluses, 2017

• India $8.4 billion
• Turkey $4.2 billion
• South Korea $4 billion
• Japan $2.7 billion
• Italy $1.9 billion

One part of global trade that won't be disrupted by sanctions: trade between the US and Iran, conducted by niche businesses and worth only around $200 million in 2017. Iran shipped carpets, art and coffee to the US.

Top Iranian exports to US, 2017

• Carpets, textiles $53.4 million
• Works of art $5.4 million
• Edible fruits, nuts $1.2 million
• Coffee, tea, spices $688,105
• Fruits, nuts $688,051

In return, the US sent oil seeds, grains and packaged food to Iran.

Top US exports to Iran, 2017

• Oil seeds, grains $36.6 million
• Wood pulp $18.4 million
• Edible preparations $14.6 million
• Optical medical equipment $12.5 million
• Organic chemicals $11.7 million

As with the Trans-Pacific Partnership agreement, the US faces the risk that other countries will carve out their own trading relationships, cutting out Washington, and US companies.

At the same time, the US retains the ability to impose enormous pressure on European companies by restricting access to its market, a $20 trillion economy that is still the world's largest.

The friction in the trans-Atlantic trade relationship will force tough decision for major European companies like Maersk, or Airbus. The Toulouse-based plane maker recently signed a contract to ship around a hundred planes to Iran Air.

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The Trade Numerologist is IHS Markit's unique weekly look at global trade by award-winning journalist John W. Miller, formerly of the Wall Street Journal, using proprietary numbers from IHS Markit's Global Trade Atlas database, the world's most complete and accurate set of trade numbers.