Middle East

Negotiating With Iran Could Pay Off for Trump

The nuclear deal didn't fix the economy. That gives the U.S. lots of leverage on Tehran's Middle East meddling.

Nice work if you can get it.

If there has been one consistent theme in Donald Trump’s foreign policy since the early days of his campaign, it has been his insistence that America has not benefited economically from the global order it mostly protects. Yet when it comes to U.S. policy in the Middle East, he has been wildly inconsistent. During the presidential race, he talked about ripping up the nuclear deal reached between Iran and six world powers. He walked that pledge back shortly after taking office. Nor has he acted on his rhetoric of ramping up sanctions on Tehran.

So, here's a way the Trump administration could bring these foreign policy contradictions in accord: By confronting conventional Washington wisdom that isolating Iran is beneficial to America's strategic goals. Instead, the U.S. could try building on the nuclear pact in a way that would allow Tehran to gain more economic incentives by moderating, what Washington has long regarded, as its destabilizing behavior in the Middle East.

Over the last four decades, the U.S. has spent a great deal of blood and treasure countering Iranian expansion in the region. It has also maintained a robust sanctions program that most of its European allies and Asian partners find cumbersome and counterproductive. There is no denying Iran is pursuing a regional agenda often at odds with U.S. interests. There is also no denying that years of isolation and sanctions have now made reintegrating into the global economy one of Tehran’s top goals.

In two weeks, President Hassan Rouhani will face voters in a referendum on not only his presidency but also the nuclear deal. That agreement was intended to usher in a new era of economic prosperity. The results have been mixed at best. Iran's economic development is still shackled by the numerous secondary sanctions enforced by the U.S. Treasury's Office of Foreign Asset Control -- for human rights abuses, state sponsorship of terrorism and its ballistic missile program.  

To be sure, Tehran’s economy has rebounded much faster than many economists anticipated when nuclear sanctions were removed 18 months ago. It has improved from a negative growth of 6 percent in 2013 to 7 percent growth in 2016. The largest driver has been Iran’s ability to sell its oil and petrochemicals back on the international market. Iran’s exports have doubled in the last year. Inflation has also been tamed. Unofficially it was hovering around 40 percent in 2013 but has now declined to about 8 percent. Even tourism jumped last year by 11 percent, as Europeans and Asians traveled in droves to see this exotic and historic corner of the world

The International Monetary Fund recently affirmed Iran’s economic recovery, but cautioned against major headwinds. Unemployment stands at 14 percent and youth unemployment at a staggering 31 percent. If anything, the signing of nuclear deal and the removal of nuclear related sanctions brought many of the structural issues that plague Iran’s economy to the forefront. Chief among them is how much secondary U.S. sanctions will always hold it back from being an economic power.

While U.S. criticisms of Iran's behavior are not without merit, it does not go unnoticed by Iranians that their neighbors, Saudi Arabia and Turkey, engage in similar mischief. And yet both can go into international credit markets and raise billions of dollars with ease. Both have also received low marks on human rights. Saudi charities and billionaires have provided seed funding for many of today's Jihadist terrorist groups. Turkey has abetted Islamic State's oil smuggling and is now bombing the U.S.'s Kurdish allies in Syria.

However, because the U.S. has not slapped broad-based sanctions on either country, their economies fare better then Iran’s. Both are part of the G-20 and the World Trade Organization.  

That said, what incentive would the Trump administration have to work with Iran on a roadmap that could end up removing secondary sanctions? The answer lies with themes that Trump’s supporters enthusiastically endorsed: A smarter foreign policy and not spending so much treasure abroad when U.S. interests are not clearly defined.

From 1976 through 2010, Princeton University Professor Roger Stern calculates, the U.S. spent $8 trillion protecting the flow of oil from the Middle East. Add that to that the money spent on two wars since 9/11. All that wealth has been consumed by a region where the U.S. has only received around 10 percent of its imported crude. It doesn’t take a savvy New York real-estate tycoon to realize that the return on investment in the Persian Gulf hasn’t been a success.  

America’s partners in the region have a vested interest in continuing the policy of isolating Iran and having the U.S. foot the bill. If, however, Trump were to engage Iran in substantive diplomacy and put the issues that matter most to the U.S. up for bargaining -- particularly, Iran’s support for sectarian militias and its ballistic missile program in exchange for removal of the sanctions that prevent Tehran from accessing international financing and investment -- he would be able to test the regime to see how far it would go. If the negotiations lead nowhere, then the U.S. wouldn’t lose anything. Sanctions and robust U.S. military presence in the Persian Gulf are in place for the foreseeable future.

Those skeptical that Iran would negotiate in good faith should consider how much Tehran has to gain from reaching such an accord. In 2016, Iran’s economy absorbed an estimated $9.5 billion in foreign investment, a tiny fraction of the stated goal of attracting between $150 and $200 billion by 2020 to revitalize its antiquated energy infrastructure. Tehran knows that so long as Washington maintains sanctions on large swaths of its economy it won’t attract even a fraction of that. Already the energy giant Total SA is waiting to see what the Trump administration will do this month when certain nuclear-related sanction waivers are up for renewal.  

For the last 40 years, the U.S. has made containment of Iran a foundation of its policy in the Middle East. Politically, this has largely failed, as Iran has more influence in the region today than it had under the Shah. Economically, however, the U.S. has managed to keep Iran out of the global economy. Without jobs and sustained economic growth, Iran’s long term stability could be in doubt.

Both sides have ample reason to expand their negotiations beyond the nuclear deal. If anything, it makes good business sense. The alternative will be more trillions of dollars wasted, and down the road, a possible a military confrontation. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Amir Handjani at ahandjani@gmail.com

    To contact the editor responsible for this story:
    Tobin Harshaw at tharshaw@bloomberg.net

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