The U.S. Economy Will Suffer the Most as Trump Withdraws from Iran Deal
Investors in the American stock market must be living in a parallel universe. The Dow Jones index has posted its biggest winning streak since February 2018. Yet, President Donald Trump’s withdrawal from the Iran Deal will cause a major blow to the U.S. economy.
Tech stocks are flying. And, well, that’s just about it. It’s the usual bunch of companies that lead the Dow outperforming others. Aerospace and defense remains the only sector that can claim any logic for its continued strength.
As for the rest of the Wall Street universe, there’s no breadth.
Only a narrow band of companies are in the “bull” segment of the market. The rest continue to struggle, which sends the message that uncertainty continues to cloud the U.S. economy.
The U.S. Economy Gains Nothing from Regime Change in Iran
The darkest cloud of uncertainty comes courtesy of President Trump’s unilateral decision to pull away from the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran Deal.
Trump may certainly be trying to lead Iran into a war to effect regime change.
But, before sending in the artillery, the White House may pursue the usual regime change objectives. Trump will try—as is the standard practice—to achieve the goal and win the war before firing a single shot.
That is, the initial strategy will be to weaken Iran financially.
If that sounds familiar, it’s because some form of it was attempted many times in Iran as well as other countries the U.S. considers rogue.
Sanctions Won’t Work
It won’t work in the case of Iran. Various U.S. presidents since Jimmy Carter have used some form of that tactic with little success. Sanctions might work against a fully market-oriented economy.
But, used against a state that controls wide sectors of the economy and employment avenues such as Iran, it tends to make the population more reliant on the benevolence of that State.
Nothing was working better to stop Iran from acquiring a nuclear weapon than the Iran Deal. That’s why, by pulling out of it, Trump’s primary achievement is to have compacted Iranian resolve and angered Europe against America.
The deal committed Iran to the most comprehensive controls ever adopted to prevent a nation from acquiring the ability to develop a nuclear weapon.
Were there any intelligence or logic on Wall Street, investors would have sold en-masse, triggering a massive stock market crash.
The Consequences for the U.S. Economy
The first and most obvious problem is the oil price. It has reached the highest level since 2014 and there’s no telling how far it could go.
International tensions have intensified between the United States and its enemies. But it’s the allies that Washington should be worried about. Trump has abandoned the Iran Deal and that hurts all of Europe.
Even the ultra-loyal United Kingdom tried to stop Trump from ditching the JCPOA. Japan and China will also have to face some unwarranted difficulties related to oil imports and investments in Iran.
China, which neither belongs to NATO nor considers itself a U.S. military ally—quite the contrary—has a few cards to play that will make Trump regret his decision.
One of those cards is Boeing Co (NYSE:BA). China could trigger dozens of billions worth of lost sales for the aerospace giant. As the largest U.S. exporter by value, Boeing is certainly one of those companies that could spark a stock market crash.
Trump Is Driving Everyone Mad
Before angering the European Union with plans to slap an unprecedented set of sanctions against a key market for European corporations—trying to find ways to accelerate growth—Trump angered Russia and China.
He described both as “enemies” or “adversaries” who are trying to challenge American authority, eroding security and prosperity. (Source: “Trump’s new National Defense Strategy will prepare the US for a great power war with Russia and China,” Business Insider, January 18, 2018.)
There are no surprises there. Trump has fired anyone in his administration who may have pursued friendlier ties with Russia and China, from General Flynn to Rex Tillerson.
Trump Has Also Lost Western Europe
EU countries will gradually but surely reduce their interests in the United States. They won’t necessarily pull away from the U.S. market. On the contrary, they’ll try to milk them as much as possible.
Trump has not just gambled American prestige in international law. The decision to unilaterally break the JCPOA without cause does, in fact, violate international law.
Therefore, in an international court and the World Trade Organization (WTO), Europeans may exploit technicalities allowing them to avoid American sanctions, while still abiding by the terms of the JCPOA.
Such terms clearly state that the parties must agree to conduct business in all areas. It also allows for Iran to gain access to bank loans in Europe.
Moreover, Europeans will cooperate less politically and militarily, pursuing different goals and intensifying their own military and aerospace industries.
That means, for example, no longer relying on such aircraft as the “F-35.” It also means buying more Airbus SE (EPA:AIR) and fewer Boeing airliners.
China, for its part, could also cancel Boeing orders in favor of Airbus. But, the international isolation and trade war climate that Trump’s policies are generating could significantly cut the need for air transport worldwide.
Therefore, Boeing risks being caught in the eye of Trump’s tariff and sanction wars. (Source: “China’s threatened tariffs target a thin sliver of Boeing’s jet sales,” Seattle Times, April 18, 2018.)
Fatal Mistake
Washington has clearly made a fatal mistake that has already started to backfire. Trump’s newly appointed ambassador to Germany, Richard Grenell, scolded the Germans on his first day on the job.
He warned them to pull their businesses out of Iran immediately because of Trump’s repeal of the JCPOA.
In so doing, Grenell violated the most basic principle of diplomacy; interfering in the host country’s political decisions. It’s a relatively small blunder.
Yet it betrays the Trump administration’s ineptitude in international issues and the peril it generates for the U.S. economy and Wall Street.
Rather, the United States has created a Russian-Chinese enemy, declaring a virtual war made of sanctions and obstruction of interests. But, it has also stepped on the toes of Europe and Japan, jeopardizing relations with allies.
Trump Has Isolated United States
Such aggressive behavior on the part of the United States will not only produce political isolation, it will also result in the U.S. economy being isolated.
Directly or indirectly, everyone will unite against Washington. Indeed, it’s doubtful that even today, Americans can claim to have allies—in the genuine and voluntary sense.
The Europeans have already learned to distrust Washington. As for Iran, they will insist on the right legal channels, that the JCPOA provides the best possible tool to ensure that Iran stops its nuclear weapon program.
In other words, the nuclear deal remains essential for European security.
Europe Cannot Allow the JCPOA to Fail
Furthermore, at a time when political uncertainty reigns in Europe, threatening the long-term tenure of the European Union itself, one of the chief architects of the JCPOA—EU foreign policy head, Federica Mogherini—will not allow the accord to fail.
To do so would increase the number of euro-skeptics at a critical moment.
As for Iran, it never counted much on American investment. It may have expected Boeing to be permitted to confirm an Iran Air order for over $20.0-$30.0 billion worth of planes.
It may even have hoped for U.S. oil majors like Exxon Mobil Corporation (NYSE:XOM) to invest. But, it did not count on it. It did count on European companies, given they have already launched major industrial and trade opportunities in Tehran.
It’s no wonder Iran has started to accept payment for oil in Euros. (Source: “India to pay Iran’s oil sales debt in euro,” Mehr News Agency, March 11, 2018.)
The others, which fell into “disrepute” for resisting the American order—and challenging American hegemonic pretenses—such as China and Russia, are already biting. This is hardly a supportive climate for the U.S. economy.
To put Trump’s retraction of the Iran Deal into perspective, consider George W. Bush and his decision to invade Iraq. The U.S. won a swift military victory in the first few weeks. But it handled the occupation and longer-term aspects of regime change terribly.
It’s unclear to this day, other than to have cost over $2.4 trillion, what the Iraq war achieved. Trump has crossed the line into another trap—and one of his own making.
The Iran Deal Was Working
The Iran Deal was working by any measure or standard. It was the most comprehensive program ever devised to monitor a country’s plans to develop any kind of weapon, nuclear or otherwise.
Instead as of May 8, 2018, the risk of a new major Arab-Israeli war has intensified to levels not seen since 2006. Such a war would drive oil prices to unsustainable levels, as the Europeans are still slowly emerging from the 2008 financial crisis.
For these reasons as well, the EU—already flooded with refugees and all the associated social tensions—will be adamant about ensuring the JCPOA continues.
Without the EU’s participation in sanctions, Trump’s withdrawal is pointless. In fact, it hurts the U.S. economy directly, ruining major trade opportunities for the likes of Boeing or General Motors.
Withdrawing from the JCPOA could be the biggest blunder to ever hit the NATO alliance. Trump could still play the trade tariff card, hitting popular EU manufactured goods with duties.
That would still fail to help the U.S. economy because it too would meet reciprocal measures from Brussels.