The Washington Post | Henry Farrell: Last Friday, the editorial board of Bloomberg Opinion condemned Europe’s new INSTEX arrangement, a so-called Special Purpose Vehicle set up to allow European companies to engage in humanitarian trade with Iran, despite the renewal of U.S. sanctions against the Islamic Republic. This arrangement — which was set up by Germany, France and the United Kingdom — has made the United States very unhappy; Vice President Pence has described it as “an effort to break American sanctions against Iran’s regime” that would “strengthen Iran, weaken the E.U., and create still more distance between Europe and the United States.”
Bloomberg Opinion argues that Europe is bluffing, and that “U.S. officials would be right to insist that the SPV be shut down — if necessary, by threatening sanctions against any person, bank or company associated with its creation.” It is possible that this editorial reflects the thinking of some Trump officials. Treasury Under Secretary Sigal Mandelker recently wrote an op-ed opposing Europe’s actions, concluding that “those that engage in activities that run afoul of U.S. sanctions risk severe consequences, including losing access to the U.S. financial system and the ability to do business with the United States.” It is unclear whether Mandelker is implicitly threatening European officials, or just businesses that used INSTEX in ways potentially at odds with U.S. sanctions law.
European and U.S. relations with Iran are the topic of heated political disagreements, which political science can’t resolve. What research can do is to better identify what is happening and what is at stake. Abraham Newman and I have been engaged in research on the broader politics that have led up to this dispute; our article is forthcoming in International Security. Our research suggests that the Bloomberg editorial is based on a mistaken understanding of the issues, and that its policy recommendations would have a far broader impact than the writers suggests.
Europe isn’t bluffing
Bloomberg Opinion seems to believe that sharp action by the United States would be relatively costless, since Europe is bluffing, and indeed ought to fold before the United States issues sanctions. This claim is almost certainly incorrect. It is true that European officials were initially uncertain about confronting the U.S., since they feared harsh retaliation. However, the way in which Europe has structured the INSTEX arrangement makes it extremely improbable that it is a bluff. America’s three most powerful European allies have collectively signed on to the new arrangement. They have furthermore appointed senior diplomats to the board of INSTEX — the UK Permanent Undersecretary of State for Foreign Affairs Simon McDonald; Miguel Berger, head of economics at the German Foreign Ministry; and Maurice Gourdault-Montagne, secretary general of the French Ministry of Europe and Foreign Affairs.
This isn’t a bluff: it is what the game theorist and nuclear strategist Thomas Schelling calls a tripwire. When one state is worried that another state will not take its credibility seriously, it may create a situation that narrows its own options in future. Thus, for example, the United States stationed troops in West Berlin during the Cold War, even though they could have done little to defend the city. Their job, as Schelling put it bluntly, was to “die” in the case of an East German/Soviet invasion, making it hard for the United States to avoid entering a full-scale war. This was supposed to put a stop to worries about the credibility of the U.S. commitment to West Berlin, thus deterring a possible invasion. Similarly, the United Kingdom, Germany and France have appointed senior diplomats to make their resolve clear.
This means that if the United States took the advice of Bloomberg Opinion, it would effectively be declaring diplomatic war on its three most important European allies, sanctioning senior European officials for acting in their official capacity to maintain an international agreement that the U.S. itself negotiated and Iran has not violated. Europe has deliberately structured INSTEX to make it difficult to back down, meaning that there would be widespread fallout from such a declaration of war.
It isn’t just about Iran
This doesn’t mean that the United States is incorrect to view INSTEX as a threat. However, its implications go far beyond Iran, as former senior State Department official, Jarrett Blanc, has argued. INSTEX is Europe’s first step toward developing capacities that would make it easier to resist U.S. pressure if there was a serious stand-off between Europe and the United States — say, for instance, over relations with Russia. By developing skills and basic mechanisms now, Europe is building options for later. Blanc worries that this “opens up the possibility of Europe developing a banking infrastructure that does not run through New York, threatening the tremendous influence the U.S. enjoys as the global backbone for even simple banking operations.” He’s not the only former senior policy maker who fears this. Former treasury secretary Jack Lew has warned that “the plumbing is being built and tested to work around the United States. Over time as those tools are perfected, if the United States stays on a path where it is seen as going it alone…there will increasingly be alternatives that will chip away at the centrality of the United States.” The dirty little secret of U.S. financial hegemony is that it rests on far more shallow foundations than its most enthusiastic proponents realize.
We will be in for quite an interesting time should the Trump administration decide to follow Bloomberg Opinion’s advice and designate senior European diplomats as sanctioned parties. If the Europeans are not bluffing (as they almost certainly are not) and if it is possible for Europe to develop a separate infrastructure, as former senior U.S. officials believe, then this action could have some quite substantial implications for U.S. power and the world financial system. Either way, officials will have the consolation that they will contribute to political economists’ understanding of how the global financial system works.