Iran faces its greatest challenge since the revolution in 1979. It is unclear how events will play out. However, the chances of Ahmadinejad remaining in power are still high. And, as President Obama recently said, Mousavi may be no easier to deal with. The upshot is that the West is likely to leave sanctions in place.
Yet, there is good reason to doubt the effectiveness of sanctions. So far, sanctions have targeted Iran’s economy. The assumption is that Iran’s leadership will give way to foreign demands as the economy grinds to a halt. But while the economy is straining, it certainly isn’t buckling.
Why not? In part because Asia has stepped in to fill the gap. Asia’s exports to Iran have soared from $2 billion to $17 billion over the past decade. The region exports cars and clothes to Iran and imports oil and gas in return. Its share of Iran’s total trade has nearly doubled to 25 percent, grabbing market share from Europe.
It’s tempting to attribute China for the rise in trade. But that’s not entirely true. China accounts for around half the gain. However, almost all of Asia’s economies have reported double-digit increases in their exports to Iran over the past decade. Korea, Malaysia, and Thailand are not far behind their bigger neighbor.
This isn’t sanctions-busting. It’s just market-forces at work.
The data tells the story. Asia’s exports to Iran first started to rise in 2003, or nearly a decade before sanctions were first imposed in 1995. More important was the recent rise in oil prices. Oil at $60 a barrel, and often a lot higher, provided Iran with the cash to buy foreign imports. The story is the same for Middle East’s other oil producers.
Next is the fact that Asia sells goods at the right price. By the right price, I mean a cheap price. Take the Changchun Railways Carriage Company in China’s northern Jilin province. The company recently made a tidy profit selling over 700 railway carriages to Iran. And, for Iran, it’s certainly cheaper than buying the carriages from Germany.
The lesson is a simple one. The rise of Asia as the world’s manufacturing hub means that sanctions applied by single countries, such as the United States, are more likely to divert trade from West to East, rather than stop it altogether.
I’ve earlier written about this in “The New Silk Road”. In this instance, the number of Arab traders visiting China surged after 2001, or about the same time the West tightened visa restrictions on Arab nationals. The Arab traders turned to China in response to the visa restrictions and, earlier this year, China overtook the United States as a larger exporter to the Middle East earlier this year.
But Iran isn’t suffering only from economic sanctions.
The United States has also imposed financial sanctions, and these are starting to bite. This article on a Chinese language B2B website is a case in point. The exporter worries how his Iranian buyer will make payment as the financial screws are tightened. (He’s advised that the money should be transferred via a Euro TT).
So, it might be that the financial sanctions will have more effect on Iran’s economy than have had economic sanctions. To put it another way, the Changchun Railway Carriages Company might not worry what the U.S. Treasury thinks. But a Chinese bank, with an office in New York, has more reason to think twice about providing a letter of credit to finance the deal.
However, the general lesson remains true―if sanctions are applied unevenly, will only spur the rise of the East.
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