Leading international media organizations are calling it the broadest and most serious challenge to the Islamic Republic since its 1979 revolution. Internally, the country has faced tremendous national unrest. This discord comes at a particularly painful moment as the economy is reeling from overwhelming sanctions and normalized trading patterns changing overnight. The United States has threatened to impose a 25% tariff on all trade with any country that does business with Iran. This latest action makes these efforts much more complicated.
The ramifications of this latest tariff threat are huge. The second purpose of the sanctions is to act as a deterrent weapon, intended to change the behavior of Iran’s trading partners. It is U.S. policy to raise the costs for third countries or actors who continue to do business with Iran. Now they are tying these financial transactions to access to the U.S. market. For most of Iran’s trade partners, the choice is an especially painful one. They are balancing their national economic considerations with the powerful U.S.
Nationwide Protests Challenge the Regime
The protests sweeping through Iran have galvanized into one of the most important movements in the country’s recent history. Through the Repairs Rebel protests, climate protestors and other activists across the country are expressing their anger at the government’s economic mismanagement and erosion of social freedoms. This wave of discontent, fueled by a combination of domestic grievances and external pressures, poses a significant challenge to the Islamic Republic’s stability.
The impressive scale and intensity of these protests indicates that the population has reached a clear breaking point. Many citizens feel that their economic conditions have deteriorated due to both government policies and international sanctions. The protests are a symptom, but there are historical root causes that we’ve been sitting on for years. They are a fundamental threat to an already delicate political ecosystem.
In part due to rising geopolitical tensions, these protests come at a time of unprecedented economic hardship. The Iranian economy has languished under an ever-growing list of sanctions, especially those placed by the U.S. Foremost among these are the US sanctions that have severely limited Iran’s ability to export oil. They’ve created a climate of unpredictability that sows discord in the world of trade and investment.
Economic Relevance of Iran’s Oil
Iran is also extremely important in global oil markets, because of more than just the volume it produces. The risk premium associated with its exports makes it even more important. The country has had a particularly hard time reestablishing its oil production and sales, largely thanks to the suffocating effect of sanctions. Given this context, it’s worth asking how Iranian oil is priced and traded internationally.
In 2022, Iran’s largest export destinations were China, India, Germany, Turkey and the UAE. Total exports to China were about $6 billion. Single-market exports to India reached $7 billion while goods flowed to Germany at a phenomenal $9 billion. These relationships are immensely important for Iran, particularly as it faces an environment full of economic hurdles.
The so-called risk premium associated with Iranian oil usually leads to bigger discounts on crude sales. As the risk of enforcement rises, Iranian barrels will likely trade at a discount given the risk of noncompliance and increased logistics challenges. This combination of conditions, both intentional and unintentional, encourages practices that make public spending invisible. Therefore, in addition to the impact on foreign exchange inflows, Iran’s economic stability is severely undermined.
The Impact of U.S. Tariffs on Trade Partners
The announced 25% tariff on US trade with countries that continue to have commercial relations with Iran has caused alarm. Unsurprisingly, this potential change has trading partners up in arms. For most countries, especially for China and India, the stakes could not be higher. They are in a tough position as they make decisions about their own dealings with Iran and with the United States.
Most of Iran’s trade partners are dependent on access to the much larger U.S. market, so this poses an enormous challenge. The risk to lose access to the U.S. market is a huge risk. Those risks greatly outweigh any benefits we receive from maintaining trade with Iran. This developing situation produces an asymmetry that will almost certainly shape their future interactions with Tehran.
With compliance costs rising exponentially, so too do the stakes of enforcement action. As a result, many countries will likely want to scale back or completely reconfigure their trade with Iran. Such a change might trigger more aggressive price cuts on Iranian products. As a consequence, Iran would need to operate in an overall more hostile economic climate—in which every transaction is subjected to increased scrutiny.