The Effect of Trump’s New Iran Policy

The United States has a long-standing feud with many countries in the Middle East. Iran is one of these countries. The United States had earlier slapped the Iranian government with economic sanctions.

However, there was a convenient getaway clause which allowed some American trade partners to continue trading with Iran. As a result of this getaway clause, several economically powerful nations such as China, India, and South Korea continued to buy Iranian oil. The United States has now decided to change this equation. Hence, the United States has amended its policy, and the new one prohibits all nations from buying Iranian oil.

This move is likely to have massive economic effects for Iran, the United States as well the other countries involved. In this article, we will provide a detailed explanation of the possible economic impacts of the Iran policy.

Global Oil Supply

The global oil supply has already been reduced drastically in the recent past. This is because of the political instability in countries like Saudi Arabia, Nigeria, and Libya. Apart from Saudi Arabia, the United States and Russia, these countries were the major sellers of oil in the global market.

The problem is that Saudi Arabia has also decided to cut its output. This is being done in anticipation of large scale production of American shale oil. It is a known fact that both Saudi Arabia and Russia have deliberately cut off the supply of oil. The OPEC countries have already cut down their production by 1.5 million barrels per day. As a result, global production has been reduced by 2% to reach a four year low! It is, therefore, no surprise that the price of oil is facing an upward trajectory and has already reached $74 per barrel. Many analysts are predicting that the oil price is now likely to reach $100 per barrel. This is because if the entire output of Iran is not available in the market, then the production will fall by another 2% to 4%.

America’s latest sanctions are only making things worse for the entire world economy. The world is already reeling under the effects of high-interest rates as well as trade wars. The stricter implementation of the sanctions imposed on Iran is likely to hurt the economy of American allies along with the economy of Iran.

Effects on the Indian Economy

The higher prices of oil lead to an inflationary economy. This is because oil is used in the production of or in the transportation of almost every other product. An increase in the price of oil, therefore, spreads to other commodities relatively quickly. This would be problematic for the Indian economy which is already reeling under the impact of rising prices.

Also, oil is the number one commodity that India imports. Therefore, an increase in the price of oil would mean a huge increase in India’s import bill. It has been estimated that a $1 increment in oil prices would add about $1.5 billion to India’s import bill. The problem is that the price will rise much more than $1 per barrel. Also, India’s import bill already stands at extremely high levels. Hence, Trump’s decision to stop India from buying Iran’s oil could lead to a foreign exchange crisis for India.

Effects on the Economy of South Korea

South Korea is the second largest importer of petroleum products from Iran. South Korea buys less crude oil. Instead, its imports largely consist of an ultra-light form of petrochemical condensate. South Korea then processes this condensate to produce other products like naphtha which it exports to smaller neighbouring countries. If South Korea is forced to stop its purchases from Iran, the entire value chain in the region will get disrupted. The South Korean economy will obviously face massive losses. Also, the economies of the small neighbouring countries will get affected since they will have to establish new supply lines which may be more expensive.

Effect on the Chinese Economy

China is the largest importer of Iranian oil. In fact, China has the highest requirement for energy in the entire world. This energy is used to power the growing industrial complex that China houses. This is the reason why increasing energy prices will negatively affect China. The manufacturing sector which is the backbone of the entire Chinese economy will see prices rise. As a result, demand may be subdued which could lead to a fall in output and therefore a smaller GDP.

Also, China is already engaged in trade negotiations with the United States. It is likely that the issue of Iranian oil may become a sticking point. China projects itself as the challenger to American hegemony. Hence, it does not want to appear to be subservient to American diktats.

The bottom line is that Trump’s decision to further tighten the sanctions on Iran are totally uncalled for. It will end up creating economic and political stability in the Middle East. Also, it will end up hurting the economy of American allies. Some of the allies might take the economic hit for now. However, it is only a matter of time before America loses the support of its allies. Trump’s mindless pursuit of “America First” policies may end up creating more enemies and losing multiple key allies in the future.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.