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End of Oil Sanctions Waivers Expected to Disrupt U.S.-China Trade Talks

Oil and Gas Refinery in Iran. Mohamad Reza Jamei/Shutterstock.com

The Trump administration’s plan to stop waiving sanctions for countries that import Iranian oil could further upset an already volatile international trade climate and, possibly, sour U.S. trade talks with China, which relies heavily on oil from Iran.

The temporary oil waivers, known as Significant Reduction Exceptions, will not be reissued after they expire on May 2 as part of a U.S. effort to tighten the screws on Iran, cutting the country off from its main revenue source.

“We're going to zero—going to zero across the board,” Secretary of State Mike Pompeo said on Monday when announcing that the U.S. “will no longer grant any exemptions” to countries that import Iranian oil.

China, India, Japan, South Korea, Turkey, Taiwan, Italy and Greece hold waivers, but the latter three no longer import Iranian oil. Exactly how the remaining five countries will respond to the development remains to be seen.  

But Gibson Dunn partner Adam Smith of Washington, D.C., formerly a senior adviser to the director of the U.S. Treasury Department’s Office of Foreign Assets Control, said the revocation of China’s waiver “could become a significant irritant between Beijing and Washington.” He added China could respond by imposing new tariffs or sanctions on the U.S.

“Clients are concerned,” Smith said. “They’re interested in learning what will happen next. I think there’s a lot of uncertainty as much as there is concern.”

Judith Alison Lee, also a partner at Gibson Dunn in Washington who focuses on international trade, called the development “disruptive” and questioned the timing: “Why would you do this when you’re negotiating with China?” she said. “It will definitely affect trade negotiations.”

Lee noted that though the U.S. is cancelling the waivers, it doesn’t necessarily mean that countries that continue to import Iranian oil will be sanctioned immediately—only that sanctions are a possibility. She added China, being a major importer of Iranian oil, most likely will be unable to “turn off the spigot by May 2.”

“By taking this position, the U.S is going to encourage these countries to look for other ways to meet their needs for energy and reduce their risks for sanctions,” Lee said. “Unfortunately, I think there could be a bad unintended consequence of people turning away from U.S. dollar-denominated transactions in petroleum trading.”

China and Turkey have already publicly criticized the move, with the former country saying that it is yet another example of U.S. "unilateral sanctions and long-arm jurisdiction," The Associated Press reported.

“One of the main complaints that China has about U.S. trade actions is the unilateral nature of how the U.S. has demanded other countries to behave even when the transactions have minimal or tangential American involvement,” Adams Lee, an international trade lawyer at Harris Bricken in Seattle, wrote in an email.

He added “U.S. export sanctions have an incredibly long reach that can affect China-Iran oil transactions if there is a U.S. party involved in the transaction chain that allows the U.S. to claim jurisdiction over that transaction.”

China could counterpunch by, for instance, going after U.S.-involved transactions or targeting U.S. companies operating in China with anti-monopoly actions or labor law violation enforcement actions, according to Lee.

He cited developments that followed the arrest of Meng Wanzhou, the chief financial officer of Huawei Technologies Co. and daughter of the tech giant’s founder, as an example of how China retaliates when it feels that its interests are threatened.

After Canadian authorities detained Wanzhou at the behest of U.S. authorities, Chinese authorities detained two Canadians and accused them of being spies.

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