Europe Paws Ground Over US Sanctions Aimed at Iran, Libya

But trade war not likely because US-EU trade is $245 billion, and Clinton may exempt nations that fight terrorism

This week, the United States celebrated 101 Olympic medals, announced the possibility of organic life on Mars, and laid down a law that Europe could no longer invest in Libya and Iran.

Mars and the medals prompted spirited discussion in Europe, but the law, which puts sanctions on firms that invest more than $40 million in nations the US says sponsor terrorism, raised threats of an US-European trade war.

The so-called D'Amato law, named after its sponsor, New York Republican Sen. Alfonse D'Amato, also achieved what few European politicians have managed - unanimous agreement on how Europe should respond to the crisis. In anticipation of the law, Europe has already drafted a series of retaliatory measures, including the establishment of a "watch list" to target US firms. Japan, Australia, China, and Russia also denounced the new US sanctions.

With EU offices locked up tight for August vacation, no formal action is expected until September. Ireland, which holds the rotating EU presidency, says it does not intend to convene a special ministerial session to implement retaliatory measures.

But on Wednesday, French President Jacques Chirac condemned the "unilateral" American law, and promised immediate retaliation if French companies were affected.

"Europe and France must both develop laws designed to specifically counteract each aspect of this law - so-called mirror legislation - to allow us to discuss these issues on a basis of equality with our American partners," he said in a last ministerial meeting before August vacations.

High stakes for big firms

The stakes are high for Europe, which counts on Libya and Iran for one-fifth of its energy supply. In addition, Libyan and Iranian oil revenues are the key to the repayment of billions in outstanding debt to European banks and businesses.

The French energy company, Total, for example, signed a deal with Iran last year for $600 million to develop two Persian Gulf oil fields, after US law forced the American company Conoco to withdraw from the project.

Mr. D'Amato wrote to Total last spring, calling its project a "direct threat to US national security." In its final version, the law is not retroactive, so Total won't be subject to sanctions. But future partners on the project could be.

US sanctions could also indirectly affect other French companies, including carmaker Peugeot. Oil revenues from new Iranian projects are to pay off a $120-billion debt to Peugeot, according to a deal signed last month. Iran's oil exports provide about 80 percent of its export earnings.

Total chairman Thierry Desmarest blasted the US law this week and said that Total would stand by its investments in Iran and Libya, as well as pursue deals in other states that the US has criticized, such as Burma, Syria, Iraq, and Colombia.

Elf-Aquitaine, France's largest oil company, has been in discussions with Iran to develop a large offshore oil field. "We are still in discussion with Iran over this contract, but we and other oil companies will have to take a careful look at what [sanctions] could mean for our American activities," says Elf spokesman Tom Saunders in Paris. Elf-Aquitaine did more than $2 billion in sales in the US last year, mostly in chemicals.

Similarly, Italy's energy giant AGIP has a $1.2 billion gas-pipeline project at stake, linking Libya and Sicily.

Trade war unlikely

What rankles many Europeans is the style as much as the substance of the new US legislation. "America seems to be saying that it has the right to lay down the law for the rest of the world - even if it violates international law," said a French diplomat.

But neither side welcomes a trade war.

Europe's trade with the US, some $245 billion annually, dwarfs its trade with Iran and Libya, which was $20.4 billion in 1994.

On Monday, US State Department spokesman Nicholas Burns offered what French diplomats say may be a face-saving solution. "The president has the authority ... to waive the sanctions for the companies of any country if that country has taken or will take concerted action against the terrorist states," he said.

Last month, France hosted a meeting of the Group of Seven industrial nations and Russia to develop 25 measures in the fight against terrorism. Such gestures may enable President Clinton to exempt European firms from this law, especially if he is still around after the fall US elections.

Europeans insist there are also diplomatic benefits from maintaining a "critical dialogue" with Iran. French and German diplomats credit their contacts with Iran for helping to defuse Middle East conflicts as well as encouraging Iran to sign the chemical-weapons nonproliferation treaty.

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