Until this week, trans-Atlantic trade frictions seemed to be on the mend.
Since April, the United States and the European Union had been laboring to avert a rupture over a US law designed to weaken Cuba's Marxist regime by penalizing foreign investments on the island.
But the EU's backing of a $2-billion natural-gas deal this week between Iran and French, Russian, and Malaysian firms has revived the threat of a trade war. The US is now considering imposing sanctions on the consortium under a 1996 anti-terrorism law. Among other measures, the firms could be banned from doing business in the US.
"We will have to make some hard choices," says a Clinton administration official. "This is the largest single investment in Iran since the  Islamic revolution. This is a major break for the Iranians."
In deciding whether to punish the consortium, President Clinton confronts a complex balancing act whose implications extend beyond US-EU trade, including to the question of whether sanctions can work as a foreign policy weapon in the new global economy.
To begin with, Clinton must weigh potential damage to American firms and jobs from EU retaliation for US sanctions. By choosing to waive sanctions, however, Clinton would call into doubt the resolve of US antiterrorism efforts and his policy of containing Iran's access to money and technology for its alleged nuclear-, biological-, and chemical-weapons programs.
If the US shows weakness in its resolve to safeguard its interests in the Gulf, it could also encourage French and Russian demands for an end to UN sanctions against oil-rich Iraq. Furthermore, it would expose Clinton to attacks by Congress, which is demanding he take a hard line against the Iranian deal.
At risk of irking Russia
Imposing sanctions, however, could have an adverse impact on relations with Russia, whose cooperation the US is seeking in a host of areas, ranging from fighting organized crime to nuclear arms control.
Russia's most-powerful company, Gazprom, is a partner of the French firm Total, and Petronas, a Malaysian firm, in the plan to develop Iran's South Pars natural-gas field. The project could provide Gazprom, which was once headed by current Russian Prime Minister Viktor Chernomyrdin, with revenues it needs to pay millions of dollars in unpaid taxes to the Kremlin.
Of the three firms, Gazprom could be hit hardest by sanctions. It is the recipient of US loan guarantees for the purchase of American petroleum equipment. Under the 1996 Iran-Libya Sanctions Act, it could lose those guarantees and be barred from buying goods in the US.
Can sanctions still work?
For many experts, the complexities of Clinton's dilemma raise new questions about the use of sanctions to achieve foreign policy objectives.
The EU, Canada, and Mexico say the US would violate international law by punishing non-American firms for acts outside the US.
The "extraterritoriality" issue is at the heart of the EU's case against the Iran-Libya Sanctions Act, which calls for sanctions against foreign firms investing more than $40 million in either country's oil industry, and the Helms-Burton Act, which penalizes foreign firms investing in expropriated US properties in Cuba.
But a greater barrier to the use of sanctions as a foreign policy instrument, many experts say, is the post-cold-war explosion in international markets. With participation in global commerce now an indispensable ingredient of political stability, many countries are unwilling to support US calls for sanctions, even against "rogue states." For the same reason, unilateral US sanctions have scant odds of success, they add.
"It is becoming increasingly difficult for sanctions to work given that target countries have a wide variety of alternative sources for goods," says Jeffrey Schott of the Institute for International Economics, a Washington, D.C., think tank. He says surveys of sanctions by the institute since 1985 show "a clear trend of declining effectiveness."
Many experts agree that laws mandating sanctions are often driven not by their prospects of success, but by the desires of the White House or Congress to score domestic political points. "A lot of sanctions policies are being developed in the heat of the moment in a congressional caucus room or a room in the White House," says Mr. Schott.
Administration officials defend the Iran-Libya sanctions law. They say it's designed to restrict resources that the two states could use to support terrorism or build weapons of mass destruction.