Economics and Politics in the U.S.-Iranian Relations

01 Sep 1993

U.S.-Iran Relations

Economics and Politics in the U.S.-Iranian Relations

By Ismael Hossein-zadeh

September 1993


[This essay was published in U.S.-Iran Review, Vol. 1, No. 6 (September 1993): 12-14.]


U.S.-Iranian relations of the recent past have been marked by unique and somewhat contradictory developments. While economic interactions between the two countries have been steadily expanding, political relations seem to have deteriorated as the so-called “battle of words” between Washington and Tehran has escalated since Bill Clinton’s arrival to the White House. Such conflicting developments in the areas of economics and politics have, understandably, been quite confusing to observers of the relations between the two countries, and have therefore led to rather divergent, sometimes even diametrically opposed, judgments regarding the future of these relations.

I hope these notes will cast some light on these often confusing developments and the arguments that accompany them. The thesis I shall put forth here is that economic forces and interests are ultimately going to overcome what seem now to be political and ideological obstacles, and that the growing trend of economic interaction contradicts the lack of progress in the areas of politics and diplomacy only superficially. In reality, economic ties almost always pave the way for political rapprochements and, therefore, precede formal diplomatic relations.


The Rising Trend of Economic Interaction

Despite Washington’s attempts to restrict economic ties with Iran, such ties are unmistakably on the rise. Here are some examples.

– According to the July issue of Iran Business Monitor, the volume of U.S. exports to Iran rose from a mere $27 million in 1989 to $750 million in 1992 (p. 2).

– Iran Business Monitor  also reported, in the same issue, that Chrysler International Corporation is planning to “construct, establish, train and operate a JEEPR assembly plant” in Iran in a joint project with Touseh Technology of Iran Limited, Inc. (p. 12).

– Coca Cola is also back to Iran; it is now being bottled and distributed in Iran for the first time since the 1979 revolution (Kayhan Havai, July 14, 1993, p. 8).

– As was reported in the May issue of US-Iran Review, p. 13, Iran has expressed interest in buying at least 20 Boeing 737-400 passenger jets and G.E. engines which could be worth as much as $1 billion– an amount calculated to represent some 40,000 U.S. jobs. The proposal for this tentative, potentially multi-billion dollar deal, is currently under review by the White House.

– Recent reports from Tehran indicate that the giant government-owned Tobacco Company of Iran recently reached an agreement with the German subsidiary of R.J. Reynolds, the producer of Winston and Marlboro cigarettes, to produce an Iranian clone of Winston, called Bistoon, under license from the American parent company. Bistoon is to be produced in Germany with the same tobacco used in the Winston brand.

These economic deals are by no means isolated or casual developments; they are part of the new pattern of President Rafsanjani’s recent economic policy. The new policy represents a drastic departure from the old one: privatization of the state-owned enterprises, lifting of most restrictions on foreign investment, scrapping of most of the food and other subsidies, removal of price and foreign exchange controls, provision of guarantees for foreign ownership of domestic assets, and removal of restrictions on imports. It was shown in the May 19, 1993, issue of Kayhan Havai , p. 18, that Iran’s import tariffs are among the lowest in the world–a mere 0.7 percent! (The official rate of import tariffs is about 15%. But because in the calculation of tariffs imports are valued at $1 = 70 rials, the old exchange rate that has long been obsolete, and not at $1 = 1600 rials, which is the current exchange rate, the effective tariff rate is therefore about 0.7 percent, not 15%).

These and similar market-based measures adopted by the Iranian government has pleased even the patron saints of free market, the World Bank and the International Monetary Fund, as reflected in their granting and/or approving of a series of loans to Iran during the last few years.


Escalation of Political Rhetoric

It seems ironic that as Iran is rapidly reintegrating into the world market and its economic ties with the United States are slowly getting reestablished political differences and diplomatic fissures between Washington and Tehran appear to be widening. As noted earlier, the change of administration in the White House may have contributed to the heightened level of the so-called “war of words” currently going on between the Clinton and Rafsanjani governments.

During, and immediately before and after, the transition from the Bush to the Clinton administration there was a relative lull in the exchange of rhetoric and recriminations between Washington and Tehran. This led some observers of U.S.-Iranian relations to believe, or to hope, that this was perhaps indicative of a moderating U.S. approach to Iran. But, alas, before long it became apparent that the Clinton administration did not wish to appear less hostile toward Iran than its predecessors. In fact, while the essence of the new policy toward Iran is not much different from the previous one, its political rhetoric is sharper.

This sharpened and obstructionist rhetoric has occasionally been voiced by President Clinton–for example, in his joint declaration with Hosni Mubarak of Egypt–as well by as his senior cabinet members such as Secretary of State Warren Christopher and Treasury Secretary Lloyd Bentson. But there was also a formal, on-the-record policy statement that was aired on May 18 by the senior director of the National Security Council for Near East and South Asia, Dr. Martin Indyk. Readers interested in a relatively detailed account of the new policy are encouraged to consult, among other sources, the June issue of US-Iran Review. Here, suffice it to say that in essence the new approach to Iran is a repetition of the old claims that the Iranian government sponsors international terrorism, that it supports Islamic movements the world over, and that it is all out to acquire nuclear weapons.

Accordingly, the new policy calls for “containment,” “isolation,” and exclusion of Iran from the benefits of international trade, finance, technology, and cooperation–all slogans and ideas from the arsenal of the Cold War era. As part of this policy, the Clinton administration recently tried unsuccessfully to persuade other G-7 leaders, gathered in Tokyo, to impose economic restrictions on Tehran. It also tried to block the World Bank’s recent approval of $160 million in loans to Iran to boost its electrical power system, again, without success.

While some experts of US-Iranian relations have dubbed the hardened U.S. position a recurrence of the “hostage syndrome,” others have argued that “having Iran as an enemy is very good for building bureaucratic empires” in the U.S. In other words, images of a belligerent and expansionist Islamic Iran are serviceable to any interest group or administrator “who might be trying to preserve defense, intelligence, or think tank budgets in a post-Soviet world” (Gary Sick, as cited in US-Iran Review, May 1993, p. 14). Whatever the reason, the fact is that the recently heightened rhetoric seems to have, once again, placed Washington at loggerheads with Teheran.

Not surprisingly, the renewed charges against the Iranian government elicited angry rebuttals and expressions of frustrations from Iranian leaders, both within and outside government circles. For example, Ayatollah Ardebili, a prominent cleric, addressing a prayer gathering in Tehran on Friday, July 9, 1993, argued that “accusations leveled by the U.S. and world arrogance against Iran…[were] insidious and baseless.” Referring to a plea recently issued at the insistence of the United States by the leaders of the G-7 countries, calling “for Iran’s contribution to world peace and security,” he further argued, “By making such a plea, they intend to brand Iran as a war monger and to persuade us to back down from our revolutionary principles.” Brushing aside the West’s “baseless and unfounded” allegations that Iran is trying to acquire arms of mass destruction, Ardebili said, “Such charges were raised by countries where atomic bombs were still tested and which were well aware of the falsehood of their accusations” (as cited by Kayhan Havai, July 14, 1993, p. 30).

President Rafsanjani who, according to unofficial reports, had hoped that the change of administration in Washington could be an opportunity for a new beginning, has likewise expressed frustration with the United States’ “double-standard” and “high-handed” attitude toward Iran. He has frequently complained in recent months, to both domestic and foreign audiences, that the U.S. government and the U.S. media distort or misunderstand Iran’s policies regarding international terrorism, nuclear weapons, and the Islamic movements within the region or elsewhere in the world.

Repeating these complaints in a recent interview with Time Magazine, the May 31 issue, Rafsanjani imploringly challenged the U.S. government and media, “If you can show one piece of evidence [of Iranian government’s involvement in international terrorism], please make it known to everybody. We should all cooperate to prevent terrorism.”

During the interview, the Iranian President also complained to his American audience about the fact that the U.S. had failed to make good on its promise to reciprocate Iran’s good-will efforts that contributed to the rescue of the American hostages from Lebanon. Rafsanjani also accused the U.S. of using selective human rights standards for its friends and foes: while employing human rights norms as a foreign policy tool against Iran, it turns a blind eye to blatant human rights abuses in other Middle East countries which are U.S. allies.


Economics vs. Politics

It is obvious from this brief account that the political rhetoric that prevails between Washington and Tehran is moving in a direction that appears to oppose the economic interactions between the two countries. Two questions need to be addressed in the context of these ironical and/or paradoxical developments. First, what are the social forces and group interests that lie behind these apparently conflicting political and economic developments? And second, what can we say about the future course of these developments: Is the recently heightened exchange of political rhetoric going to further escalate into a more serious conflict between the two countries, or are the long-term economic interests going to transcend the conjunctural political bickering and ultimately lead to a political rapprochement between Iran and the U.S.?

There are two major contending views of U.S.-Iranian relations in each of the two countries. One view, espoused largely by the international traders, investors and financiers on both sides, is clearly in favor of reestablishing economic and political ties between the two countries. The other view, advanced primarily by ideological, administrative and political bureaucrats, does not countenance such a rapprochement.

The administrations in Tehran and Washington stand somewhere in the middle of these two contending forces and, depending on the balance of forces and political expediencies, will occasionally tilt to one or the other side. This explains why, for example, President Rafsanjani’s recent bid for reelection swayed him somewhat toward the so-called hard-liners’ position in Iran, perhaps also how some kind of “wimp paranoia” may have helped move President Clinton’s position toward that of the obstructionist voices in the United States.

The conflict between the two contending interest groups is rather well known in Iran; it is the conflict between the so-called liberals and hardliners. While a parallel conflict on the U.S. side is not as well known, it nonetheless does exist here too. There is evidence that the U.S. businesses trying to deal with Iran are frustrated with obstructionist bureaucratic agencies that are denying them export licenses. For example, the New York Time  recently reported that out of a total of $1.55 billion export license applications in a 13-month period in 1990-1991 only $59 million, or .04%,  were approved and the rest denied. While exporters’ persistence and lobbying raised the figure approved to $357.3 million in 1992, it still fell far short of the figure denied, $639.6 million.

To reach the Iranian market, the largest in the Middle East, American exports often go through tortuous channels to get around bureaucratic and legal hurdles: they are first exported to the neighboring countries in the Persian Gulf region and then, after being re-labeled, re-exported to Iran.

That the U.S. exporters trying to reach the Iranian market are frustrated with the many restrictions blocking their exports became evident during the recent hearings of the International Trading Commission. During the hearings, held in mid-April, 1993, several business representatives complained that their businesses were suffering because they were losing to foreign competitors as a result of those restrictions.

The Boeing-GE $1 billion tentative deal with Iran Air, mentioned earlier, proved to be such a strong case in terms of revenues and the jobs it could create for American businesses and workers that, despite vehement opposition from various “bureaucratic empires,” including a protest letter from 150 members of the U.S. Congress, the White House found it difficult to reject it and, instead, decided to review it–the case is currently under review.

As noted earlier, in Iran too proponents of rapprochement with the United States come largely from the business community, not so much from small businesses that are wary of foreign competition as from international traders and big importers. A large segment of Iranian consumers, especially the upper and upper-middle classes who have since the pre-revolution days acquired a firm taste for the U.S.-made consumer goods, are also in favor of expanded economic relations with the U.S.

Managers of state enterprises as well as government agencies in charge of macroeconomic and financial policies on a national level are also increasingly becoming amenable to the idea of doing business with U.S. manufacturers and traders. These managers and agencies have since the beginning of the revolution been surrounded by a multitude of the surviving middlemen of pre-revolution days–contractors, consultants, import/export experts, and specialists of all kinds–who continue to function as mediators between the state and private sectors, and frequently act as unofficial advisors to state managers. They monitor the performance and financial situation of state enterprises and at every turn press their mangers for openings for the private sector, as well as for closer ties with the U.S. and other Western economies.

Until recently, managers of state enterprises and bureau-technocrats in charge of macroeconomic decisions on a national level balked at such suggestions as they perceived both national economic progress as well as their own personal and/or social advancement as being contingent upon state capitalism (i.e., upon nationalizations and the expansion of the state sector). They blamed international capital, global markets and the private sector for domestic economic ills.

But not any longer. Now, they too invoke market mechanism and private incentives as remedies for economic problems, and call for, or go along with, the privatization of state enterprises.

There are a number of reasons for this change of heart. Firstly, compared to confused and bureaucratic management of state enterprises, the market does appear more efficient. Secondly, because of the close U.S.-Iranian ties before the revolution, many industrial plant and equipment in Iran are U.S.-made and their repair, maintenance and modernization, therefore, require U.S. parts and components. And thirdly, the state-centered managerial stratum has gradually established close ties with the private sector, which means that many of the members of this class have since the 1979 revolution become capitalists in the shadow of the public sector, and are now ready to interact with the private sector, with the world market, and with the U.S. business community.

Whatever the reason, the fact is that managerial, technocratic and entrepreneurial strata, the so-called liberals, are slowly but surely overcoming the so-called hard-liners’ resistance to their economic agenda: privatization and/or marketization of state enterprises, economic retrenchment or curtailment of social spending, integration into the world market, and economic rapprochement with the West, including some initial but important interactions with the United States.

To be sure, resistance to this agenda is still intense. But evidence shows that opposition forces are not in possession of the administrative, legal or institutional posts that can block implementation of the agenda. A close watch of the Iranian news media indicates that opposition groups often learn about major economic decisions–for example, the deals with Coca Cola or with Boeing-GE–from domestic or foreign news reports, which is indicative of the fact that they are increasingly being detached from policy-making positions.


Historical Precedence

While the conflicting developments between Iran and the United States are unique, they are by no means without precedence. During the last several decades, a number of other developing countries have experienced similar relations with the U.S. and other industrialized powers of the West. Like the Iranian case, national liberation and social revolutions in countries like Egypt, Algeria, Syria, Guinea, the Congo, Indonesia, Burma, and others, brought them the wrath and displeasure of Western powers which, likewise, led to economic boycott and the severing of diplomatic ties with those countries.

In almost all these cases the reestablishment of formal political ties with Western powers followed a period of quiet and submerged economic ties with those powers. In Egypt, for example, Anwar Sadat’s so-called open-door policy toward the West followed years of low-key economic relations which dated way back to the days of Nasser’s rule. U.S.-Iranian relations seem to be following a similar course.

Of course, the demise of the Soviet Union and the end of U.S.-Soviet rivalry in the Third World, as well as the perceived eligibility of Islamic fundamentalism as a mini-substitute for the Soviet threat, might further delay a U.S.-Iranian rapprochement. But the general trajectory of the relations between the two countries is clearly headed in the direction described above.



The apparent political divergence from the developing economic ties between Iran and the United States is due to the existence of two conflicting interests in both countries: political, diplomatic and ideological expediencies on the one hand, and economic interests on the other. While the economic interactions highlighted above have understandably been low key, they are nonetheless indicative of a trail-blazing trend that carries more weight in terms of the overall future relations between the two countries than the shrill voices behind the recently heightened exchanges of political rhetoric between Tehran and Washington. And while such rhetorical exchanges might slow down the groundbreaking economic trend already initiated between the two countries, they cannot reverse that trend. The dynamics of economic forces and interests is such that it will ultimately overcome political and ideological obstacles and lead to expanded ties between the two countries.