The effects of the May 8 decision by President Donald J. Trump for the United States to exit the Joint Comprehensive Plan of Action, or Iran nuclear deal, will unfold over the next several months as U.S. sanctions are reinstated against Iran, and secondary sanctions are imposed on those countries continuing to do business with the Islamic Republic. The U.S. government is quickly ramping up its sanctions power against Iran with new measures, on May 15 designating the head of its central bank as a terrorist, accused of directing state funds toward Hezbollah. For traditional U.S. partners and allies in the Gulf and beyond, the unwinding of U.S. participation in the JCPOA will create some multidimensional consequences.

The U.S. withdrawal is not just a bilateral action against Iran. It creates divisions between Europe and the United States on trade and regional-security policy toward the Gulf. There is likely to be additional stress on the Gulf Cooperation Council as smaller member states contend with demands for regional unity against Iran even as they continue to engage with Iran as a regional economic actor. The fissures will be trans-Atlantic, and within the GCC, and will work to the advantage of those Asian consumers of Gulf energy products who are the beneficiaries of the U.S. security umbrella in the waters of the Gulf and Bab el-Mandeb. Saudi Arabia and the United Arab Emirates will encourage U.S. financial pressure on Iran, and they will anticipate (and are willing to accept) greater risk of confrontation between U.S. and Iranian actors in the Gulf, particularly in transit waterways.

In the short term, there are some clear winners and losers in the U.S. reimposition of sanctions on Iran. It appears that the “America First” confrontational posture toward Iran in the Gulf includes a very gracious, though perhaps unintended, protection of Chinese economic interests in the region. A case in point is the shared investment in Iran’s South Pars gas field between Chinese, French, and Iranian oil companies: The withdrawal of the $1 billion Total investment in South Pars absent a sanctions waiver from Washington would allow the co-investor, China National Petroleum Corporation, to assume Total’s stake in the 20-year South Pars project. Total currently holds a 50.1 percent stake, with China National Petroleum Corporation holding 30 percent and Iran’s national oil firm, Petropars, holding 19.9 percent. If Total does not receive the waiver to maintain its investment and activities in the venture, China contractually has access to Total’s share, which would make China and CNPC a majority owner (as much as 70 percent) of one of the largest gas fields in the world. Production in the South Pars project, according to the state-run Iranian oil company and its managing director, Ali Kardor, would be as much as 2 billion cubic feet a day of gas. (This is equivalent to the amount of gas produced by Qatar and exported via the Dolphin pipeline to the UAE and on to Oman each day.)

China has been a consistent investor in Iran, even under previous sanction regimes. As Nader Habibi has argued, China was a major investor in Iranian infrastructure and manufacturing between 2005 and 2015, only reducing some operations in 2013 and 2014 during the JCPOA negotiations. China quickly ramped up its investments again in 2016, cementing its position as Iran’s number one oil export destination, and its largest export market for many non-oil goods, like petrochemicals and iron ore. China’s Export-Import Bank has financed many transport projects in Iran, from a subway system to railways and roads as part of China’s larger Belt and Road Initiative. Perhaps more importantly, China has the advantage of being able to settle purchases of Iranian oil and non-oil products in local currency, avoiding U.S. financial institutions and settlement processes, negating the impact of reimposed U.S. sanctions. China has been actively creating financial products to facilitate Iranian oil trading very recently. In fact, China began trading the first yuan-denominated crude futures contract on the Shanghai Energy Exchange in April.

European allies will face a harsher unwinding period of investment and trade with Iran. Key sanctions to be reimposed on August 6 will impact European investments and joint ventures in the automotive industry in Iran, an emerging area of economic cooperation and development.

Key Sanctions to be Reimposed on August 6 Preclude:

• Purchase of U.S. dollar currency by the Iranian government
• Iran’s international trade in gold and precious metals
• Trade with Iran in key construction materials like aluminum and steel
• Large transactions in the Iranian rial and relating to Iranian debt
• Trade and investment in the Iranian automotive sector

Key Sanctions to be Reimposed on November 4 Impact:

• Transactions by foreign financial institutions with the Central Bank of Iran
• Transactions related to the oil and gas sectors

• Trade and investment with port operators, shipping, and shipbuilding

For large European firms these sanctions create some difficulties, especially for automotive ventures like Peugeot S.A. and Renault. According to Barclays, in 2017, 12.2 percent of PSA Group’s sales volume was generated in Iran, with nearly 450,000 sales, up from about 230,000 in 2016. For Renault, Iran was the eighth largest market for the company’s global sales in 2017. Without a sanctions waiver, or some kind of European Union blocking effort, these joint ventures and sales will become difficult, if not impossible to resume. Iran is not a major trading partner of Europe; the Euro area economy exported 10 billion euros worth of goods to Iran in 2017, comprising less than 0.1 percent of the Euro area’s gross domestic product, according to Goldman Sachs. However, for those small firms in the EU with no formal links to the U.S. banking system, trade might continue. Moreover, the political project aimed at normalizing relations with Iran is at risk, despite European leaders’ best efforts to salvage the nuclear deal. Even if the EU is able to create a lifeline to Iran via export lines of credit and targeted investment by the European Investment Bank, these efforts will be dwarfed by the pressure on private firms, particularly in the energy sector, to avoid financial entanglements that risk U.S. sanction exposure.

For the GCC states, the preliminary political reactions to Trump’s announcement have been mixed, with official statements released by the foreign ministries of the UAE, Bahrain, and Saudi Arabia broadly praising the move, while statements by Oman and Kuwait were more cautious. The UAE applied new sanctions against Iranian individuals last week. On May 16, in coordination with the United States, Saudi Arabia and all other GCC members (except Kuwait) placed 10 Hezbollah leaders on their terrorism list, including Hassan Nasrallah and his deputy Naim Qassem.

The economic outlook and repercussions from the U.S. weakening of the nuclear agreement are also mixed. Both Oman and the UAE saw an increase in trade with Iran between late 2016 and late 2017. According to International Monetary Fund Direction of Trade Statistics data, UAE-Iran trade increased from just over $2 billion to 7 billion; Oman-Iran trade doubled from about $100 million to 200 million. Dubai has traditionally been an important re-export point for goods into Iran. There are also tourism ties, as well as real estate investments from Iran that contribute to the emirate’s economy. According to data from Dubai’s Department of Tourism and Commercial Marketing compiled by HSBC, Iranian tourists accounted for 3 percent of arrivals in 2017. (Saudi visitors are the most important market.) Dubai’s ability to create advantage from regional instability has been part of its history as a trade center and financial hub, but the shift in compliance regulations and banking standards over the past decade will make this tradition much harder to maintain, particularly because of the wide reach of the U.S. Treasury Department’s efforts to counter terrorist financing networks in the GCC states. Qatar is further isolated in the GCC and will be under increasing scrutiny for growing trade and energy sector ties with Iran.

The regional outlook for the GCC is therefore very mixed after the U.S. withdrawal from the JCPOA. The political risk premium has been raised considerably, and oil prices are reflecting that anxiety, providing some short-term gain in fiscal balances for Gulf oil exporters. However, the medium-term outlook is less clear. Oil prices reached a three-year high this week. For the Euro area, this points to a potential decline in GDP, as fuel and production costs are sensitive to oil price hikes. For GCC oil exporters, the IMF estimates that maintaining oil prices at these current levels would push the UAE, Qatar, and Kuwait to fiscal surpluses this year, after three years of deficit spending across the GCC states. Stronger oil prices may weaken the political momentum of economic reforms, including rationalizing fuel prices and lowering inefficient subsidies of electricity and water, and the imposition of the value-added tax beyond Saudi Arabia and the UAE in the Gulf states. But it is not the rising comfort with higher oil revenue that increases the risk of confrontation between Saudi Arabia and the UAE, and Iran. Saudi Arabia and the UAE see an opportunity, in partnership with and preferably led by the United States, to raise the stakes on Iran, with little regard to the financial cost. For this reason, political risk in the Gulf is increasing.