The nuclear deal reached in the Obama presidency, by Unites states, European Union, Russia, China and Iran is an historic agreement signed in 2015. It states that Iran will have to limit its nuclear development program for the United Nations to remove economic sanctions imposed in 20007.
By this agreement, it guarantees that Iran will at least be a year away for next 10 years, if, and when it wants to make a nuclear weapon (Amadeo, 2017).
If Trump’s presidency, re-imposes those sanctions, and does not honour the nuclear deal, the world will change, on macro and micro economic level.
Iran is sixth largest exporter of crude oil, with China being the largest importer of Iranian oil at 22%. Japan and China also take collectively import 27% of total Iranian Crude oil. If the economic sanctions were imposed, oil would rise drastically, which would lead to a depreciation of dollar, as dollar and oil are inversely proportional. The lifting of these sanctions and the nuclear deal had seen a rapid economic development of Iran of 6.5% which is expected to decline by 6.6% because of the trade sanctions (Elana Ianchovichina, Devarajan, & Lakatos, 2016).
Imposing the trade sanctions, will see a rise in oil prices to 80$ per barrel as there will be more demand and less supply. This will lead to lower import as compared to current market import. Rise in oil prices will also cause of the economies around the world, like India, China, United states, which among the top oil importing countries. But the inflation will also slow down the global economy which will lead to unemployment.
The rise of oil prices will negatively affect economic growth of India, as it is one of the major oil importing countries. During the earlier hike in oil prices, the exploration of new indigenous oil was taken underway. But it those oil fields have almost run dry. India will continue to need the crude oil imports at the current price if if has to sustain at a current development, if the oil import was reduced, it will reduce the development growth rate of the country.
This dilemma may give way to formation of new oil committee, among the developing countries with increasing demand of crude oil in these countries, for example India, Sri Lanka, Bangladesh and other South Asian countries.
China is one the largest importer of Iranian oil. China has close diplomatic, economic ties to Tehran. It was instrumental in the historic Nuclear Deal being signed in 2015. But the re-imposing of trade sanctions will hinder china’s development. Due to high cost of importing crude oil, the production cost will rise in china, which will lead to decline is production as a result will reduce exports. China majority of the GDP is earned through exports. A decline in export GDP will see overall decline in Chinese economy.
China in retaliation to the imposed trade sanctions on Iran, may choose to sell the US government bonds. China is one of the largest owner of US bonds, at 1.789 Trillion US dollars. If china decides to sell these bonds, US stock market will take a huge hit, and further lower the dollar price over and above the dollar reduction after the rise in oil prices.
Due to the decline of Chinese goods in countries around the world, specifically United Sates and India, it will a rise in local production a see a rise in local market and a demand of indigenous products.
In retaliation to the trade sanctions, Iran has threatened to close the strait of Hormuz, which plays a vital role in oil transportation from the middle east to the world. It has also threatened to cut the oil supplies to the west.
The closing of strait will not only effect Iran but also heavily impact Saudi Arabia, which is a largest producer and exporter of oil. The strait sees 17 million barrels per day, which is 20% of the oil traded worldwide (Data Blog, n.d.). it will see a major decline in oil exports, which in turn will lead to inflation of commodities around the world due high cost of production and to a general recession because of the increasing oil prices.
This recession after the trade sanctions on Iran can be avoided if Saudi Arabia counteracts the oil production keeping the prices at the current rate, but it is highly unlikely, as Kingdom of Saudi Arabia will benefit from the increase in oil prices.
The world may stabilize after the sanctions are lifted again returning, and re-introducing Iran as one of the largest oil exporter.
There may also be one more way to stabilise the world, the technological development, and introduction of electric cars. The automobile industry is one of the major consumer of petroleum. The introduction of electric cars will see a drastic decrease in demand of crude oil, which will compensate for the reduction on oil production by Iran.
Because of the increase in oil prices, the overall demand will increase, which will encourage countries, specially UAE, which heavily rely on oil to look for energy sources elsewhere. This may lead to increase in production of solar production, and development of other renewable energy sources.
In conclusion, the global economy will be adversely affected due to trade sanctions on Iran, although some countries will prosper which will be detrimental in bringing the world out of the recessive economic status.