By Laurence Norman
Foreign-policy differences between the European Union and the U.S. are widening, forcing EU leaders to once again ponder how to stop American sanctions from targeting European companies.
The EU has for decades opposed U.S. sanctions that Europeans consider extraterritorial — laws allowing Washington to penalize foreign companies for doing business with third countries such as Russia, Cuba or Iran.
The issue re-emerged this summer when the EU threatened — then retreated from — retaliation against U.S. sanctions on Russia. The U.S. legislation included possible action against European energy companies doing business with Moscow.
While the EU has largely been in line with the U.S. on punishing these countries — the bloc has imposed its own sanctions on Russia, for example — the EU’s rules apply only to member states.
Also worrying Europeans: the growing fragility of the 2015 Iranian nuclear deal, which President Donald Trump has repeatedly criticized. The deal led the U.S. to suspend most sanctions targeting foreign banks and companies doing business with Tehran. If the deal collapses and sanctions return, European firms could pay the heaviest price.
The EU’s few options for countering U.S. pressure have limited effectiveness and entail risks, so EU governments want fresh ideas.
“We need to adapt our national mechanisms and update European mechanisms” against U.S. extraterritorial sanctions, the French foreign ministry said recently.
The fight over U.S. sanctions began in the mid-1990s when the Clinton administration, pushed by a Republican-controlled Congress, passed the Helms-Burton act, which forced foreign firms to choose between trading with the U.S. or Cuba. A few, like Canadian mining firm Sherritt International Corp., stuck with their Cuba business.
In recent years, sanctions tensions faded as the U.S. and Europe increasingly coordinated responses to Iran’s nuclear program, the violence in Syria and Russia’s Ukraine intervention.
European officials still publicly opposed U.S. extraterritorial measures but privately acknowledged their effectiveness, for example, in bringing to the Iran back to the negotiating table over its nuclear program. The U.S. threat to bar foreign firms from U.S. markets and to cut foreign banks’ ability to clear dollar transactions in the U.S. proved powerful.
That has changed since Mr. Trump took office. Foreign-policy coordination between Washington and Brussels has weakened. Sanctions decisions diverged. The U.S. has imposed fresh sanctions on Iranian firms over missile tests. The EU hasn’t. Washington has targeted more people involved in North Korea’s missile and nuclear programs than the EU has.
The summer standoff over Russia sanctions ended when Mr. Trump issued a statement while signing the bill, saying it shouldn’t be used to undermine cooperation with European allies and should avoid “unintended consequences” for businesses.
Before that, EU officials discussed two legal options.
One was to apply the EU’s “blocking statute,” which the bloc adopted following the 1996 Helms-Burton act. The statute orders EU companies not to obey specific U.S. sanctions decisions and offers compensation for U.S. penalties.
The law was effective in protecting Europe’s few economic links with Cuba in the 1990s, but it would be far less effective protecting business with Russia, said a German official close to the issue. The many European energy giants with Russian contracts wouldn’t risk being locked out of the U.S.
Richard Nephew, a former top sanctions official at the U.S. State Department, said as the U.S. was ramping up Iran sanctions from 2005 onward, Washington was fairly relaxed about the blocking statute threat given uncertainties over European enforcement of its own legislation. Penalizing companies for breaches is largely in the hands of national governments, which might protect firms, not the EU, he noted.
“It’s very unclear what role the EU…and what role other member states can play in policing the implementation of other countries,” Mr. Nephew said.
Where U.S. officials had greater concerns, he said, was an EU challenge to U.S. extraterritorial sanctions at the World Trade Organization. The EU initially took the U.S. to the WTO over Helms-Burton but dropped the case after President Clinton used waivers to prevent European companies being sued.
The EU’s most likely claim, some experts in sanctions law say, would be to argue the U.S. is breaching its WTO commitments on services liberalization by threatening to cut European firms out of the U.S. financial system. The U.S. could argue their actions are exempt on national-security grounds.
Neither the national-security exemption nor sanctions cases in general has been much tested at the WTO. An EU win could, unintentionally, permit WTO challenges to the EU’s own sanctions regimes, one of the bloc’s few joint foreign-policy tools.
“The most obvious EU and WTO measures available are pretty blunt tools,” said Andrew Hood, Senior Director at law firm Dechert LLP and a former U.K. government sanctions expert. “Any countermeasures should only be considered once all other avenues have been explored and then can only be…limited to ending the U.S. measures.”
As well as European governments, lobby groups looking to defend the Iran deal have also called on the EU to take further action to protect their firms. The National Iranian American Council, a U.S. group that lobbied for the Iran nuclear deal, wants the EU to create offshore dollar-clearing facilities that would weaken the threat of European banks being cut out of the U.S. financial system.
With the U.S. market dwarfing most others, European officials will surely tread carefully.
–Emre Peker and Anton Troianovski contributed to this article.