The nuclear deal reached in the Obama presidency, by United States, European Union, Russia, China, and Iran is a 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 microeconomic level. Iran is a 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 the 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. The rise in oil prices will also cause of the economies around the world, like India, China, the 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 has almost run dry.
India will continue to need the crude oil imports at the current price 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 the 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 the 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 an overall decline in the 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 owners of US bonds, at 1.789 Trillion US dollars. If China decides to sell this 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 the United States and India, it will arise in local production a see a rise in the local market and a demand of indigenous products.
In retaliation for 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 affect 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 to the 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 exporters. There may also be one more way to stabilize the world, the technological development, and the introduction of electric cars.
The automobile industry is one of the major consumers of petroleum. The introduction of electric cars will see a drastic decrease in demand for crude oil, which will compensate for the reduction of 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.