Donald Trump pulling out of the Iran nuclear deal is economically irrelevant – here's why

Iran is a wonderfully cultured, and in many ways heroic nation, but in global economic terms it barely registers

If President Trump cancelling the Iran nuclear accord is such a big deal, why have the financial markets taken it so calmly? Sure, the oil price picked up a bit, but it had been rising anyway and was at a three-and-a-half year high last week. The dollar rose too, perhaps indicating its “safe haven” status in an uncertain world rather than an endorsement of the president’s policy – or maybe simply reflecting the prospect of higher US interest rates. There was some impact on the share price of US, UK and European companies, including Airbus and Boeing, which will now be shut out of the Iran market, but nothing beyond the ordinary swings that happen every day. So what’s up?

Well, the first thing to acknowledge is that the investment community is not good at assessing political risk, and it may be overly insouciant now. But there is a second point. Iran is a wonderfully cultured, and in many ways heroic nation, but in global economic terms it barely registers. It has a population of more than 80 million, but its GDP of $420bn puts it a fair way down the global league: a bit smaller than Sweden but a bit bigger than Ireland.

True, it is a big oil producer, the third biggest in OPEC, but even that has to be put into perspective. It is now pumping at a little below four million barrels a day. But the US is now producing more than 10 mpd, up from six mpd in 2012. So in four years the US has added more to its output than Iran’s entire production. Anyway there is global excess capacity in the oil market.

Where the economic danger lies – it is for others to assess the political and military dangers – is that a US president stepping back from an agreement signed by his predecessor is part of a wider retreat. The world economy has seen a long period of gradual reductions in barriers to trade and financial flows. Now they are going up again. Trump-haters will see this as a result of personal failings of the president, but I think what is happening is wider than that. It is a more general failure to appreciate the benefits of free trade.

Iran wants to buy 100 aircraft from Airbus and 80 from Boeing. Why shouldn’t it be able to do so? They are civil aircraft, not military ones. True, there have been abuses, for example where countries have allowed huge surpluses to build up. Germany is in the dock here, running a current account surplus equivalent to eight per cent of GDP. China has artificially restricted imports. But the overall benefits of freer global trade are so abundant that it is strange they are not appreciated.

The statistic I most like in the new book Factfulness, by Hans Rosling, is that the number of people in extreme poverty in the world has almost halved in the past 20 years. Another fact, highlighted by Seven Pinker in Enlightenment Now, is that global inequality, which had been rising steadily from the early 1800s until 1980, has been rapidly falling since then.

This general concern is caught in some work by Oxford Economics out today. It has surveyed global business opinion and reports:

“Businesses have become significantly more pessimistic about the world economy and its prospects over the past three months …. Around two-thirds (66 per cent) of respondents also judge that the risk of a sharp slowing in global growth has increased over the past three months….A trade war remains the biggest downside concern among businesses surveyed.”

Seen in a global context the US re-imposing trade sanctions on Iran is one small part of the jigsaw. If US action forces China to open its markets to more imports, as it seems to be doing, then the world can work its way towards a benign outcome on that particular front. As for Iran, such is the brutality of the arithmetic that making it a bit poorer and stopping a few companies becoming a bit richer by blocking trade deals is not going to shake the world economy. That, at least, is what the markets are saying. Boeing can sell its planes to China instead. But we should all worry at the ease of which agreements are overturned, and recognise that growth doesn’t just happen and can be easily damaged, even reversed.