MYTH vs. FACT: The Effect of Poor US-Iran Relations on Everyday Americans
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By AIC Research Associate Nika Mobed
MYTH: Iran is an ostracized nation whose economy and diplomatic relations have little direct impact on the lives of people living in the United States.
FACT: Strained relations with Iran do impact the lives of everyday Americans by virtue of lost business opportunities, increased oil prices, and diminished economic and geopolitical power. Increased engagement with Iran could unlock a surprisingly wide range of economic opportunities for people in the West.
Background
The US and Iran had a close relationship until the pro-Western Shah, Mohammad Reza Pahlavi, was overthrown in favor of the Islamic Republic. This historic event, combined with the fateful hostage crisis at the US embassy in Tehran in 1979, set the tone for US-Iran relations for decades to come, and was the beginning of US policy to impose ever-stricter sanctions against Iran in order to isolate it and reduce its regional influence.
This enduring rift between the United States and Iran has resulted in a detached perspective among many Americans, leading them to view Iran as effectively disconnected from US interests and their daily concerns. However, Iran is an influential country, with a population of 90 million people, and its economic fluctuations have direct consequences for the US economy. Indeed, sanctions against it, which have served as the US’ primary policy tool for applying pressure to the Iranian government, have also boomeranged, negatively impacting US economic interests.
Global Enterprise
Between 1972 and 1979 the United States made sixteen billion dollars selling arms to Iran and three billion annually in civilian trade. Major companies such as General Motors, Du Pont, Gillette, Pfizer, Pepsi‐Cola, Colgate‐Palmolive, Coca‐Cola, Shell Oil, and Johnson & Johnson, had joined Iranian investors in building factories to produce American goods in Iran. America’s largest construction contractors, such as Fluor, Bechtel, Morrison‐Knudsen and Brown & Root, had signed on to build a world class infrastructure of roads, bridges, ports, pipelines, petrochemical plants, telephone lines, new housing and hospitals. Moreover, General Dynamics, Grumman Aircraft, the Bell helicopter division of Textron, McDonnell Douglas and Boeing had contracts to supply Iran with advanced military hardware.
After the 1979 revolution and instigation of US sanctions, these projects were abruptly halted, resulting in billions of dollars of lost profit. To this day, global enterprises are faced with many restrictions operating in Iran, often making it impossible to engage with the Iranian market at all. If companies violate these sanctions, they can face significant penalties, including hefty fines, restrictions on doing business in the US, and even criminal charges against executives. Meanwhile, some industries such as technology, agriculture and pharmaceuticals would especially benefit from new avenues of growth in Iran. For example, after the JCPOA was signed in 2015, Boeing and Airbus had contracts valued at around thirty-nine billion dollars intended to modernize Iran’s aging commercial aircraft fleet. After the Trump administration pulled out of the JCPOA in 2018 and reintroduced sanctions, these contracts were canceled, resulting in a loss of profit and a significant drop in Boeing stock.
Over time, a majority of American businesses that used to export to Iran have been replaced with those from China (28%), United Arab Emirates (19%), and Brazil (13%). In fact, in 2022 Iran imported $9.44 billion worth of goods and services from China, more than they ever had from the United States. Local companies have also gained in popularity since the Iranian revolution, many of which often resemble their well-known American counterparts. Some fast food restaurants in Iran that have high profit margins, for example, include KFC (Kabooki fried chicken), Pizza Hat, and Mash Donalds. While the knock-offs provide an amusing anecdote about the effect of sanctions in Iran, they also raise a more serious point, which is the strong demand for American products in Iran - with a population of over 90 million people - which is frustratingly inaccessible to American businesses. Very simply, historical animosity between Iran and America has cost the US billions of dollars in lost trade and disadvantaged American companies in favor of those in countries like China that do not abide by US sanctions.
Natural Resources
Iran holds the third largest oil reserve in the world and is one of the world’s largest petroleum producers. Broad estimates suggest that if Iran’s exports were completely eliminated, oil prices would rise by approximately $15 per barrel.
US consumers naturally understand some of the ways in which oil prices affect their daily lives. The most visible ways they do so include the effects on gas prices and home heating costs. However, America also has a large reliance on petroleum based products, which are all subject to fluctuations of oil prices: plastics, rubber, paint, adhesive, pesticides, and cosmetics only scratch the surface of daily products that contain petroleum.
Conflict in the Middle East often makes the news when oil prices rise. For example, the recent conflict between Israel and Iran has made it notably more expensive to operate factories and transport goods in the region. Tensions therefore have cascading effects with rising gas prices, increased cost of business and ultimately inflation for consumers globally. Economists believe, for example, that a cost of $100 per barrel of oil would add hundreds to thousands of dollars to annual household energy expenses in the US.
What is perhaps less obvious to consumers, however, is that beyond Middle East turmoil, sanctions against Iran have already led to increased oil prices by hindering Iran’s ability to export oil on the global market. Some of the gap in the market is covered by other nations (including the US), but not without expense. For example, producing oil domestically costs the US double what it would be to import from Iran. Meanwhile, Iran’s significant reserves play a large role in global energy markets despite (and indeed sometimes due to sanctions), with interesting geopolitical consequences. The Chinese government has made it clear, for example, that regardless of sanctions they will continue to import crude oil from Iran. In fact, in 2023, China imported $4.59 Billion worth of crude oil, which is 15% of their total imports. Thus far China has not been targeted by the US due to these purchases, but this could change in a second Trump administration and cause serious diplomatic tensions with other cascading economic effects (via, e.g., Chinese retaliation with tariffs on exports or targeting of American companies on Chinese soil).
Cultural Exchange
Although there is currently no travel ban on Americans going to Iran, a surprising number of Americans believe that there is; and many others believe it is unsafe to travel there. For their part, Iranians - while no longer ‘banned’ from entry to the US as happened temporarily during the first Trump administration – are unable to travel to the US in large numbers due to the complicated and at times biased process of obtaining a US visa.
It is widely agreed that cultural exchange (also including educational and professional exchange) fosters mutual understanding among nations and peoples through the sharing of knowledge, ideas, and experiences. While it is difficult to put an economic number on the benefits of increased cultural and professional exchange, in 2019 international college students contributed $32.8 billion to the US economy, and tourism $239.4 billion, therefore increasing the number of Iranian students, professionals, and visitors that come to the U.S. can benefit everyone involved. The U.S. is home to world class universities, and Iranian students have historically contributed significantly to academic and scientific communities. In addition to the tuition fees and economic footprint of additional Iranian students in the US, easing visa restrictions for them would foster a new generation of leaders with a deep understanding of both cultures. Additionally, encouraging collaboration between Iranian and U.S. professionals in fields like technology, healthcare, and education would benefit both countries, leading to enhanced trade relationships and innovation.
While less immediately financially beneficial for the US, an increase in Americans traveling to Iran would also reap rewards in the future. At the moment, European and Chinese tourism contribute most to Iran’s growing tourism sector, which attracts foreign tourists given Iran’s rich cultural and historical offerings, including UNESCO World Heritage sites like Persepolis and Isfahan’s bazaars. Following the 2015 nuclear deal, the number of European tourists increased as diplomatic relations improved. Chinese tourists, meanwhile, are more likely to visit Iran as part of broader economic and diplomatic ties, particularly within the framework of China’s Belt and Road Initiative. With direct flights and growing infrastructure, Chinese tourism to Iran is expected to continue increasing. Ultimately, if U.S.-Iran relations improved and sanctions were eased, American companies in hospitality and tourism could find opportunities for expansion in Iran. U.S. airlines, travel agencies, and hospitality brands like Marriott or Hyatt could partner with Iranian businesses, creating a foundation for mutual growth in tourism and related industries.
Beyond future economic benefits of increased exchange, there are less tangible benefits as well, such as fostering first and second hand knowledge of life in each other’s respective countries. Experiencing a country personally, or knowing someone who has, creates a clearer, more humanized perspective that is harder to distort through negative media portrayals or political rhetoric. Greater exchange and understanding between peoples can significantly reduce the likelihood of conflict.
Reserve Currency Status
The United States has benefited significantly from the dollar’s status as the world’s reserve currency, and from the SWIFT (Society for World Interbank Financial Telecommunication) payment system for international trade. US diplomats have been able to use these resources as leverage in foreign policy, and particularly via the implementation of economic sanctions. For example, when the US withdrew from the JCPOA in 2018, it reinstated extensive economic sanctions targeting Iran's oil exports and financial transactions. These sanctions leveraged the dollar's dominance and restricted Iran's access to the SWIFT system, severely impacting its ability to participate in international trade. While the US State Department has been able to rely on this economic tool for decades, the continued and broadening application of sanctions - not just against Iran, but also against other states like Russia - ultimately provides incentive for countries on the opposite end of this diplomatic stick to find alternatives to the American system.
As various countries seek to assert their autonomy from US influence they may become more inclined to challenge American economic hegemony. For example, China has been exploring its own payment systems, such as the Cross-Border Interbank Payment System (CIPS), which facilitates trade in yuan and reduces reliance on the dollar. Russia has also been working to increase its financial sovereignty by using their ruble in international trade, particularly with China and India. The collaboration between Russia and China is especially noteworthy. Both nations are motivated to challenge US financial dominance, and their partnership could lead to a concerted effort to develop alternative payment systems that could operate independently of the dollar. Ultimately, if other countries join these efforts and the dollar loses its position as the preferred global currency, the US will face higher borrowing costs and increased inflation. This has the potential to significantly undermine the US’s financial power globally and would have wide spread economical implications for the lives of everyday Americans.
US Safety/Security
It is undeniable that military conflict generates significant profits for US defense contractors, which enjoy the benefits of participating in a multi billion dollar industry. To this end, one might speculate that war with Iran could create large profit margins for these companies and therefore, benefit US consumers. However, the long term benefits of peace - both for the economy and also importantly, general psychological well being of American citizens (and indeed people around the world) - outweigh those of war.
Economists have long discussed the negative side effects of war, including misallocation of government funds, a boom and bust economic cycle, and fueling regional tensions. While it might temporarily stimulate the economy, when conflict settles, there is a sudden drop in demand for military-related goods and services. This can cause an economic downswing and frustration among those who feel abandoned or left without viable economic opportunities in the post-conflict environment.
Military spending is often justified as essential for national security, but it competes with other important areas like healthcare, education, and infrastructure. Opportunity cost helps explain this trade off: every dollar spent on defense could have been used for something else that might improve citizens' lives, such as better schools, expanded healthcare, or improved public infrastructure. Some economists argue that excessive defense spending "crowds out" investment in areas that could offer greater long-term benefits. For example, instead of investing billions in advanced military technologies like fighter jets or missile defense, that money could be used for renewable energy projects, healthcare reform, or upgrading the education system. These kinds of investments not only improve quality of life but also promote long-term economic growth by building a healthier, more educated, and more skilled workforce.
The U.S. spends hundreds of billions annually on defense to maintain technological superiority and global security. However, if even a fraction of this spending were redirected toward domestic issues, it could help address challenges like poverty, affordable housing, and climate change. These investments could create long-term benefits, reducing inequality and promoting a more sustainable, resilient economy. The opportunity cost of military spending is about more than just the financial trade-off. It's about the potential to invest in a stronger, more prosperous society. While defense is undeniably important, it’s worth asking whether reallocating some of those resources could better improve the well-being of citizens and contribute to long-term national stability.
Meanwhile, a shift away from conflict and instead towards cooperation in the Middle East would pave the way to better economic outcomes, including trade, innovation, and investment as previously described in the sections above.
Beyond the obvious stability and security that peace brings, and potential economic boom, an additional benefit of cooperation over conflict is the fact that US foreign policy goals are more likely to be achieved. Studies have shown that countries with strong economic ties are more likely to cooperate politically. For instance, research published by the Cato Institute found that trade interdependence reduces the likelihood of war and enhances diplomatic cooperation. When countries are economically intertwined, they have a vested interest in maintaining peaceful relations, which can lead to better negotiation outcomes. Enhanced diplomatic relations can facilitate trust, reduce hostilities, and provide the groundwork for successful compromise on a wide range of issues.
Conclusion
The history of US-Iran relations reflects a recurring cycle of conflict and misunderstanding, often to the detriment of both nations. While sanctions have been framed as necessary for American security, the broader implications of lost economic opportunities, unstable oil markets, and the potential erosion of US financial dominance should prompt a revaluation of this approach. Shifting towards a peaceful, diplomatic relationship would lead to meaningful benefits for everyday Americans as well as Iranians, fostering a more prosperous, peaceful and innovative future.
