By Ricardo Vaz for Venezuelanalysis
The Trump administration is barely two months into its term but every day feels like a rollercoaster. Migrants get rounded up, threats fly everywhere, and now a brutal bombing campaign is underway in Yemen. Wholehearted support for genocide in Palestine is the one constant.
When it comes to Venezuela, analysts put forward different scenarios for US policy approaches, ranging from a rehashing of Trump 1.0’s “maximum pressure” to more pragmatic scenarios that would see Washington leverage foreign policy weapons to favor US corporate interests.
An early direct engagement between the White House and the Maduro government created the illusion of a more heterodox and less hostile approach. However, all the subsequent moves point in a different direction. Trump is maximizing pressure against Venezuela.
What happens to Chevron?
Chevron’s license to operate in Venezuela was seen by most as a bellwether of where the US’ re-elected reality-show host wanted to go. Allowing Chevron to continue would mean an admission that regime change was not in the cards and that a US energy giant should keep making profits. Driving Chevron out clearly meant trying to strangle Venezuela by all means possible.
After a lot of speculation, pressure from Florida’s “crazy Cuban” representatives led to the US Treasury Department withdrawing the company’s sanctions waiver and giving it 30 days, until April 2, to wind down operations.
However, Chevron later saw its deadline extended to May 27. The question is now whether this is really the end of the road or if Chevron could eventually remain on recurrent short-term licenses. This middle-ground policy would ensure the conglomerate does not suffer losses but also would discourage it from making any significant investments to boost production.
Tariffs and sanctions
The most groundbreaking move happened on March 24 when the US president announced 25 percent “secondary tariffs” on imports from countries that are destinations for Venezuelan oil exports. The announcement caught everyone by surprise, not just because secondary tariffs do not exist in international trade, but because the measure is absurd and illogical. Not that irrationality would be an obstacle for Trump…
It is important to distinguish between sanctions and tariffs. In the case of Venezuela, the first Trump White House introduced primary sanctions, basically blocking all US persons and entities from dealing with any company where the Venezuelan state held a majority stake. Then it threatened and levied secondary sanctions against third-country firms that dealt with the Venezuelan oil industry.
In recent years, major international corporations have shied away from lucrative business opportunities in the Venezuelan energy sector because of the fear of getting slapped with secondary sanctions, a phenomenon known as overcompliance. The ones that have engaged have done so with explicit approval from the US Treasury Department.
Secondary sanctions punish a particular agent found “guilty” of breaking the “rules” that the US unilaterally imposes. In that sense, it is a weapon that forces trade, oil exports in this case, into an informal market of ship-to-ship transfers, disguised locations, and re-labeled shipments.
Meanwhile, tariffs are blunt-force objects that levy a tax on specific goods from a given country. Trump’s announcement of tariffs on the entire world, with the most absurd formula behind them, has already caused shockwaves. But secondary tariffs are especially nonsensical because of the total disconnect between the culprits who would trigger the measures and the ones affected, as will become clear below.
Furthermore, given the shell game involved in most Venezuelan crude exports, would the US even be able to prove that a given refinery in country X received a shipment from Venezuela? It might not even matter, since Secretary of State Marco Rubio is the one in charge of imposing these secondary tariffs at his discretion.
A concrete example
To understand how the newly minted secondary tariffs would play out, a concrete example is useful. For example, if US officials determine that Repsol took Venezuelan crude to Spain, the US could levy import tariffs on Spanish olive oil.
US importers would pay this extra tax, which they could attempt to offset by demanding lower prices from Spanish suppliers. In the end, US consumers would likely foot the bill, or lose access to the products. But in this scenario, why should Repsol care about US importers, US consumers or Spanish olive oil exporters?
Additionally, the Spanish state cannot force Repsol to stop importing Venezuelan crude, because it does not violate any laws in doing so. Also, if Repsol takes the crude to its refinery in Peru, where does the US impose tariffs?
This example is just for illustration purposes, since a corporation like Repsol would not do anything without explicit approval from Washington. And recent reports indicate that European companies currently involved in Venezuela joint ventures will likewise see their permits curtailed. So, if they end up leaving, or stay on with precarious short-term perspectives, they will not trigger tariffs.
But even if tariffs never come into effect, their damage is immediate.
Paying the price for higher risks
Early 20th-century chess grandmaster Aron Nimzowitch had a saying, “The threat is stronger than the execution.” It means that a looming threat on the chessboard can force the opponent into a worse and worse standing, eventually collapsing their position. In the case of sanctions/tariffs, this translates into overcompliance and higher costs of doing business (CODB).
Overcompliance means that companies shy away from doing business with Venezuela, whether that is buying crude or brokering a vaccine purchase, for fear of being targeted, even if the action does not violate anything.
However, so long as there is demand, Venezuelan crude will continue to reach markets. It might require more effort to disguise shipment origins but most of all, it will mean PDVSA being forced to offer (even) bigger discounts to export its production and inevitably reduced government revenue. It is the price to pay for the higher risk.
While the uncertainty over the implementation of tariffs lingers, there is already a hit on Venezuela’s oil revenues.
The Chinese dragon and the paper tiger
While China has shown a growing refusal to be intimidated by US threats, most recently going tit-for-tat on tariffs. But this has not necessarily translated to stronger support for Venezuela. As the sanctions threat loomed large in 2019, state-owned CNPC suspended direct crude purchases and reduced involvement in joint ventures.
As the US becomes more belligerent, it remains to be seen whether Beijing will call Washington’s bluff and see if Trump 2.0 truly wants to continue escalating a trade war that will increasingly hit US consumers’ pockets.
So far, Chinese leaders have condemned US secondary tariff threats, just like they have regularly blasted sanctions. They have yet to issue instructions to their companies, particularly the so-called “teapot” refiners that operate with Venezuela’s extra-heavy oil blends. According to reports, these independent refineries are already working with small profit margins, so removing a source of cheap crude could be fatal and have a domino economic effect, even if Venezuelan imports are relatively small in the big picture.
Paradoxically (for US interests), the added uncertainty and the driving out of Western companies could end up meaning a bigger supply of cheaper oil to China.
There is also the fact that some Venezuelan oil shipments serve as repayment for long-term Chinese loans. But ultimately, it all boils down to Beijing’s willingness to stand up to Washington’s bullying and substantively back one of its most important Latin American allies.
Sanctioned countries of the world, unite!
One actor that might prove key once more is Iran. It has come to Venezuela’s rescue in the past and has consistently shown that it has non-negotiable foreign policy principles, Palestine chief among them.
With an industry that has withstood US-led sanctions for decades, Iran could lift Venezuelan heavy crude and reroute it to China or other destinations. There are also risks for Tehran, which has seen ships blatantly seized by the US in acts of modern-day piracy. In exchange, Iranian companies could supply sorely needed fuel and diluents. It would be far from ideal for Venezuela, since it would mean selling barrels way below market value, but the Maduro government might be bereft of alternatives.
The Trump administration thus far has only moved to drive out everyone from Venezuela’s oil scene. There is still an opening to try and corral US corporations into that void, though it would require a lot of spin and bluster. For instance, saying “We are getting cheap oil as payback for all the migrants they sent us.” But this would likely mean sidelining Rubio and the hardliners.
US officials have mostly refrained from overt regime-change calls, but the pressure is surely building in that direction. Is the Venezuelan government better prepared to handle the blows than five years ago? There are promising and worrying signals alike. But what is nonetheless clear is that for popular movements, the beating heart of the Bolivarian Revolution, surrender is not an option.