In the latest sign of the growing divide between Washington and its allies, the European Union’s foreign policy chief announced Monday that the bloc was creating a new payment mechanism called the Special Purpose Vehicle (SPV), to allow countries to transact with Iran while avoiding the Iran sanctions re-imposed by the U.S.

The EU member states will set up a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world.

American sanctions have already been imposed on a number of Iran’s industries  including aviation, metals, automotive and its ability to trade gold and acquire dollars as a result of President Donald Trump’s withdrawal from the 2015 nuclear deal. On November 4, a second round of penalties will fall on Iran’s massive oil sector, which accounts for 70 percent of the country’s exports. Iran is the world’s seventh-largest oil producer.

The Iran nuclear deal, known officially as the Joint Comprehensive Plan of Action, was spearheaded by the Obama administration and signed by the aforementioned five world powers, the U.S. and Iran, lifting economic sanctions on Tehran in exchange for curbs on its nuclear program. The Trump administration pulled out of the agreement in May, calling it the “worst deal ever,” despite U.S. allies and international agencies attesting to Iran’s compliance to the deal’s requirements.

Washington’s subsequent re-imposition of the Iran sanctions now threaten to cut those who transact with Iran off from the U.S. financial system. This has forced numerous multinational companies and foreign investors out of the country, while the impending oil sanctions aim to push countries’ imports of Iranian crude down to zero.

The move angered U.S. allies and the deal’s signatories, who have since been searching for ways to enable their companies to continue doing business with the Islamic Republic. All of the deal’s remaining members engage in trade with Iran, particularly for its oil.

The SVP will intend to serve as a “clearing house” of sorts for transactions with Iran in order to avoid involving central and commercial banks, who fear U.S. penalties on their operations. It’s a blatant show of defiance from foreign leaders who have expressed mounting frustration at Trump’s foreign policies, which have been characterized by trade war antics against allies and adversaries alike, as well as financial sanctions. Just on Tuesday, China’s vice-minister of commerce stated that Beijing and Moscow could combine their efforts to counter the negative impacts of Washington’s trade tariffs and sanctions on their economies.

Whether the Iran sanctions ‘skirting’ plan will actually work is a different matter. Washington has the power to expand its sanctions in response, but the scale of retaliation may depend on how far each side is willing to push its aims.

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