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eric reguly

Iran is the economic equivalent of a Group of Seven country. With a population of 80 million, more than double Canada's, it's a big and tempting emerging market. By developing-country standards, its citizens are well educated and fairly wealthy. The country sits on the world's fourth-largest oil reserves and has enormous pent-up demand for everything from cars and aircraft to smelters and smartphones.

Iran has been starved for these goodies since 1979, when Western sanctions were imposed after the fall of the Shah and the hostage crisis that followed. They were tightened in recent years but largely lifted earlier this month, when Iran, under reformist President Hassan Rouhani, agreed to wind down Iran's nuclear development ambitions.

Now the race is on to supply Iran with all the bits and bobs it needs to overhaul its decrepit economy. Canada should be at the forefront of the sales onslaught; it's not and may never be. So far, in transportation – aerospace and trains – and in energy services, two areas where Canada is globally competitive, it's a big, fat zero.

How to explain the Canadian no-show when European companies from France's Airbus to Italian oil-engineering giant Saipem are already piling up tens of billions of euros of Iranian contracts? Impossible to say for sure, but Canada's diplomatic naiveté may have something to do with it.

Canada, like the European Union, imposed tight sanctions on Iran in 2012. In September, then prime minister Stephen Harper closed the embassy in Tehran, expelled Iranian diplomats from Canada and called Iran "a clear and present danger." There was more. Canada also listed Iran as a state sponsor of terrorism and passed the Justice for Victims of Terrorism Act, which allowed terrorism victims to sue countries that are listed as terrorism sponsors.

As Canada severed all diplomatic relations, the EU kept the diplomatic and trade door open – even as it tightened the sanctions screws. In November, an Iranian news agency reported that Fiat Chrysler Automobiles NV, led by Italian-Canadian CEO Sergio Marchionne, had held talks aimed at building commercial vehicles in Iran. The French and the Italians obviously found quiet ways to keep their Iranian relations intact; even before Mr. Rouhani made his official EU debut in Rome on Monday, it was widely reported that Iranian airlines had arranged a deal to buy 114 Airbus passenger jets.

Canada, like all other Western countries, had legitimate concerns about Iran's dire human-rights record – the relationship between Canada and Iran turned critical in 2003 when Zahra Kazemi, a photographer with Canadian and Iranian citizenship, was killed while in custody in Iran. And it had legitimate concerns about Iran's nuclear ambitions and its support of the Assad regime in Syria.

But its decision to end all diplomatic relations no doubt put Canada and its industries at a huge disadvantage – and made Canada look like a hypocrite: During the sanctions era, Bombardier could make no effort to promote its airplanes in Iran ahead of the inevitable wind-down of the sanctions; meanwhile, Canada was forging ahead with a $15-billion deal to ship made-in-Canada armoured vehicles to Saudi Arabia, another country with a grim human rights record.

Canada has a long history of misreading geopolitics and botching foreign deals. In 1979, then prime minister Joe Clark fulfilled a campaign promise by announcing he would move the Canadian embassy in Israel from Tel Aviv to Jerusalem, pleasing the Israelis to no end but earning the ire of the entire Arab world. Bell Canada, which had a big contract in Saudi Arabia at the time, and other Canadian companies with Middle East business, freaked out and complained to the government, forcing Mr. Clark into a humiliating climbdown.

Canada need not lose its Boy Scout image, at least not entirely. Its biggest companies need not take outlandish risks, as engineering and construction company SNC Lavalin did in Libya where it cozied up to the Gadhafi regime, only to get tangled in epic corruption and bribery allegations that hollowed out its executive team in Montreal. But Canada need not take a bad situation and make it worse, as Mr. Harper and his foreign minister, John Baird, did in 2012, when they became outright antagonists to Iran.

The EU took a much more sensible diplomatic approach and is now reaping the rewards. Italy alone has lined up €17-billion of contracts in recent days. Airbus and other French companies will probably bag contracts of similar size or larger.

Bailed-out Bombardier, which is desperate to find buyers for its ailing C Series jet, could get shut out of the Iranian sales bonanza. So could Canadian oil companies, which should be in prime position to modernize Iran's energy infrastructure. Maybe their products and services are not what Iran needs. Or maybe in a part of the world where the politics and the economy are so intertwined, Iran may have decided that it's revenge time. Canada is now trying to find ways to end its sanctions against Iran, a process complicated by Iran's status in Canada as a state sponsor of terrorism. When they do disappear, it may be too late for Canadian exporters.