Khatami worked to improve relations with other countries visiting many other countries and holding a dialogue between civilizations and encouraged foreigners to invest in Iran. He announced Iran would accept a two-state solution for Palestine if Palestinians agreed to one, relaxed restrictions on the Baháʼí, and assured Britain Iran would not implement the fatwa against Salman Rushdie. Several European Union countries began renewing economic ties with Iran in the late 1990s, and trade and investment increased. In 1998, Britain re-established diplomatic relations with Iran, broken since the 1979 revolution. The United States loosened its economic embargo, but it continued to block more normalized relations, arguing that the country had been implicated in international terrorism and was developing a nuclear weapons capacity. In his State of the Union Address, United States President George W. Bush labeled Iran, along with Iraq and North Korea, as an "Axis of evil."