Since taking office President Trump has not hesitated to threaten or implement sanctions against countries like Venezuela and North Korea. Sanctions are useful tools, but Mr. Trump and bipartisan majorities in Congress run the risk of making them less effective.
The U.S. economy’s size is not the primary reason its sanctions are so powerful: Countries without a significant trade relationship with the U.S. can still be severely damaged by bilateral sanctions. Though the European Union’s gross domestic product almost matches America’s, EU sanctions are much less devastating. This influence derives from America’s central position in international finance—particularly its control over the invisible plumbing that allows money to move around the world.
Recognizing how much of their work touches the U.S., major foreign banks will often go so far as to treat themselves as “U.S. persons” for legal and regulatory purposes. Countries or entities subject to U.S. sanctions thus have a very difficult time with even simple banking transactions, which is catastrophic for trade.
Yet America’s dominant place in international banking, like its position in the broader international system, can be lost. The international financial plumbing can be changed with the investment of time and resources by banks, governments and regulators. So far there have not been sufficient incentives to make those changes, but governments and banks will reconsider if the U.S. abuses its position.
Policy makers and regulators in the U.S. have long been sensitive to this risk. They have taken it into account in the application of new sanctions and have worked closely with foreign banks to ensure they’re doing permissible business—even business barred to their American competitors. For example, outreach surrounding the Iran deal was designed to assure foreign businesses and regulators that remaining U.S. sanctions were tailored and not a back door to enforcing the sanctions lifted by the deal. Thanks to these efforts, major foreign banks working with Iran have largely chosen to work with U.S. officials and stay in careful compliance.
The U.S. government’s caution seems to have been lost with the latest sanctions against Iran, Russia and North Korea—legislation that passed with overwhelming support from both parties and was signed into law by a hesitant Mr. Trump. The new sanctions will do little to change the kinds of commerce allowed with the target countries. The law’s main function is to shift influence over lifting sanctions from the White House to Capitol Hill.
Congress has historically found it more attractive to levy sanctions than to lift them. Sanctions generally target adversaries, so that even if a country changes the policy that prompted sanctions, it likely will have other problems with the U.S. Some members of Congress will be tempted to promote these remaining issues as new reason to keep sanctions in place. That’s why the 1974 Jackson-Vanik restrictions on most-favored-nation status for Russia stayed in place for a generation after Russia opened up emigration restrictions, the legislation’s original aim. Mr. Trump is right to say the shift in power toward Congress will make it harder to use sanctions as a chit in international negotiations.
For those who are deeply concerned by Russian meddling in other countries’ elections—and by Mr. Trump’s apparent nonchalance—congressional authority over sanctions may feel like progress. For banks, governments and regulators abroad, it looks as if the U.S. is turning sanctions from means of achieving particular ends into permanent stigmas. That makes it more attractive to find ways to leave the U.S. banking system.
Mr. Trump also is threatening loudly to trash the Joint Comprehensive Plan of Action, better known as the Iran deal. Never mind that America’s international partners and the intelligence community agree that Iran is fulfilling its commitments. The U.S. built an international consensus that Iran’s nuclear program was a problem. European and Asian partners took appropriate action, suffering real economic harm by ratcheting back oil purchases and other commerce with Iran and then working to negotiate the deal. If the U.S. cannot take “yes” for an answer, those same partners likely will be at least as concerned about the threat posed by America’s financial power as the threat of Iran’s nuclear program.
In a time when U.S. consistency and reliability is openly questioned by some of America’s closest allies, threats of permanent sanctions will draw more attention to the risks of being dependent on the U.S. financial system. America’s importance as an international financial hub will not disappear overnight, and neither will the reach of U.S. sanctions. If the U.S. comes to be seen as an untrustworthy custodian, there will be a slow and inexorable erosion of America’s role and influence.
Sanctions compare favorably with any other tool the U.S. has—and certainly very favorably to military action. Sanctions can help address real problems in the world, which is why the U.S. should not fritter them away.
This article was originally published in the Wall Street Journal.
Comments(2)
Your article does not fully examine the problem of extra territoriality. Unlike the universal applicability of UNSC sanction, when the US unilaterally applies sanctions to change the behavior of foreign entities not under US jurisdiction, it is essentially illegally exceeding its authority. This could produce political and legal conflicts on which the US could likely be on the losing end. When such US sanctions actually go against the policies of foreign states, it could invite legal and political and moral intervention to nullify the effects of such sanctions in their particular jurisdictions. This could happen in the Iran case if the US pulls out and tries to enforce objectionable extra territorial sanctions on the other parties. It could also invite and justify the application of sanctions by others to influence the behavior of US entities in US jurisdiction such as the Arab boycott of Israel in years past. The preposterous idea from President Trump that trade would be cut with countries trading with North Korea is the ultimate ridiculous application of US extra territoriality that could even threaten international trade and security. Thus the problem of US overreach and extra territoriality and how to limit and avoid it is another reason why the US should tread carefully and respectfully with its international sanctions policies.
An exceptional article, a warning which should not be ignored by anybody having some US dollars in an account (some retirement money). There was a time when the U.S. economy’s size was the primary reason that the US dollar was the most desired currency in the world, and most and foremost everybody else accepted it cheerfully: July 1st 1944. There was also the hope that new institutions will bring peace and stability, after the long war started in 1914 (brief armistice, 1918-1933). That was the 1944 Bretton Woods Conference, known as the "United Nations Monetary and Financial Conference”. It is there and then that the US dollar become the world reserve currency, convertible into gold at $35 an ounce. To reiterate: it was not just the size of the US economy, it was that is also almost intact and splendidly efficient and multilaterally developed, and a middle class; it was that if you have a US dollar you get something for it; it was also the hope that the world will rely on rules, rather than war, embodied in the concept of United Nations, heavily promoted by the US. It is also the moment in history when every single country in the world, any single individual became ready to do anything (well, almost) to get US dollars. IBRD and IMF were also established at this conference. That was then. Now it is very different. In 1971 the US dollar became fiat currency, while still being the reserve currency. That was followed by a slight devaluation, from $35 to even $1800/gold ounce. Adam Smith was replaced by Milton Friedman; manufacturing engineering by financial engineering. The 2008 financial crisis questioned the ability of the US (as a whole) to be trusted with the ability to print gold; after all, in one night the FED could buy all assets in the world, paying with electronically generated US dollars. Next day will be ugly. Worse, “In 2017, SCO's eight full members account for approximately half of the world's population, a quarter of the world's GDP, and about 80% of Eurasia's landmass.” (Wikipedia). Worse, BRI (formerly OBOR, formerly Silk Road) is a gigantic conveyer belt moving back and forth goods between China and the rest. SCO and BRICS are growing larger and more assertive, in accordance with their newly acquired economic status (and nuclear triads), and their growing populations. And worst, 09/01/2017: “China sees new world order with oil benchmark backed by gold/Yuan-denominated contract will let exporters circumvent US dollar.”(Nikkei Asian Review).
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