In my previous column I briefly touched upon certain views that American sanctions will be to dentrimental the U.S. in the long run. The Bulwark columnist Shay Khatiri warned in an article on July 26 that economic sanctions may be a good way to deal with adversaries in the short run, but in the long run this could have bad consequences for the U.S.
The Trump administration is eager to impose sanctions on countries it considers hostile. Sanctions escalate trade wars, dubbed the new Cold War. According to Khatiri, the excessive use of sanctions carries the risk of reducing their viability in the long run. One of the risks is the depletion of the U.S. dollar's power, which is the largest reserve currency.
The dollar accounts for 60 percent of global money reserves and 40 percent of international transactions. People around the world more often use American financial instruments for investment. U.S. sanctions include not only the target country, but also states and companies that deal with them. Those who are exposed to them, which are called secondary sanctions, are looking for ways to overcome their dependence on the dollar. The most concrete example was that EU countries, which suffered from sanctions imposed on Iran, developed new channels to allow payments to Tehran.
Trump’s withdrawal from the Iran Nuclear Agreement, as well as sanctions against Tehran, have led EU countries to build alternative financial channels. Britain, France and Germany, all signatories of the Iran Nuclear Agreement, established a mechanism called the Instrument in Support of Trade Exchanges (INSTEX) in order to overcome U.S. sanctions and resume trade with Iran. Thus, direct trade with Iran will be possible without having to use the U.S. dollar. Parties of the Iranian Nuclear Agreement discussed this mechanism in Vienna on Sunday.
The SWIFT, short for the Society for Worldwide Interbank Financial Telecommunication, is the dominant system of inter-banking financial transactions based on the U.S. dollar. Pointing that China and Russia have developed alternative systems to bypass the dominance of the dollar, Shay Khatiri notes that the number of SWIFT financial transactions performed by Russia in 2018 accounted for slightly less than half of its overall transactions in the same year. Albeit limited for now, the success of alternative channels in circumventing the U.S.-controlled international financial system is growing as it goes. Khatiri says China's “New Silk Road” project could further strengthen alternative channels. Khatiri points out that Iran, Venezuela and North Korea are quickly learning how to exploit these channels in order to bypass U.S. sanctions.
Trade wars harm both sides. For example, trade wars with China have led Beijing to seek a rapport with countries other than the United States. American farmers selling products to China are also harmed by Trump's additional customs tariffs to China. U.S. Secretary of Agriculture Sonny Perdue announced that new aid will be provided to farmers affected by the trade war with China. China's investments in the United States have fallen by about 90 percent since Trump took office. While China's direct investments in the U.S. were 46.5 billion dollars in 2016, this figure shrank to 5.4 billion in 2018.
To sum up, one the one hand, U.S. sanctions are a double-edged sword that will pierce itself in the long run. On the other, U.S. pressure has led countries exposed to it to look for new ways, new alternatives and new alliances. The debate about the international monetary system is intensifying. As the global financial system collapses, the needs of the global population for a more humane and fairer system are gradually deepening.