The World Looks to Abandon the Dollar as US Sanctions Tighten Their Grip

The World Looks to Abandon the Dollar as US Sanctions Tighten Their Grip by  for Mises

When the US places financial sanctions on one country, it de factosanctions many other countries as well — including many of its allies.

This is because not all countries and firms are interested in participating in the US sanctions-based foreign policy. Sanctions, after all, have become a favorite go-to strategy for American policymakers who seek to isolate or punish foreign states that don’t cooperate with US international policy goals.

In recent years, the US has been most active in imposing new sanctions on Russia and Iran, with many consequences for US allies who are still open to doing business with both of those countries.

The US can retaliate against organizations that violate US sanctions in a variety of ways. In the past, the US has sued firms such as the Netherlands’s ING Groep and Switzerland’s Credit Suisse. Both firms have paid hundreds of millions of dollars in fines in the past. The US has been known to go after individuals.

US bureaucrats like to remind firms that penalties await them should they not buckle under the US sanctions plan. In November 2018, for example, US secretary of state Michael Pompeo announced:

I promise you that doing business in Iran in defiance of our sanctions will ultimately be a much more painful business decision than pulling out of Iran.

Fear of sanctions has caused some firms to stop work mid-project, such as when Swiss pipe-laying company Allseas Group abandoned a $10 billion pipeline that was nearing completion.

Not surprisingly, these firms — who employ people, pay taxes, and contribute to economic growth — have put pressure on their governments to protest the mounting interference from the US in private trade.

As a result, some European politicians are increasingly looking for ways to get around US sanctions. In a tweet last week, Germany’s deputy foreign minister Niels Annen wrote

Europe needs new instruments to be able to defend itself from licentious extraterritorial sanctions.

Another “senior German government official” concluded,

Washington is treating the EU as an adversary. It is dealing the same way with Mexico, Canada, and with allies in Asia. This policy will provoke counter-reactions across the world.

But how is the US so easily able to sanction so much of the world, including companies in huge and influential countries like Germany?

The answer lies in the fact that the US dollar and the US economy remain at the center of the international trade system.

SWIFT: How the US Sanctions the World

By the waning days of the Cold War, the US dollar had become the dominant currency in the noncommunist world, thanks to the Bretton Woods agreement, the petrodollar, and the sheer size of the US economy.

Once the Communist Bloc collapsed, the dollar was poised to grow even more in importance, and the world’s financial institutions searched for a way to make global trade and investing even faster and easier.

Henry Farrell at the National Interest describes what came next:

Financial institutions wanted to communicate with other financial institutions so that they could send and receive money. This led them to abandon inefficient institution-to-institution communications and to converge on a common solution: the financial messaging system maintained by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) consortium, based in Belgium. Similarly, banks wanted to make transactions in the globally dominant currency, the U.S. dollar.…In practice, the physical infrastructure, for a variety of efficiency reasons, tended to channel global flows through a small number of central data cables and switch points.

At the time, Europe was still years away from creating the euro, and it only seemed natural that a centralized dollar-transfer system be developed for all the world.

SWIFT personnel have always maintained that their organization is apolitical, neutral, and only interested in providing a service. But geopolitical realities have long intervened. Farrell continues:

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