February 9, 2021 | Is the US using too many sanctions?
Will US sanctions over-use backfire in the long-run?
Early exploration of how sanctions can undermine US interests in the long-run
Related notes:
The US Dollar’s Global Dominance and the Internationalization of the Chinese Yuan (Renminbi)
How will the Chinese government benefit from issuing its own digital currency?
Today we’re initiating an exploration of the role of sanctions in US foreign policy. We’ll specifically focus on financial sanctions, their effectiveness, and undesirable second-order consequences such as destabilization of the US dollar, severe economic fallout, and the alienation of US allies.
Disclaimer: I’m neither defending nor refuting any particular viewpoint on this topic. Today's notes are intended to be an initial effort to understand emerging trends related to US sanctions, US sanctions' effectiveness in achieving geopolitical goals, and the long-term impact of sanctions on the US dollar’s reserve currency status.
This month, the think tank Defense Priorities published a concise overview (“the overview”) of the mechanisms and methodology underpinning US sanctions as a geopolitical tool for advancing US interests.
Defense Priorities outlines four types of US sanctions:
Economic sanctions
Cut states off from markets for goods (US embargos, etc.)Financial sanctions
Cut off access to banking, capital, and dollar marketsIndividual sanctions
Apply economic, financial, and travel restrictions against particular people, often political and business elites in foreign nationsSecondary sanctions
Target economic actors for doing business with sanctioned entities or states
Financial sanctions will be the main focus today and in future notes. They are significant because their authority is embedded within the US dollar’s position as the global reserve currency. There are enormous advantages to being the country with the power to print the world reserve currency, and it’s not easy to obtain this status.
In previous notes, I compare the US dollar’s position as the global reserve currency to a computer operating system:
Consider the way Microsoft leverages its Windows operating system to introduce (and often compel) its users to adopt Microsoft’s software and services.
It’s definitely convenient to be able to use Outlook to send and receive MS Word files across the world with other Windows users. However, Microsoft uses Windows’ dominant position to box out its competition, and force users to adopt features they may not want or need.
The logic is similar to the relationship between the United States and the US Dollar. The United States is Microsoft, and the dollar is Windows. Banks, financial institutions, and even entire countries are the end-users.
The United States is beginning to rely more on financial (US dollar) sanctions in recent years.
Referring to the chart below, we can clearly see a surge in US sanctions and designations from the beginning of the Obama administration through until the end of the Trump administration (2009-2019).
According to Defense Priorities:
“Washington is increasing its use of sanctions. While the Clinton administration averaged around 8 new sanctions designations per year, the Obama administration average more than 525 per year, and the Trump administration added more than 975 per year.”
Moreover, just because the US is using more sanctions doesn’t mean it’s an effective strategy for facilitating positive outcomes:
“Sanctions rarely succeed because (1) they tend to demand states cease activities their leaders deem critical to their rule or security and (2) often other markets can open to replace those sanctions close.”
If the Biden administration stays on pace with this trend of heightened use of US sanctions designations, then we could begin to see cracks beginning to form in the rules-based order.
China is already in the process of developing its own state-backed digital currency. This isn’t surprising because China has been open about its desire to achieve independence from the US dollar for years.
However, what’s happening now is we’re starting to see pushback from traditional allies like the European Union who are now beginning to develop their own digital currencies as a means of avoiding US economic influence as well.
It’s not a small matter that the EU is attempting to gain this kind of independence from the US. Especially given that so much of the US’s global influence depends on control of the world’s reserve currency and the global financial system.
I can’t prove this connection yet, but there’s a growing body of evidence to support the idea that US over-reliance on financial sanctions will directly undermine the US dollar’s global reserve currency status.
Although there are no viable alternatives to the US dollar, my underlying thesis is that US sanctions over-use will ultimately incentivize both non-allies and allies to develop their own means of reducing exposure to US dollars.
I will return to this topic in future notes. If you have any questions, comments, or ideas for suggested reading, please feel free to comment below or reach out to me directly at tellierkevin@gmail.com or Twitter DM.
Thanks for reading! - Kevin
Additional Notes, Reading, Resources
Recalibrating Sanctions to Preserve US Financial Hegemony (Defense Priorities)
EU wants less dependence on US dollar (Modern Diplomacy)
On January 19 the European Commission released a preliminary plan which is designed to reduce the European Union’s dependence on the US dollar. In addition, the plan signals an intention to protect European companies from Washington-imposed extraterritorial sanctions. As a long-term strategy, it states an intention to “considerably” increase the role of euro as an international currency.
EU seeks to cut reliance on U.S. dollar, other financial centres (Reuters)
The European Commission said on Tuesday it would seek to boost the international role of the euro and build European financial infrastructure so that the EU becomes more independent of outside financial centres and the dominance of the U.S. dollar.
Sanctions Programs and Country Information (US Treasury)
OFAC administers a number of different sanctions programs. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.
China’s National Digital Currency DCEP / CBDC Overview
China’s national digital currency DCEP (Digital Currency Electronic Payment, DC/EP) will be built with Blockchain and Cryptographic technology. This revolutionary cryptocurrency could become the world’s first Central Bank Digital Currency (CBDC) as it is issued by state bank People’s Bank of China (PBoC).