How Donald Trump is emerging as a big threat to the dollar
Today, the US is acting counterproductively to its own interest to safeguard the currency's centrality.
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How to navigate America’s new extraterritorial sanctions targeting Iran has become an important diplomatic test for India and other democracies concerned about President Donald Trump’s pursuit of aggressive unilateralism.
Many of them have already taken an economic hit, in the form of higher oil import bills, from Trump’s unilateral pullout from the multilateral nuclear deal with Iran. The US has also imposed extraterritorial sanctions to punish Moscow: The new ‘Countering America’s Adversaries Through Sanctions Act’, or CAASTA, which came into effect on January 29, seeks to stop other countries from making “significant” defence transactions with Russia, a leading arms exporter.
The US is armed with not just unmatched military might but also unrivalled financial power from the role of the American dollar as the world’s reserve currency. As the world’s dominant currency that greases the wheels of the global financial system, the US dollar equips America with tremendous economic leverage while conferring important advantages to its economy.
By imposing extraterritorial — or, as it likes to euphemistically portray them, “secondary” — sanctions, the US seeks to effectively extend its jurisdiction far beyond its borders. Such sanctions, however, run counter to international law, including the United Nations Charter and the rules of the World Trade Organisation.
It is one thing for the US to invoke national security or other grounds as a rationale to impose punitive trade sanctions on a country, including prohibiting American persons and companies from engaging in transactions with the designated state. It is quite another for the US to use extraterritorial sanctions to block trade and financial activities by non-US parties with that country — in other words, to coercively turn national actions into global measures, in breach of the sovereignty of other states.
Through extraterritoriality, the US aims not only to sharpen the impact of its sanctions but also to advance its own geopolitical and commercial interests. One example is how the US today is ingeniously employing the sanctions threat under CAASTA to wean countries as diverse as India and Turkey off their craving for Russian weapons so as to boost its own arms sales. The US is already the world’s No 1 exporter of weapons, accounting for 34 per cent of all global sales.
In the past, few international players were willing to flout US extraterritorial sanctions for fear of being locked out of the US financial system and barred from doing business with American entities. But Trump’s aggressive unilateralism on matters extending from trade and global warming to Iran and Israel has prompted calls for defiance even by US allies.
The European Commission has decided to revive its “blocking statute” to prevent European firms from adhering to the new US sanctions against Iran. The commission hopes its blocking law will take effect before August 6, when the first batch of re-imposed US sanctions against Iran kick in, including on trade in precious metals, coal, aluminium and steel.
Trump’s shipping- and petroleum-related sanctions — the second set — are scheduled to enter into force on November 4. But global shipping operators and tanker owners are already pulling back from Iran-related business.
Under Trump’s predecessor, Barack Obama, foreign companies were held hostage by America’s Iran-related extraterritorial sanctions, forcing them to cease or cut oil and other business dealings with Tehran between 2012 and 2015. But the US at that time secured wide support from an international community keen to block Iran from developing nuclear weapons. This time the US is acting alone. It is seeking to tighten the screws on Iran after having reneged on the Iran deal.
In this situation, the Trump administration will not find it easy to coerce the rest of the world to comply with its Iran-related sanctions regime. Even Washington’s extraterritorial jurisdictional claim in relation to the Russia-centred CAASTA is being challenged.
Turkey, a NATO ally, has threatened reprisals if the US cancels the F-35 fighter-jet deal with it in response to its contract with Moscow to buy the S-400 long-range air and anti-missile defence system. India also appears all set to import the lethal, interceptor-based S-400 system.
On Iran, even if the US succeeds in browbeating some vulnerable countries into abiding by its new sanctions, it will likely find it difficult to secure broad international compliance.
China, India, Japan and South Korea together account for almost three-quarters of Iran’s oil exports. China, ever ready to swoop in to exploit opportunities in sanctions-hit countries, will find ways to circumvent the new sanctions, as it did in the previous round, including by boosting imports of Iranian fuel oil. It used the earlier sanctions to deeply penetrate the Iranian economy. Trump’s new sanctions are another diplomatic boon for Beijing.
Past experience indicates that when the US is internationally isolated, it ultimately caves in to the demands of its friends who show resolve to defy its sanctions threat. For example, in 1997, the US reached an agreement with the EU to suspend enforcement of the extraterritorial dimensions of its Cuba-related sanctions after the threat of an EU complaint to the WTO.
Today, the US is acting counterproductively to its own interest to safeguard the dollar’s centrality: It is leaving other countries with little choice but to work around its sanctions by using non-dollar currencies so as to avoid the American banking system. This development, and Trump’s other actions could ensure that the dollar’s days as the world’s reserve currency are numbered.
(Courtesy of Mail Today)