Trump weaponises the dollar in drive to put America first
Simply sign up to the US trade myFT Digest -- delivered directly to your inbox.
For a long time the business of economic and financial sanctions was relatively sedate. They were usually applied in a fairly consistent way to a generally predictable set of countries. True, their sophistication increased with the complexity of the world financial system and supply chains. But their use was often politically constrained by corporate interests in the sanctioning country.
Then came Donald Trump. The US president has been far more willing than his predecessors to mix economic and security considerations. Indeed, since he regards reliance on imports as intrinsically damaging to the US economy, his worldview is that the two are necessarily linked.
This has created an atmosphere in which the US has been more prone to reach for sanctions and much more careless about their knock-on effects. Further uncertainty arises from Mr Trump’s readiness to shunt governments — notably Iran — between the “friends” and “enemies” columns in his mental spreadsheet.
The extent to which security and economic concerns can be intertwined was underlined by Canada’s arrest of Meng Wanzhou, chief financial officer of Chinese technology company Huawei — at the US’s request — for allegedly breaking sanctions on Iran.
The issue is tied up with Mr Trump’s obsession with China’s role in the global economy and particularly in tech, where he has been trying to assert US self-sufficiency and dominance. He has identified Huawei in particular as a security threat to the US, and is trying to drive it out of 5G systems worldwide. Mr Trump even mixed trade with security when he offered to intervene in the Huawei case if it helped seal a trade deal he was seeking with China.
Mr Trump is also prepared to use tools such as the dollar’s dominance in banking and payments in a much more aggressive way.
The requirement for foreign institutions to have correspondent banking arrangements in the US to undertake dollar transactions increases the reach of the Treasury’s sanctions enforcers. This added scope means many companies and policymakers are paying attention to the threat of sanctions for the first time. Leigh Hansson, partner at the law firm Reed Smith, says: “We are increasingly being contacted by companies from countries like China where there hasn’t been much interest in the past.”
Iran has proved to be a test of how other governments and companies react. Ms Hansson says: “The structure of the current US sanctions on Iran has generally been about the same as before but there has been a far broader reach.” Most big companies have quit Iran and do not even attempt to supply products exempted from sanctions, such as food or medicine.
Anahita Thoms, head of the trade practice at the law firm Baker McKenzie in Germany, says that the overall effect is to create an atmosphere of anxiety where companies simply pull out of Iranian trade altogether. The modern globalised world’s extended supply chains increase the risk that some business in the process, perhaps a transport company, could get sanctioned even as products are being shipped. “The practical reality is that many companies decide they don’t want to be involved at all,” she says.
The weighty consequences of breaching US sanctions was underlined in 2018 when French bank Société Générale paid $1.3bn to resolve American accusations that it handled billions of dollars in transactions to entities in Iran, Sudan, Cuba and Libya between 2003 and 2013. BNP Paribas paid $8.9bn to settle a sanctions case in 2014.
It seems highly unlikely that any other major government will be able to restrain or bypass the US’s wholesale remodelling of the sanctions landscape. Governments in the EU, which helped broker the Iran deal, are unhappy with the effect of sanctions. They talk enthusiastically about the euro eventually replacing the dollar as a primary currency for bank funding and trade invoicing, undermining the US’s ability to weaponise the payments system for its own ends. But the European currency has its own weaknesses which prevent it playing that role and seem unlikely to be fixed for decades.
Trade Secrets is the FT’s must-read daily briefing on the changing face of international trade and globalisation.
Sign up here to understand which countries, companies and technologies are shaping the new global economy
Meanwhile, the EU’s attempts to allow European companies to ignore US secondary sanctions, which America tries to enforce worldwide, have largely failed. It has updated its “blocking regulation”, which is aimed at preventing companies from obeying extraterritorial sanctions. But caught between the rock of US sanctions and the hard place of EU retribution, businesses will often choose the former. “Reality dictates that enforcement risk on the US side is significant, while on the EU side it is manageable,” Ms Thoms says.
The official European attempt to avoid the collateral damage from sanctions has been to create Instex, a type of barter instrument which avoids the dollar payments system. But companies are still reluctant to get involved in a mechanism which will put them at risk of disfavour in the US.
“There is not much information about Instex and it only covers food and medicine,” says Lourdes Catrain, a partner at the law firm Hogan Lovells. “The scope of US sanctions is very wide and it [Instex] isn’t bulletproof against them at all.”
The world has discovered just how much impact the US can have if it is prepared to inflict collateral damage on all companies connected to a supply chain with a country it wants to sanction. Eventually, those companies and other governments may find ways to cope with the threat. For the moment, at least for broad sanctions on a country like Iran, they are mainly choosing to get out of the way.