Sanctions: Economic scalpel or trade war bludgeon?

For many followers of international affairs, the barrage of sanctions-related news in recent years will have been difficult to ignore. From Chinese steps to ban imports from South Korea in response to the deployment of an American missile system in 2017, to the ubiquitous measures taken against Russia for invading Crimea and eastern Ukraine in 2014, economic sanctions have clearly cemented their position as a favored policy ‘weapon’ for dozens of governments around the world. While the use of such tools has evolved significantly in recent decades, the frequency with which economic sanctions are currently deployed threatens to undo 20-plus years of international efforts to develop responsible, proportionate, and ‘targeted’ sanctions. Instead, sanctions are at risk of being used as blunt and unilateral measures that primarily advance punitive and protectionist economic goals. 

Given the numerous sanctions-related developments over the past year, this piece picks up on Dr. Vlcek’s overview for the Transatlantic Puzzle on U.S. ‘dollar power’ last December. As he concisely points out, Washington’s ability to enforce sanctions on USD transactions around the world has been a major contributor to the frequency and effectiveness of U.S. sanctions for over two decades. For policy-makers in the U.S. government, that popularity certainly hasn’t evaporated in recent years. And thus, against the backdrop of escalating Sino-American geopolitical tensions, it is not surprising that sanctions have since featured prominently in the ongoing trade war. Last December’s detention of Meng Wanzhou, the Chief Financial Officer of Chinese telecoms giant Huawei, by Canadian police was connected to allegations that a subsidiary of Huawei had violated U.S. sanctions on Iran. Driven by long-time security hawk and Assistant for National Security Affairs, John Bolton, the Trump administration has been pressing China (and Chinese companies) to cease violating American and United Nations sanctions on North Korea in order to maintain a posture of ‘maximum pressure’ on the Kim Jong Un regime. Amidst intensifying political tensions and uncertain economic flags in response to the trade dispute, academics and former U.S. officials are voicing critical findings on the impact of President Trump’s ‘overuse’ of sanctions at this fragile juncture in the international order. 

First, we should step back and ask: why have economic sanctions become such a common element of U.S. foreign policy, and why are we now talking about U.S. ‘overuse’? The former question has been debated extensively by scholars (cf. Daniel Drezner), and the answer has myriad factors. Many harken back to the days of Woodrow Wilson, when the then-President, seeking to convince the American public to support the newly-founded League of Nations, toted economic sanctions as a ‘peaceful, silent, and deadly alternative to war’. In recent decades, American policy-makers in the Treasury Department have effectively reinforced Wilson’s legacy by adopting strict enforcement strategies and unparalleled intelligence-gathering capabilities to go after rogue states, narcotics traffickers, terrorist groups, and other politically-defined ‘bad actors’. After the attacks of 11 September 2001, a consensus emerged around the utility of financial sanctions as potent leverage for the U.S. to coerce, constrain, and signal sanctioned targets and intermediary corporate entities by freezing non-compliant and recalcitrant actors out of the global financial system. Adding to this momentum, the successful use of economic sanctions by President Obama on Iran between 2009 and 2015 was widely credited with helping to bring Iranian authorities to the negotiation table, ultimately contributing to the signing of the Joint Comprehensive Plan of Action (JCPOA). On the Iranian deal, U.S. Treasury and State Department officials learned to work with major international banks to blacklist ‘targeted’ nuclear-affiliated and radical political elements of the Iranian regime––a contrast to the devastating corruption and humanitarian suffering encouraged by the ‘comprehensive’ sanctions placed on Saddam Hussein’s Iraq in the 1990s. Although the nuclear-related sanctions regime on Iran also arguably caused economic harm more broadly than on the intended target entities, the coordination of sanctions by the P-5 + 1 parties vindicated those who believed that targeted sanctions––along with other diplomatic tools––could be successfully used in international negotiation. 

In contrast, the Trump administration has all but abandoned several key tenets of successful targeted sanctions policy, including multilateral cooperation and selective application. In turn, this approach is damaging the legitimacy of all forms of U.S. sanctions and undermining their short- and long-term potency. For the near-term, the absence of international support for Trump’s sanctions policy on Iran has contributed to the evaporation of U.S. credibility on the world stage. And many in Washington foreign policy circles have already warned about the longer-term potential for sanctions misuse to incentivize foes, such as Russia and China, to hasten ‘de-dollarization’. It’s all quite the contrast to the late 1990s, when the U.S. (and others, such as Switzerland) pioneered sophisticated approaches to developing targeted financial sanctions such that widespread human suffering could be avoided. Yet, instead of voicing confidence in the Trump administration’s ability to improve U.S. sanctions, the discussion is now centered on the overuse, misuse, and effectively a dumbing-down of this extremely powerful tool. 

Meanwhile, Trump backers argue that the U.S. continues to use sanctions in a similar vein as the Obama administration, namely: to force North Korea and Iran to abandon their pursuit of nuclear weapons, to call attention to the Maduro regime’s flagrant human rights violations in Venezuela, and coerce Russia into ceasing its malign activity. However, the fundamental distinction remains that the Trump administration has been using sanctions as foreign policy in and of itself, rather than as a tool to achieve realistic policy objectives. Unfortunately, sanctions are thus bound to become further scrutinized at home and abroad as a reckless feature of Trump’s isolationist foreign policy. Framed as a Trumpian foreign policy, rather than as a general foreign policy tool, sanctions become subject to the whims of broader geopolitical fracturing irregardless of the responsible and strategic efforts of officials in the Treasury Department.

As such, U.S. sanctions, once praised for their ‘smart’ application and perceived surgical tact, are quickly becoming an intimate part of the economic bludgeon with which the Trump administration is hitting the likes of the European Union, Russia, China, and other major global economies. From here, the eroding legitimacy of U.S. sanctions among leading powers bodes well for smaller sanctioned nations, such as Venezuela, North Korea, and Iran, since it will weaken the psychological and economic blow of their imposition and allow an outlet of support to rival U.S. pressure. Henceforth, the Maduro regime is able to look to Russia and China for economic aid, North Korea is empowered to ask the U.S. President directly for total sanctions relief without preconditions at the most recent round of negotiations, and Iran is able to work with the EU to establish a ‘special purpose vehicle’ for companies to circumvent U.S. penalties. 

Returning to the U.S.-China trade war, how U.S. policy-makers proceed to enforce Chinese violations of U.S. sanctions represents a critical area to watch in the coming months. For instance, since re-introducing secondary sanctions on Iran’s mining sector earlier this year, White House officials are reportedly encouraging the Treasury to punish Chinese companies for importing oil from Iran. While this would be seen a drastic escalation of tensions, even a multi-million dollar fine against a potential Western violator of U.S. commodity sanctions against Iran would send tremors throughout the market: although U.S. prosecutors previously went after big multinational banks for sanctions violations ($8.9bn for BNP Paribas in 2014), energy majors have largely not incurred such significant punishments. Moreover, while asset freezes and other financial restrictions can be easily imposed on a specific group of actors, gathering intelligence on ship movements and enforcing sanctions against oil companies has proven more cumbersome. Yet for all their differences, the financial system, oil industry, and sanctions are deeply intertwined. All rely on the trusted U.S. dollar, and loathe the political and monetary uncertainty that de-dollarization might bring. The greatest threat to the longevity of effective U.S. sanctions therefore does not reside in Beijing, Moscow, or Tehran, but in the Oval Office. 

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