U.S. Sanctions Harm America's Global Financial Hegemony


The United States remains the world’s most dominant power. Its military possesses the only truly global capabilities and its culture, for better or worse, is ubiquitous. The country is also home to historic levels of innovation. What few realize is that the basis of American power is its economy. And the U.S. economy is the world’s most dynamic because of the financial hegemony that the country has maintained since the end of the Second World War.

This financial hegemony has also allowed for the United States to enact policies that, for any other country, would likely make them financially insolvent. Yet, the fact that the U.S. dollar is the world’s largest reserve currency—and that oil is traded according to the American greenback—means that U.S. leaders are given a medley of policy options that are usually denied to most “normal” countries. The fact that the United States has a 100 percent debt-to-GDP ratio, or that America’s deficit spending is always increasing at historic levels has not negated foreign investment or the appeal of the U.S. dollar…not yet at least.

Ending America’s Financial Hegemony

Since the end of the Cold War, when the United States emerged as the dominant, unipolar superpower, countries such as China, Iran, and the resurgent Russian Federation, as well as the European Union sought to end what the former French foreign minister Hubert Vedrine once derisively referred to as America’s “hyperpuissance.” Thus, since 2000, various powers seeking to weaken America’s unipolarity have targeted its position as the world’s financial hegemon. And while the United States remains home of the world’s hegemonic currency, that position has eroded over the last 20 years. In the year 2000, the U.S. dollar accounted for 72 percent of the world’s financial transactions. Compare that to about 62 percent today. While still the majority, there have been concerted efforts over the last several decades to winnow down America’s hegemonic position in the global financial sector—all in the name of financial multipolarity. Also, Chinese yuan-based economic relationships exploded from 2009-2016 by a whopping 3,335 percent (as opposed to the U.S. dollar-based relationship during that time of a meager 15 percent).

The world’s economy has grown at an impressive rate since the end of the Cold War and the United States has helped to create an international system where the currency of other countries, like China’s yuan or the euro, can begin competing with the U.S. dollar. The diversification, therefore, is inevitable and natural—to a point. The Americans, however, have used their top dog status as the hegemonic financial power globally as a bludgeon against countries with whom they agree. And in some cases, American actions against rival states, such as Iran or Russia, have imposed grievous costs upon traditional U.S. allies in Europe and elsewhere.

Frankly, the excessive use of sanctions against rival states, whether it be Saddam Hussein’s Iraq, Iran, or the Russian Federation, have done more harm to America’s standing as a financial superpower than anything else. The United States has pioneered the use of sanctions as a “middle ground between [military] force and doing nothing,” according to the CATO Institute’s Richard Hanania. Yet, the history and function of U.S. sanctions has been overplayed and misunderstood according to both Hanania as well as Enea Gjoza of Defense Priorities.

Gjoza outlines four types of sanctions: economic, individual, financial, and secondary. Economic sanctions are the most commonly used and they are meant to destroy a target country’s “trade relationships at either the industry or economy-wide level.” The individual sanctions are popular today because they limit the negative side-effects of economic sanctions. By targeting individual elites in a given country with sanctions, those most responsible for the policies the U.S. government disagrees with will bear the brunt of the burden rather than their people. Financial sanctions attempt to prevent a target country from engaging in the American-led world financial system. The downside, as Gjoza points out, is that they are hard to roll back if concessions are needed and highlight the unfairness of the U.S.-dominated world financial system (leading other powers, even American allies, to call for a less American world financial system). Lastly, secondary sanctions, according to Gjoza, target corporations or persons doing business with the country being sanctioned. This is a potent tool, as it can multiply the impacts of existing sanctions, but it can also aggravate American allies (and it does).

The best form of sanctions tends to be multilateral, limited, and directed against weak states. When sanctions are employed against rival great powers, such as the Russian Federation, the results can have deleterious consequences to both the United States and overall world stability. Because Russia is too big to be contained through sanctions alone, American actions have likely pushed Moscow into a truly threatening posture while at the same time prompting Moscow to seek closer ties to the number one geostrategic rival to the United States, China.

Over the years, robust and enduring sanctions regimes against U.S. rivals imposed devastating costs on innocent people in the countries being targeted. In the case of American sanctions on Iraq throughout the 1990s, it is a known fact that innocent Iraqi citizens suffered more than the murderous elites who populated Saddam’s regime. In this way, then, the sanctions ended up harming the very people they were meant to empower. Ironically, the very people the sanctions were meant to harm—the Iraqi elites—ended up helping their bid to stay in power by weakening their potential domestic opponents. Further, sanctions have had the unintended effect of steeling resistance to the United States in those countries rather than weakening that resistance.

After all, in the words of Gjoza, “the U.S. has liberally leveraged [its dominant position in the world financial system] to pressure foreign governments, including European allies, in the hopes of changing their political behavior.” Very often, U.S. policymakers envisage using economic sticks to force political change within the countries that are inimical to American interests. Although, as we saw with Iraq, the copious use of sanctions did little to avoid what proved to be a terribly costly and destabilizing Mideast war.

Iran and North Korea Get by Despite Being Sanctioned

Today, the United States has not been able to use sanctions against the Islamist regime of Iran to roll back their hostility toward the U.S. or Iranian aggression against their U.S.-allied neighbors. At this point, any political change America seeks to impose upon Iran will likely come from the barrel of a gun rather than the economic legerdemain of wily officials at the U.S. Department of Treasury. Another absurd example of Washington’s bipartisan obsession with economic sanctions has been North Korea. Here is a land that is, for all intents-and-purposes, a pariah state of historic proportions. Yet, despite having comprehensive sanctions enacted—for decades—against it, the North Korean regime does not appear to be changing its behavior in any meaningful way. Just as with the Iranian and Iraqi examples, sanctions did not equal an amelioration of conflict. They led to greater conflict and far wider ranging ramifications for American global financial dominance.

Consider this: if a country is being sapped economically by U.S. sanctions, that country might embrace a use-it-or-lose-it mentality; they might try to strike hard and fast against the Americans before the sanctions totally gut them of their military and economic capabilities. This was precisely what transpired between the United States and the Japanese Empire in the run-up to the outbreak of conflict between the two powers in the Second World War.

American Sanctions Precipitated Pearl Harbor

As Edward S. Miller wrote in his fantastic book, Bankrupting the Enemy: The U.S. Financial Siege of Japan Before Pearl Harbor, Washington had taken a series of increasingly punitive financial and economic actions against Japan (who relied on the United States as their number one trading partner), even going so far as to deprive Japan the ability to trade oil, which most likely precipitated the Pearl Harbor surprise attack in 1941 more than anything else. The question of whether or not war with Imperial Japan could have been avoided absent of U.S. sanctions is not the purpose of this piece. But it bears noting that without harsh American economic and financial actions directed against Tokyo, it is quite unlikely that the Japanese would have dared risk their entire empire on December 7, 1941.

It’s very telling that the day before Tokyo ordered their fleet on its fateful mission against Pearl Harbor, the Japanese Imperial cabinet resigned en masse and was replaced with the war hawks led by General Hideki Tojo. Even Japanese Admiral Isoroku Yamamoto, the man who planned and led the attack on Pearl Harbor, was never convinced that Japan could defeat the “sleeping giant” that was America. The American moves against Japan’s economy, though, necessitated Tokyo’s absurd attack on Pearl Harbor.

Sanctions Do Not Avert War, They Compel It

Sanctions are effective in crippling target countries, but they also work to turn rivals into enemies, and enemies into desperate fanatics. Sanctions are an important tool in the toolbox of statecraft and should never be abandoned entirely. However, by pushing for greater sanctions, U.S. policymakers usually punish innocent people in those targeted countries, while inspiring greater levels of resistance; sanctions can also anger traditional U.S. allies who prefer to trade with the targeted states, and all of this not only likely leads to actual conflict but it also weakens U.S. dominance in the global financial sector—all of which harms long-term U.S. interests.

Going forward, as more challenges to America’s financial hegemony mount, policymakers must be more judicious in the application of sanctions and recognizing the inherent limitations and risks that an overreliance of sanctions pose.

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©2020, The Weichert Report. All Rights Reserved.

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