The United States frequently reacts to adverse foreign events by imposing economic sanctions. Sanctions are attractive because they are easy to impose, tend to have little budgetary impact, and, do not subject U.S. military personnel to death or injury. But the historical record shows that sanctions are usually ineffective. And the accumulated weight of economic sanctions, which are readily imposed but rarely repealed, could eventually jeopardize the U.S. dollar’s role as the world’s reserve currency, making it harder for the federal government to finance the country’s growing debt.
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The first high-profile use of economic sanctions in the modern world occurred in 1935. The League of Nations, the interwar predecessor of the United Nations, voted to sanction Italy for invading Ethiopia. But Italy was undeterred, and its fascist regime was only ejected from Ethiopia by military action during World War II. Trade restrictions on Cuba date back to the Eisenhower years and have been in force continuously since 1962. But 60 years later, Cuba’s communist regime remains in power.
Similarly, various U.S. and international sanctions have been imposed on North Korea since 1950. And while economic sanctions may have helped bring Iran to the negotiating table over its nuclear weapons program, the Islamic regime has remained in place since the U.S. first imposed restrictions in 1979.
There is little reason to believe that economic sanctions being imposed on Russia by the United States and Europe will break Vladimir Putin’s regime or bring an early end to its military invasion of Ukraine. Higher energy prices arising partly from the economic sanctions are filling Russian government coffers, helping it continue its aggression.
The Russian Ruble declined sharply after sanctions were imposed but rebounded. The currency is now stronger than it was in February, and the Russian Central Bank has been able to lower its key interest rate back to pre-war levels.
Long-term, if banks, companies, and countries find the U.S. sanctions regime too onerous, they might seek alternatives to the U.S. dollar-based international payments system. As a 2021 Congressional Research Service report explained, Russia and China were actively searching for alternatives to U.S. dollar-based trade before Russia invaded Ukraine. Similarly, during the Trump era, France and Germany tried to create a special purpose vehicle that would allow them to trade with Iran while avoiding secondary sanctions.
Fortunately for the United States, alternatives to the dollar have significant drawbacks. Because the European Union often employs sanctions as well, the Euro provides limited benefits in terms of flexibility. China might welcome the opportunity to replace the dollar with its Renminbi. Still, banks, businesses, and other countries would worry about China’s capital controls and the government’s penchant for manipulating and changing rules. China is also currently experiencing severe economic headwinds.
The United States benefits from the dollar being the world’s reserve currency. Foreign central banks and other international players demand U.S. dollar-denominated assets, such as Treasury securities, even if they provide negative real returns. But if more countries see a need to circumvent the dollar-based system and can find reasonable alternatives (such as barter), Americans could face even higher interest rates. And, with over $30 trillion in national debt to service, the federal budget would become more strained as interest rates rise.
Sanctions are an attractive way to state U.S. principles and imply something is being done. Unfortunately, sanctions are rarely effective and have substantial costs. The U.S. Treasury’s Office of Foreign Asset Control has a list of over 10,000 sanctioned individuals and organizations, so rather than continuing to layer more and more sanctions onto those put in place over the last 70 years, the U.S. should prune restrictions that have outlived their usefulness and fight the temptation to impose more.
In essence, it is better to find other means from dialogue to military blockade (instead of economic sanctions) to deal with an “unlawful” action by a “rogue” state. So long as the U.N. (with its veto) remains powerless, the resolution to several crises remains an illusion. And America’s sanctions only mollify its local vote base for now.
Reference:
Sanctions are ineffective and could jeopardize US fiscal health, Marc Joffe, The Hill, 21 June 2022
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