Counting the cost of financial warfare

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Publish Date : 11/26/2019 19:29
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The overuse of financial sanctions has spurred Russia, China, and now the EU to work on alternative institutions that would place their companies outside the reach of the U.S.

An article by Enea Gjoza, a research fellow and defense scholar at Defense Priorities, has been published on “Counting the cost of financial warfare”. The article says that the US has a dominance in global finance so it elaborates reasoning and arguments for recalibrating sanctions policy to preserve U.S. financial hegemony.


It believes sanctions should be accompanied with an assessment of the cost to the American economy, in order to better assess their relative value. This point is particularly important, as despite 8,000 U.S. sanctions currently in place, policymakers have no reliable data about how much that forgone business has cost the American economy and they do not analyze sanctions’ overall effectiveness in achieving broader U.S. policy goals or objectives such as national security.
In this report we take a look at some important points of the article:

 

- The American economy, dollar, and banking system create unparalleled power for the U.S. in the global financial system. This power provides disproportionate influence over the world’s key economic and financial institutions, regulatory authority over major foreign companies and banks, and allows borrowing on favorable terms and in dollars, enabling long-term deficit spending.


- U.S. policymakers are increasingly deploying financial sanctions to punish or coerce other states. Once targeted at weak rogue states, sanctions are now used against great powers and allies.


- These sanctions yield few political victories because they ask too much and are often implemented reflexively, to punish, rather than strategically, to achieve a desired outcome. But they carry serious political and economic costs—damaging relations with allies and locking American companies out of foreign markets.


- The overuse of financial sanctions has spurred Russia, China, and now the EU to work on alternative institutions that would place their companies outside the reach of the U.S.


- While this parallel infrastructure is still in the early stages, it could threaten U.S. financial dominance and the status of the dollar if it succeeds—balkanizing the global financial system into different spheres of influence.


- The U.S. need not forswear sanctions altogether but should dial them back. Sanctions should be deployed against adversaries rather than allies or partners—rarely and strategically against great powers—in pursuit of clear, attainable goals, and continually re-evaluated for effectiveness.


- With no perceived threat, other countries will likely abandon their alternative institutions, which are expensive and worthwhile only so long as U.S. action makes the current system unreliable.

 

DO SANCTIONS WORK?
Sanctions are a frequently-used tool because the domestic politics behind them are compelling. Imposing sanctions provides a political bump to policymakers who want to appear strong during international disputes without incurring domestic political risk. In these cases, whether the sanction works well or not as a policy tool is less important than its ability to be touted before domestic audiences. As long as sanctions remain on, policymakers can argue that the target entity is paying a price for its behavior, regardless of whether the sanction is actually advancing the desired foreign policy objective.


Scholars have extensively examined the effectiveness of sanctions; the research shows economic sanctions tend to be ineffective at changing state behavior, primarily because other self-interested nations will step in to fill the void where the U.S. or its allies have severed relations. For example, with U.S. and European firms locked out of Iran due to the Trump administration’s “maximum pressure” policy, Chinese companies have provided Iran with a lifeline, in the process establishing near monopolies for themselves in key sectors of the Iranian economy. In this way, sanctions can at times be strategically self-defeating.


Additionally, sanctions are often used to compel a costly political concession from an adversary—one that touches on a perceived national interest that the target government is willing to endure economic hardship to protect. Despite several rounds of U.S. sanctions designed to deter Pakistan from pursuing a nuclear weapon, Pakistan ultimately ignored outside pressure and acquired its own nuclear arsenal to defend against archrival India.


The most comprehensive sanctions ever imposed—on Iraq between 1990 and 2003—nearly halved its GDP but led to neither regime change nor major political concessions. In autocracies, which tend to be the primary targets, sanctions often help strengthen the ruling regime, allowing it to deny scarce resources to domestic opponents while lavishing them on a narrow group of supporters.


When sanctions are effective , it tends to be under the following conditions: they are applied quickly, decisively, and in a multilateral manner; the target is “small and weak;” they are used in pursuit of “modest policy goals;” they are used against semi-democratic rather than authoritarian regimes; they are coupled with positive inducements; and the target believes the sanctions will be adjusted based on its behavior.

 

 

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“ Counting the cost of financial warfare ”