Sanctions are ineffective and could jeopardize US fiscal health
The United States frequently reacts to adverse foreign events by imposing economic sanctions on other countries. Sanctions are attractive because they are easy to impose, tend to have little budgetary impact, and, most importantly, 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 And the accumulated weight of economic sanctions, which are readily imposed but rarely repealed, could eventually jeopardize the U.S. dollar’s role as the world’s reserve currency, making it harder for the federal government to finance the country’s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.
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. As historian George Baer observed in the journal “International Organization”: “Far from imposing on the Italian people a desire to reverse their government’s policy, sanctions made the Ethiopian war popular. Isolation and condemnation called forth reaction; the occasion to stand up against states hitherto patronizing and now critical of Italy was turned into a rally to the regime.”
This kind of resistance helps explain the history of ineffective U.S. sanctions. For example, 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, surviving the retirement and death of Fidel Castro.
Similarly, various U.S. and international sanctions have been imposed on North Korea since 1950 without overthrowing the multi-generational Kim regime or derailing its pursuit of nuclear weapons. 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.
Unfortunately, today, 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. As American drivers watch gas prices rise, the Putin regime still has many customers for its oil and gas products, including India and China.
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.
The U.S. is also considering secondary sanctions on Russia, just as it did on Iran. In Iran’s case, the U.S. upped the ante by imposing secondary sanctions on non-U.S. entities that do business with Iran to prevent it from selling oil or conducting other kinds of trade with parties in any other country. But trying to shut down trade entirely can backfire, raise costs, prevent access to products, and inflict burdens shouldered by U.S. businesses and consumers.
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.
Cryptocurrencies may have long-term potential but suffer from volatility and are too risky for many payment applications. And for some purposes, two foreign countries could trade outside the U.S. dollar-based system by engaging in barter.
With the federal government so deeply in debt, the United States benefits from the dollar maintaining its role as 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.
Marc Joffe is a policy analyst at Reason Foundation, former senior director at Moody’s Analytics, and author of the new study “Unfinished Business: Despite Dodd-Frank, Credit Rating Agencies Remain the Financial System’s Weakest Link.”
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