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America’s economic warfare: a law unto itself?

Despite the European Union’s emphatic opposition, this month the Trump administration reimposed the full set of sanctions which had been placed on Iran before 2015’s landmark nuclear agreement, the Joint Comprehensive Plan of Action (JCPOA). By doing so, followed swiftly by sharper sanctions on Venezuela and Cuba and the threat of penalties for Nicaragua, the Trump administration has further underscored its continued commitment to turn economic sanctions, a fragile foreign policy tool, into a blunt and indiscriminate instrument that impacts Washington’s friends and foes alike.

The renewed Iranian sanctions will fall not just on the country’s banks, shipping and airline sectors but also on the nations that continue to buy its oil or invest in its industries. And although Secretary of State Mike Pompeo announced that eight oil importers — including China and India — would receive temporary waivers, all will be expected to eventually reduce their Iranian supplies to zero, an imperative which will strain the United States’ diplomatic relations around the world.

Washington’s high-profile exit from the JCPOA has cast a spotlight on the Iran sanctions– but Tehran is far from being the only victim of the Trump administration’s love of imposing sanctions on countries it disagrees with. In 2017, the US instigated more than 900 such sanctions against foreign entities; even more sanctions are expected this year.

A globally unpopular move

The renewal of sanctions has angered U.S. allies and JCPOA co-signatories, who disagree with Washington’s heavy-handed approach and are determined to continue trading with Iran. Britain, France and Germany regard the treaty as a success and fear that its breakdown could destabilize the region, incentivize Iran to resume enriching uranium, and elevate international security risks. Signalling a clear break from the Obama administration’s multilateral approach, Trump has doggedly forged ahead with his sanctions policy regardless of this opposition from a large proportion of the international community.

While Trump’s critics fulminate, the dollar’s unrivalled position at the heart of the global financial system continues to neutralize any attempt to circumvent the new U.S. sanctions. An alternative payment mechanism, or special purpose vehicle (SPV), is under development in Europe at the moment. The workaround would involve a sort of barter system, by which Iran could trade its oil and gas for imported goods. Wary of retaliation from the American government, however, European countries have yet to volunteer to host the SPV.

Casting the sanctions net wider

The sanctions on Iran have dominated media coverage thanks to their geopolitical implications and the unusual scenario of the European Union standing with China and Russia against American policy. The U.S. has nevertheless ramped up its use of sanctions elsewhere as well, particularly in Latin America.

American officials have expressed their desire to ‘tighten the noose’ on another outspoken critic of U.S. policy, Venezuela. A recently signed executive order authorized new sanctions on the Venezuelan gold sector, effectively isolating one of the country’s few industries which had emerged largely unscathed from the economic crisis. As the U.S. has choked off Caracas’s access to international financial markets, exporting gold to markets like Turkey was one of Venezuela’s only ways of accessing hard currency.

The Trump administration has also ramped up existing restrictions on long-time foe Cuba and threatened Nicaragua with bruising sanctions. Cuba is being punished for its support of Maduro, while Nicaragua is under the microscope because of President Daniel Ortega’s violent repression of dissent. Dubbing the three countries a ‘Troika of Tyranny’, the White House has framed the new round of action as part of a coordinated effort to promote democracy in the Americas. The U.S.’s long history of interfering in Latin American affairs, unsurprisingly, has prompted some scepticism about this mission of spreading democratic values.

The backlash is already underway

Even aside from the question of American motivations, the U.S. government’s sweeping use of sanctions provokes a number of problems. Bruising penalties have been proven unlikely to achieve their goals; they inspire anti-American sentiment abroad and undermine America’s negotiating capability; they run the risk of harming ordinary people, rather than their government; and they create rifts with American allies who don’t support them.

Not only is Trump’s sanctions-based approach to diplomacy risky, it may well be counter-productive.

Major importers of Iran’s oil are likely to find ways to around the embargo; India has, in the past, paid for Iranian oil with rupees, while Iran’s biggest customer, China, may welcome the opportunity to negotiate a yuan-based oil price as part of its longer-term efforts to challenge the dollar for international dominance.

Moreover, if U.S. sanctions are intended to coerce a change of behaviour among nations that refuse to toe the American line, Trump risks being disappointed. Iran has already pledged to restart its nuclear activities in response to Washington’s withdrawal from the JCPOA. U.S. interference will cause hardship among Iranian citizens, inevitably suppressing more moderate voices while empowering Tehran’s hardliners.

The sanctions on Venezuela pose similar problems. The country is already suffering from an economic and humanitarian crisis of staggering proportions—food and medicine are scarce, while hyperinflation is so acute that prices double every 26 days. Sanctions will only exacerbate the shortages and spiralling economy; moreover, given that the majority of Venezuelans oppose the restrictions, they could even strengthen rather than diminish support for Maduro.

Alienating long-standing allies

A wider issue for America is that confidence in U.S. leadership is declining, especially in Europe, which has traditionally enjoyed the strongest of diplomatic ties with Washington. By using the dollar as a sledgehammer to bludgeon its opponents into compliance, the Trump administration risks destabilising global finance – and diluting the power of the dollar. By taking unilateral action, with no care for what other leaders – or international organisations such as the UN or WTO – think, Washington is playing fast and loose with the rules-based system that governs international diplomacy.

Trump’s America First agenda may play well at home but is only increasing tensions with the world’s other economies. If Washington doesn’t rethink its strategy, it may discover too late that sanctions are no substitute for a carefully crafted foreign policy.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes

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