US Sanctions And A Way To Challenge It | textpound

  

US sanctions and a way to challenge it

 

US sanctions

US is 20 trillion$ economy, having 70% consumer market, largest importer of goods and services and 2nd largest exporter of goods and services in international trade. All of this trade contributes to value of US dollar, making it international reserve currency. EU and China trade with US and hence the world's collective second and third largest economies respectively are also dependent on US market.

Most of the world's top companies, MNCs and businessmen use US dollars as their transaction tool. And only Fed can issue and print US dollars. This makes almost all the major companies vulnerable to US banking exposure and its laws.

US dollars are circulating in market through US banking and SWIFT banking channels making it vulnerable to US treasury. When US sanctions any country, all the companies are directed to follow US sanctions or lose access to SWIFT and US banking system, and sometimes they even freeze the accounts of businessmen, making them vulnerable to volatility and US dominant economic superiority.

What happens when US sanctions China and Russia?

Those companies which settle their transactions in US dollars through worldwide SWIFT banking network and dollar based accounts all over the world would have to follow US sanctions or else lose access to transactions facility which route through US banking. As most of the Chinese and Russian markets are also dependent on US for economic growth and stability, companies pay heed to US sanctions and wind up their business there.

Same happened in case of Iran. When US sanctioned Iran, all the major companies having business in Iran had operations and transactions in US dollars all over the world through US banking and SWIFT. Such companies wind up their businesses in Iran in order to avoid economic dilemmas by losing access to world's financial institutions. As world is capital, free and liberal in performing transactions all over the globe, having US dollar as international reserve and trading currency make them vulnerable to US sanctions.

How to challenge it?

US has 20 trillion$ economy. It is largest importer of goods and services. 2nd largest exporter of goods and services. All of this contributes to US dollar value. China, EU and all the major economies are its trading partners, and hence dependent on US financial system and market. Other alternatives are amateur. China doesn’t provide enough space. Chinese economy is still dependent on US and EU for its growth and its monetary policies and capital restrictions make it not a good option for other businessmen. The best way to challenge US sanctions would be another payment system independent of US financial system. But this is unlikely too. Any country trying to develop such system would have to face US sanctions in the first place. Collective strategy is important. EU is US's ally and then there is China and Russia. All these countries are still trying to cope with their own financial institutions rather than developing its own payment systems.

Another thing is that countries could start trading in their respective national currencies. But then how would they import products which need US dollars like US based products? This imports again need exchange to US dollars. This is again in need of access to US financial and SWIFT banking system.

Oil is traded in US dollars. Converting to Yuan or other basket currencies wouldn’t help OPEC much. But it has political consequences. Now that if there is no economic advantage, why would OPEC drop the dollar? Not a good way again.

Best way is making independent payment system, supranational currency like bancor or SDRs, and giving an alternative stronger to US economy and market. Would China provide such market? Yes. But when? Not before 2050.

Another problem is US debt and securities. US owes 8.1% of its debt to China. But then China is larger trading partner of United States, making two economies integrated. Even if countries start dumping US securities and dollars, it would help US exports, making their products subsidized in the first place. Then what would happen to banks having billions of dollars already in place? Why would one dump currency that would devalue their savings? Purchasing power is declining anyway but still US dollar is investor's confident currency.

Best thing would be to weaken this confidence. But how? US debt is over 26 trillion$. Investors say US securities are A-OK. They buy US securities. But for how long? It’s another question.

In nutshell, countries follow US sanctions because of its dynamic economy, its global role in international trade and more than half of corporations using US dollars as medium of transaction giving it status of international reserve currency.