Counting the Cost of Financial Warfare: Recalibrating Sanctions Policy to Preserve U.S. Financial Hegemony

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By Enea Gjoza

Bottom Line: The U.S. is overusing sanctions, which are rarely effective in achieving their goals and threaten to balkanize the global financial system. U.S. policymakers should recalibrate sanctions policy to be targeted, sunsetted, multilateral, and applied to effect modest policy change. The U.S. should acknowledge the limitations of its financial power and use it strategically and in pursuit of clear, attainable goals if it wants to preserve it well into the future.

Thanks to American financial hegemony and the power of the dollar, the U.S. has disproportionate power over the global economic system and can engage in deficit spending. Most global trade has long been conducted in U.S. dollars.

The U.S. is using this financial and economic advantage to issue sanctions not only on weak or rogue states but also on great powers as punishments. These sanctions include economic sanctions, individual sanctions, financial sanctions, and secondary sanctions, which sanction third-parties who do business with sanctioned entities. Each of these sanctions approaches have their own costs and benefits.

These sanctions are rarely effective or strategic but they do impart significant damage by destabilizing markets and political relationships. Research suggests sanctions don't tend to change state behavior. That's because other nations like China step in to fill the void left by the U.S. The most expansive sanctions ever issued -- on Iraq between 1990 and 2003 -- failed to generate any political change. Sanctions can work when they are targeted, multilateral, sunsetted, and applied to effect modest policy change.

The U.S. has become overreliant on sanctions, with Congress especially ambitious. Even with sanctions' poor track record, Congress has continued to sponsor hundreds of bills issuing new sanctions over the past decade. Sanctions also have longlasting inertia, where they remain intact long after the underlying issue has been resolved.

U.S. policymakers have weaponized their financial dominance. As a result, China, Russia, and the EU are now working on alternative financial and economic institutions to avoid and evade overused U.S. sanctions. This parallel financial structure could threaten U.S. hegemony and the dollar -- balkanizing the global financial system. Saudi Arabia has threatened to sell oil in the Chinese Renminbi.

As a result of this threat, the U.S. should reduce its sanctions and limit them to adversaries. The U.S. currently imposes about 8,000 distinct sanctions affecting targets across the vast majority of countries. This undermines the trust and relationships that underpin the global economic system. All sanctions should have clearly defined goals. The pushback to U.S. dominance has not yet resulted in U.S. decline or dollar devaluation. The dollar accounted for 72 percent of global reserves in 2001. Today, that figure is down to 62 percent.

The U.S. should acknowledge the limitations of its financial power and use it strategically and in pursuit of clear, attainable goals if it wants to preserve it well into the future. Such restraint will likely lead other countries to abandon their plans to create alternative financial institutions out of reach of U.S. authorities.