Connect with us
Iranian leaders cry

FOREIGN AFFAIRS

Trump’s Iran Sanctions Will Enhance America’s Long-Term Economic Dominance.

The erosion of the dollar’s dominance will lead to the revival of the US economic might.

U.S. President Donald Trump’s decision to quit the JCPOA deal in 2017 drew substantial criticism, especially after the recent exchange of strikes between the US and Iran brought the nations to the brink of the war. And though the renewal of sanctions did not bring about regime change, or force Tehran to the negotiating table, they have been successful in certain aspects—in particular, in restraining the activity of Iran-sponsored organizations.

Trump’s Iran policy, however, will indirectly reinforce America’s economic power by forcing a return to export dominance and re-establishing America’s role as the global creditor.

Iran’s oil exports are down sharply, inflation is soaring, and its economy is collapsing (the IMF expects its GDP to contract by 9.5%). As a result, there have been reports of cuts in financial support to groups like Hezbollah exert Tehran leverages to wield influence over the region.

However, what many analysts fear is that, in the long-term, withdrawal from the JCPOA reduces the United States’ political power—by diminishing the dollar’s influence.

The secret to the effectiveness of US sanctions is the dollar’s global dominance. Because the dollar is the most widely used currency in the world, the vast majority of international transactions have to go through American financial intermediaries, thereby technically falling under Washington’s legal jurisdiction, and providing the United States with powerful foreign policy leverage. It can relatively easily cut off another country’s access to dollars and American financial system, thus severely hindering its ability to trade in the global economy.

But, because Iran, Europe, Russia and others are not happy with Trump’s reinstatement of sanctions, they are actively working to create alternatives to a dollar-centered financial and economic system to bypass U.S. restrictions. Indeed, at first glance, Washington’s policies might seem illogical, because they in effect diminish its own political power. As Vladimir Putin, President of Russia, said, “They [the US] are biting the hand that feeds them,” adding that sanctions “undermine the trust in the dollar, isn’t it clear, that they are destroying it with their own hands?”

What Putin and President Trump’s critics fail to realize, however, is that Trump’s Iran policy, however, will indirectly reinforce America’s economic power by forcing a return to export dominance and re-establishing America’s role as the global creditor.

Iran.

Iran.

AN EXORBITANT BURDEN

While the dollar’s unique status as the world’s primary reserve currency accrues considerable political advantages to the United States, its economic implications are detrimental to the US economy—what I have previously called “the clash between globalism and nationalism.”

In face of this intractable conundrum, the Trump administration has brilliantly resorted to indirect means to undermine the dollar’s global standing—sanctions against Iran.

Contrary to conventional wisdom, the economic impact of the dollar’s supremacy is a considerable strain on the U.S. economy, it is not an “exorbitant privilege” but, as the economist Michael Pettis has pointed out, an “exorbitant burden.”

Simply put, a country that possesses a global reserve currency is inevitably forced to run persistent trade deficits—a phenomenon that is also known as the Triffin dilemma. The dollar’s dominance stems from foreign states accumulating U.S. financial assets, most importantly Treasury securities (government bonds), since they allow foreigners to obtain dollars necessary for trading with other states. When they buy dollar-denominated assets, foreign countries drive up the value of the dollar relative to their own currencies (because of increased demand for dollars), pursuing a strategy known as “relative devaluation’ of their currencies. By doing so, their exports become cheaper and more competitive in the U.S. domestic market, allowing them to run trade surpluses with the U.S.

The dollar’s supremacy forces the U.S. to run a concomitant trade deficit with these countries (most importantly China, Japan, and Germany), which harms their domestic manufacturing industry, as well as inflates asset bubbles in the financial markets—like in prelude to the 2008 crisis. Importantly, trade deficits lead to more debt by eroding the domestic tax base due to the flood of cheap imports into the country from these economically savvy foreign manufacturers–eliminating America’s own manufacturing sector.

Though the dollar’s dominance provides a powerful political leverage, it comes at a high economic cost: chronic trade deficits and rising debt. Until recently, Washington, in part because it supported economic development of China, Japan, and Europe, preferred to enjoy political advantages at the expense of the economic costs to the dollar. However, with the debt soaring and endangering U.S. prosperity, and China seeking to displace America’s global predominance, it is becoming critical for Washington to shift their focus from politics to economics—and curtail the dollar’s supremacy.

Devaluing the value of the dollar (which the IMF estimates it is currently overvalued by 7%) and restricting capital flows into the U.S. economy is the best way to address the economic problems spurred by the dollar’s dominance. But because of its free-market economy, the U.S. is unable to as efficiently and quickly change the value of the dollar (unlike China). Moreover, direct intervention to depreciate the dollar might cause turmoil in the markets and lead to self-fulfilling prophecies. In particular, market players, aware of the upcoming devaluation, might dump their holdings of dollars, hence depreciating the currency further and deviating from the healthy equilibrium point.

In face of this intractable conundrum, the Trump administration has brilliantly resorted to indirect means to undermine the dollar’s global standing—sanctions against Iran. These sanctions have spurred many countries, including the EU, Russia, India, China to take measures to disentangle from the dollar.

President Trump’s sanctions have both short-term gains (in terms of leverage over Iran), and long-term economic advantage.

President Donald J. Trump signs sanctions against Iran.

President Donald J. Trump signs sanctions against Iran.

A PATH TO RESTORING AMERICA’S ECONOMIC DOMINANCE

The immediate effects of such a policy may not be apparent—but in the long run, the strategy holds a lot of promise. Diminishing the dollar’s supremacy will decrease the trade deficit and amplify America’s economic power over other countries. It will also stop a seemingly inexorable rise in debt, because Washington will no longer have to finance its trade deficit by issuing bonds.

The Trump administration is right to put economic power before political power.

Trade surpluses will empower Washington to allocate more money to other states, thus offering alternative Beijing’s troubling “Belt and Road Initiative” and restoring America’s role as the global creditor. Trade surpluses imply less debt and more savings—which could be exported abroad in the form of debt to foreign countries to enhance American soft power.

Political power is often illusionary, temporary and ineffective; we’re learning that the hard way as the dollar goes to war and other countries finding ways to bypass the global dollar-centered monetary system. Economic power, on the other hand, is real and provides long-term advantages—just as the Marshall Plan achieved in rebuilding Europe after World War II.

The Trump administration is right to put economic power before political power. And by trying to extricate themselves from the dollar, President Trump’s opponents, probably without realizing this, are actually helping him pursue his agenda.

Written By

Sukhayl Niyazov is a freelance writer covering politics, economics, and A.I. His work has been featured in Global Policy, Areo Magazine, Towards Data Science, and Data Driven Investor. Read his Medium blog @sukhaylniyazov or find him on Twitter @Sukhayl_Niyazov.

TRENDING NOW:

Woke Irrationality Is Undermining Civilization. Woke Irrationality Is Undermining Civilization.

Woke Irrationality Is Undermining Civilization.

CULTURE

DJI Phantom 1. DJI Phantom 1.

It’s Time to Set Ground Rules for Drones.

TECH

Alexandria Ocasio-Cortez / AOC Alexandria Ocasio-Cortez / AOC

I Faced Down AOC in the Halls of Congress.

U.S. POLITICS

"Thanksgiving DInner" by Douglass Crockwell, Home Life in America. / Traditional women / Tradwife "Thanksgiving DInner" by Douglass Crockwell, Home Life in America. / Traditional women / Tradwife

The #Tradwife Affair.

CULTURE

Connect