China and the EU Are Growing Sick of U.S. Financial Power

This month, the United States imposed on Iran its most draconian round of sanctions yet. These measures made clear something the global community has long known: When it comes to international finance, Washington sets the rules for others to follow. Though some governments, led by the European Union, have announced initiatives to break free of this U.S. dominance, their policies will likely fail. Less publicized trends, however, are already eroding U.S. financial power and may make aggressive U.S. sanctions policies untenable.

When U.S. President Donald Trump announced in May that he would reimpose sanctions on Iran lifted under the 2015 nuclear deal, the effect was swift. Companies began to comply, independently of their governments’ stances toward Tehran. Even as the EU moved over the summer to make it illegal for its companies to comply with the new U.S. sanctions, firms were already turning away from Iran.

The costs of not following U.S. rules are very high. The U.S. dollar greases the wheels of global commerce, and legitimate businesses cannot risk losing access to it. French energy giant Total made this calculation explicit when it decided over the summer to stop operating in Iran. U.S. banks were involved in over 90 percent of its financing, and American shareholders owned over 30 percent of its shares. It could not “afford to be exposed to any secondary sanction,” the company said in a press release. Similarly, the SWIFT payment messaging system earlier this month suspended sanctioned Iranian banks, saying that the decision, though “regrettable,” was “taken in the interest of the stability and integrity of the wider global financial system.”

Unable to counteract U.S. sanctions, some countries are pushing for structural changes. The EU is in the lead. China is following, and Japan, South Korea, and India are watching closely. European Commission President Jean-Claude Juncker has argued that the euro should become a global reserve currency to reduce financial dependence on the United States. Additionally, the EU has called for a so-called special purpose vehicle that would facilitate trade with Iran in a formalized barter system, offering some new economic opportunities to Iran to incentivize its continued participation in the nuclear deal.

This is not the first time countries have tried to move away from a U.S.-dominated financial system. During the global financial crisis a decade ago, policymakers from French President Nicolas Sarkozy to People’s Bank of China Governor Zhou Xiaochuan called for a system beyond U.S. leadership. As historian Adam Tooze has shown, the opposite happened, and the United States solidified its central role.

Today’s calls for change will also likely stall against ingrained U.S. financial power. However, less-discussed trends are already chipping away at America’s hold on the global financial system—but not in the way the EU would wish.

The city of London, for example, keen to rebuild business after the crash, presented itself as a partner to Beijing in its goal of expanding China’s financial reach. Jeremy Green, in an article for the British Journal of Politics and International Relations, documented how the United Kingdom courted new business from Asia after 2010. In 2012, London launched its “RMB initiative” to increase its Chinese exposure and smooth market frictions for Chinese customers. The national government supported this effort to turn the gaze of London financial markets east.

London has looked to Moscow, too. Since 2011, it has laid out what one expert called a “red money carpet” for Russian money. This effort has already caused headaches for U.S. sanctions policy. During the 2014 Ukraine crisis, photographers captured the notes of a British civil servant indicating that Downing Street opposed sanctions measures that would close off London’s services to Russians.

It is no secret that China and Russia are actively looking to exploit the growing divide between London and Washington on sanctions. Already, when it thinks it can, Beijing has ignored Washington’s economic threats. China has signaled that it will continue importing Iranian oil, only partially complying with U.S. sanctions. Still, there are some areas in finance where China cannot afford to go against Washington’s wishes. If Beijing could count on a more cooperative London, with its key financial services, to circumvent U.S. jurisdiction, it could seriously damage the U.S. sanctions edifice.

Trans-Atlantic divisions are further weakening the sway of U.S. sanctions and finance. A political wave of opposition to U.S. economic and foreign policy has undermined trans-Atlantic unity. Recently the populist Italian Lega-Five Star Movement government questioned Russia sanctions, a hit to the U.S. push for these restrictions. As a Brexit-minded U.K. seeks new economic partners and strikes deals with countries with heightened illicit finance risks, Washington-London coordination on sanctions will be harder.

Neither Juncker nor Italian Prime Minister Giuseppe Conte is likely to weaken U.S. sanctions or dislodge the United States from the center of the global financial system, but emerging financial arrangements like China’s money ties with Britain might. Next time Washington drops a massive sanctions hammer, these new arrangements could offer an appealing alternative to the U.S.-centered system. Leaders on both sides of the Atlantic should consider what the world would look like if Washington struggled to set the rules.