The US as Economic Bully? Wall Street Journal

The Wall Street Journal: These days, the biggest, baddest weapon in the American arsenal isn’t a missile, or a tank, or a fighter jet. It is America’s economic clout.

But here’s the tricky question: Is this weapon being overused, at the risk of undermining the very economic strength that makes it so powerful in the first place?

Certainly the Trump administration has been liberal in its flexing of American economic muscle—and often quite effectively. Unhappy with the trade practices of China, Mexico, Canada and Europe, it has imposed tariffs to make it harder for them to penetrate the lucrative American market until they change their policies. When that hasn’t worked, it has doubled down with more tariffs.

Eager to change Iran’s behavior, or maybe even the regime there, it has sanctioned the oil sector, the metals industry and military leaders by cutting them off from the American-led international financial system. To compel unhappy allies to go along, it has threatened to cut off their companies as well if they continue doing business with Iran.

In an effort to change the government of Venezuela and the behavior of the one in North Korea, it has made it harder for them to export goods and used economic leverage to make other nations fall in line. This approach is having an effect. Tariffs are forcing China to consider significant changes in its predatory economic behavior, for example, and economic sanctions are buckling the Iranian economy.

The weapon works, at least in the short run, because America’s economic throw-weight remains so significant. The American market is big and rich and everyone wants access to it. The American financial system sits at the center of international commerce, and the dollar remains far and away the world’s most used currency. Countries and companies doing international business must use both.

But there is a real underlying risk that by deploying and using its economic weaponry so frequently the U.S. will, in the long run, drive others, friend and foe alike, away from its economic orbit. “These are not zero-cost options,” says Robert Hormats, former under secretary of state for economic affairs and an adviser on international economics for presidents going back to Richard Nixon.

Imposing tariffs on China and other nations trying to send their goods to the U.S. not only raises the prices of those products for Americans, it also gives targeted nations an incentive to develop markets, and long-term trade ties, in other countries. At the same time, those foreign nations can retaliate by cutting purchases of American goods, or by slapping retaliatory tariffs of their own on American products, making them less competitive, as China has just announced it will do. The Chinese may find other countries to provide, say, wheat and soybeans, and in doing so develop lasting, non-American trade ties.

 “If the U.S. develops a reputation as an unreliable supplier, countries will turn to our competitors, and, when sanctions end, earlier supply chains will be difficult to restore,” says Mr. Hormats.

Similarly, there is a danger the U.S. is providing both allies and adversaries an incentive to find ways around using the American financial system as the wiring for international commerce.

For now, there are few alternatives to using American banks for clearing international transactions. As a result, enemies find they can be shut out of much international commerce by crossing the U.S. and being slapped with American sanctions.

But it isn’t just enemies. Friends also know their companies can be isolated if they don’t heed American wishes to shut down commerce in countries on the American black list. The risk of losing access to the financial system is a powerful motivator.

Yet overuse of this threat could compel other counties—including the very allies whose cooperation the U.S. seeks in applying financial pressure to the bad guys—to find alternatives to using dollars and American banks. Mr. Hormats notes that this “is not easy to do now, given the dollar’s pre-eminent role, but over time such overuse could eat away at the dollar’s role and hence U.S. leverage.” 

Indeed, there are signs that others are seeking alternatives to the dollar and the American-led financial network. The European Union is trying to set up its own payment system to allow oil companies and businesses to continue trading with Iran despite American sanctions. China has made clear it would be happy to lead a different international finance system and use its currency as an alternative to the dollar.

Similarly, 11 Pacific Rim allies have moved ahead with their own new trade bloc after the U.S. pulled out of the Trans Pacific Partnership trade deal.

America remains the big kid on the economic block, but it isn’t the only one. The danger is that it could come to be seen as the bully who tries to intimidate the other kids once too often, persuading them to join together to find ways around him.