Raising a caution flag on US financial sanctions against China

Jeffrey Schott

No PB21-1, Policy Briefs from Peterson Institute for International Economics

Abstract: China’s policies in Xinjiang, Hong Kong, and the South China Sea and its ongoing support for Iran, North Korea, and Venezuela pose major challenges for the United States, where bipartisan pressure is growing to ramp up punitive sanctions against leading Chinese firms and financial institutions. Financial sanctions freeze the US assets or bar US entry of the targeted individuals and firms and prohibit US financial firms from doing business with them. Schott explains why US officials should carefully weigh the risks to international financial markets and US economic interests before imposing punitive sanctions on major financial institutions engaged with China. The collateral costs of such sanctions would be sizable, damaging US producers, financial institutions, and US alliances. By restricting access of major banks to international payments in US dollars and barring use of messaging systems like SWIFT, tougher US financial sanctions would effectively “weaponize” the dollar; friends and foes alike would be pushed to seek alternatives to dollar transactions that, over time, would weaken the international role of the dollar. Instead of doubling down on current unilateral financial sanctions, US policy should deploy sanctions in collaboration with allies and calibrate trade and financial controls to match the expected policy achievements.

Date: 2021-01
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