April 22, 2024
World Economy

It’s Time to Dismantle the US Sanctions-Industrial Complex


The key to America’s global supremacy in the twenty-first century is not bombs or battalions. It is the things we can’t see: fiber-optic cables, semiconductor chips, and the dollar “clearing” system. Underground Empire by Henry Farrell and Abraham Newman is a study of how the United States turned seemingly unremarkable digital infrastructure into powerful weapons which it has wielded to discipline allies and punish enemies.

By targeting “choke points” in the global economy, the United States can prevent rivals — most importantly China — from accessing technologies and resources that they depend upon. While this weaponization of US economic power has largely been successful so far, it is creating strong incentives for other countries to establish ways of operating in the global economy that bypass the United States.

Washington’s economic warfare is intended to shield US hegemony from rising threats in an era of relative decline. In the long run, however, it may be setting changes in motion that fatally undermine American dominance.

The underground empire did not come about by design. It developed organically, above all in response to the need for the fastest possible internet, finance, and supply-chain connections between the United States and the rest of the world. The infrastructure of contemporary globalization was built in the neoliberal era, and as such it is privately owned. But it is overwhelmingly US companies that own it, and much of it sits on US soil.

The fiber-optic cables which run along seabeds and under the ground are essential for near-instantaneous telecommunications globally. By 2002, over 99 percent of cables which passed between any two continents ran via the United States.

The SWIFT international payment system allows banks across the world to trade in dollars, the global reserve currency. Although it is based in Belgium, its data center is located in Northern Virginia and its board is full of US banks.

While the semiconductor supply chain was offshored decades ago, key links in the chain are still American-owned and much of the rest is in the hands of US allies. Even though China has become the heart of global capitalist production, the arteries of neoliberal globalization still bleed red, white, and blue.

Until 2001, the United States had no reason to weaponize this underground empire. America was the chief beneficiary of the new world order as it sat at its center, with those on the periphery paying tribute every time they traded in US dollars or bought American technology. It suited Washington not to politicize its economic hegemony, as if it was a natural state of being that worked as well for Uganda and Uruguay as it did for the United States. If there were no problems, there would be nothing to contest.

That changed when two planes hit the Twin Towers. 9/11 was the shock to the system which made everyone in Washington sit up and think about the “pipes and plumbing,” as Farrell and Newman put it, of US power.

Al Qaeda had been able to use American telecoms and American dollars to fund and organize their attacks. Now the US government wanted access to this infrastructure so that the National Security Agency (NSA) could listen in to phone calls and the Treasury could cut anyone off from international finance, anywhere in the world. The US state quickly realized that all this was not only possible — it was not even that difficult.

As Farrell and Newman write:

The global economy relied on a reconstructed system of tunnels and conduits that the United States could move into and adapt, nearly as easily as if they had been custom-designed by a military engineer for that purpose.

What began as ad hoc measures justified on the basis that they were dealing with emergency security threats quickly became “commonplace tools of policy.” The NSA “maintained and expanded” its global spying network despite the Edward Snowden revelations in 2013, while “intelligence gathering and economic coercion are now part of the Treasury’s core mission.”

At first, the targets were the outliers, Al Qaeda and North Korea. But as America’s hegemonic position came under ever greater challenge and American politics became ever more volatile, Washington turned these powerful weapons of economic war towards the heartlands of the global economy.

The real test case for whether the United States had the power to carve countries out of the global economy was Iran. The United States had been sanctioning Iran for years, but the West Asian country continued to trade various commodities — most importantly its oil — in dollars using European banks.

This changed in 2006 when the United States cut off an Iranian bank from the dollar clearing system, which can only be accessed via US banks. Until then, the United States had thought it was too risky to politicize dollar clearing in case foreign banks responded by trying to find alternatives to the dollar.

Washington was pleased when it realized that the response of European banks to the new Iran sanctions was complete compliance. These companies feared that the Treasury would cut them out of the dollar clearing system if they rebelled: access to the dollar was indispensable for them, whereas facilitating Iranian trade was nice but optional. By 2015, Iran had been completely cut off from trading in dollars.

This was a game changer not only in terms of how the international financial system worked, but also in terms of how the United States did diplomacy. On their travels abroad, Treasury officials became less interested in meeting ministers than going directly to their banks, since they didn’t need other countries’ permission to cut off — or threaten to cut off — their companies from the dollar. The era of “dollar unilateralism” had begun.

There was resistance to dollar unilateralism. The European Union (EU) and the five permanent members of the UN Security Council had negotiated the Iran nuclear deal in 2013 and were legally obligated to stick by it. When Donald Trump pulled the United States out of the deal in 2018 and restarted the full array of sanctions against Iran, including “secondary sanctions,” the EU and the other states that had signed up to the deal said they were still committed to it.

Germany, France, and the UK — hardly enemies of Washington — even built a work-around to SWIFT called INSTEX to facilitate trade with Iran. However, it proved to be a massive flop.

The signatories to the Iran deal could not enforce it because European companies were terrified of the existential threat posed by American secondary sanctions. The collapse of the Iran deal proved how limited European sovereignty was in a dollar-dominated global economy.

The reality of European subordination became further evident when the EU decided to impose major unilateral sanctions of its own in wake of Russia’s invasion of Ukraine in February 2022. The EU quickly realized that it didn’t have the weapons to “take charge of its own story.” As Farrell and Newman observe:

The more that the EU sought to build its own sources of power and authority, the more it realized that it needed what the United States had: information, institutions, technical expertise, and power over global markets.

The same realization about the power of the US state had dawned on Microsoft. The company had been a fully signed up ideologue of “the free market,” promoting itself globally as a “digital Switzerland” free from geopolitical interference by Washington or any other state.

By the time of the Ukraine war, the company had done a volte-face. It was now boasting about its influence in fending off Russian cyberattacks and facilitating Ukrainian ones, a role which has been compared to that of Ford Motors building US tanks in World War II. Whether it is the European Commission or Microsoft, pieties about the free market have made way for the brutal realpolitik of the underground empire.

 

The sanctions on Russia went beyond anything that had ever been comprehended previously. Most dramatic of all was the seizing of $260 billion of Russia’s own foreign currency reserves, an unprecedented move which set off alarm bells in foreign capitals all over the world about their vulnerability to the dollar — most of all in Beijing. As a former advisor to China’s Central Bank put it: “If the US stops playing by the rules, what can China do to guarantee the safety of its foreign assets? We do not have an answer yet.”

China’s search for answers went beyond foreign currency reserves. The US war on one of its most important companies, the telecoms giant Huawei, had by and large worked. Washington had decided to put a stop to Huawei’s realistic aim of dominating global 5G infrastructure, an ambition that directly threatened US control of global telecoms and thus endangered the underground empire.

Sanctions cut Huawei off from many of its key suppliers, most importantly the Taiwanese semiconductor fabricator TSMC. By 2021, Huawei’s global market share of the smartphone market had fallen from a high of 20 percent to just 4 percent. Key American allies such as the UK and Australia had abandoned plans to have it build their 5G networks. The United States had shown China that it had the power to prevent it becoming a technological superpower.

The United States wasn’t satisfied with just blocking the dragon’s path. Joe Biden’s national security advisor, Jake Sullivan, made a speech in September 2022 stating that the goal of maintaining a “relative advantage” over China technologically was no longer enough. The United States now wanted “as large of a lead as possible.”

Shortly afterwards, Biden announced the largest set of semiconductor sanctions yet, prohibiting any US company from providing supplies to any Chinese chip manufacturer and pressuring allies to do the same. Since chips are now needed for producing just about anything, these sanctions pose a major threat to China’s economic development.

The United States appears to be convinced that these sanctions are working. CNBC reported on January 17 that Chinese imports of chips fell 15.4 percent in 2023, with the United States lining up further measures to close “loopholes” in the sanctions regime.

However, Huawei announced in September that its new smartphone contained a two-nanometer chip, which lies just behind the most advanced semiconductors in the world. This was not supposed to be possible, and the news shocked Washington.

It remains unclear exactly how Huawei managed to get the two-nanometer chip and whether China is capable of producing them at scale. But the crack in the underground empire opens up wider questions about the constraints and potential pitfalls of weaponizing American economic power.

As Nicholas Mulder’s recent history of sanctions, The Economic Weapon, found, sanctions tend to fail more than they succeed, and they almost always have unintended consequences. The most obvious risk is that by placing so much of the world economy under sanction — about one-third of it at this point — the United States may be providing the motivation these countries need to build alternative financial and technological infrastructure. This may be difficult, costly, and inefficient compared to relying on the US-dominated system, but at least it holds out the promise of independence.

Iran responded to US sanctions by using black market “proxies, cut outs and cash payments,” according to Farrell and Newman — a move which generated $80 billion in annual trade. China is taking a more sophisticated approach, developing a Central Bank Digital Currency (CBDC) which has the potential power to facilitate instant bilateral trade, cutting out the dollar entirely.

Other risks include a “hard decoupling” between the economies of the United States and China if tit-for-tat sanctions “spiral.” Such a breakdown could trigger a global recession that would dwarf that of the 2020 pandemic crisis.

As Farrell and Newman argue:

The US understands the world economy far better, and can manipulate it more easily, than its allies and adversaries. Yet as the contradictions mount, the risk of catastrophic failure grows.

A major problem is that once you go down the road of sanctions, where do you stop? Matt Duss, foreign policy advisor to Bernie Sanders, told the authors that there is now a “sanctions-industrial complex” in the United States, with agencies invested in finding new reasons to impose more sanctions, especially when previous ones have not been as effective as hoped.

When a sanction is imposed, it becomes politically difficult to then take it away again without facing the accusation of being “soft” on America’s adversaries. Once the global economy has become weaponized, it is very difficult to disarm, even if the long-term consequences of continuing down this road may be grave for American power.

The risks associated with America’s underground empire raise the question of what is to be done about it. For Farrell and Newman, the answer is “a different kind of imperium, one that would demonstrably serve the global as well as national interest.”

For a book that is immersed in realpolitik, this is a disappointingly fanciful conclusion. The idea that the United States, or indeed any capitalist state, can be trusted to serve humanity as a whole is naive in the extreme. America is weaponizing its hegemonic position exactly because it is under threat, especially from a rising China.

This mistake is compounded when the authors advocate a new US agency with oversight for “economic security” matters. While Farrell and Newman intend such an agency to think about the long term and consider the risks of sanctions and other hostile measures, the reality of the US state means it would inevitably help entrench the sanctions-industrial complex, institutionalizing the problem even more.

Indeed, the authors, who coined the now widely used term “weaponized interdependence” to describe the US-China relationship, admit in the book that US officials have instrumentalized their ideas to inspire new choke points that Washington can find and weaponize, thus intensifying the very dangers that they are trying to warn about.

The reality is that there will be no benevolent underground empire, and trying to wish one into existence is a dead end. The fact that Biden has deepened the sanctions developed under the Trump administration should be evidence enough that it is a waste of energy at best and actively counterproductive at worst to place hopes in establishment politics to tame the underground empire.

We should instead look to anti-imperialist politics, both within the United States and beyond, as the alternative to America’s weaponization of the global economy. By building national economic sovereignty, strengthening trade relationships outside of the dollar zone, refusing to comply with America’s unilaterally imposed diktats, and breaking from US-dominated international institutions like the North Atlantic Treaty Organization and the International Monetary Fund, we can hasten US imperial decline and move towards a world of genuine multipolarity, where no one country can dictate the rules of the game.





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