Breaking the Iran deal and the US dollar

Robert Rosner in his contribution to Trump withdraws from the Iran nuclear deal. What now? Bulletin of the Atomic Scientists 05/09/2018 writes about one possible implication of the US breaking the agreement with Iran that hadn't occurred to me. This is not something that could happen quickly. And it would presumably require EU countries cooperating with each other in a way they haven't been able to do so far. And it wouldn't happen over the Iran agreement alone. Rosner:

Iran’s current posture ensures that the remaining other signatories to the deal—i.e., the U.K., France, Germany, China, and Russia—will have no current reasons to withdraw from the agreement and therefore are extremely unlikely to participate in the reimposed, US-led sanctions. This will generate international stress; according to the sanction rules set down by the United States, it will be put into the position of imposing secondary sanctions on European allies, as well as on China and Russia, if they trade in oil or other proscribed ways with Iran, because if they do, they will be violating American sanction rules.

At minimum, the United States has already managed to anger its own allies and will anger them more if it does indeed impose secondary sanctions on them. It is perfectly conceivable that they may take retaliatory measures in concert with China and Russia. Perhaps the most damaging of such measures—especially in the long term—have already been discussed openly by the Chinese and Russians. These would involve the creation of an alternate international banking system that no longer relies on the US dollar as its principal reserve currency. Eliminating the US dollar as a reserve currency would sharply reduce the effectiveness of US sanctions, which depend on our ability to control international financial transfers, an ability that hinges on the dominance of the US dollar in international trade. The damage of such a shift in international currency flows to the US economy, and to the United States’ ability to influence international trade, would be enormous. And once such a shift occurs, it is difficult to see how the damage might be undone.

The foreign policy "realists" would say this an idea that Europe, China, and Russia will inevitably attempt. Because the United States had a "unipolar mooment" in the world after the collapse of the Soviet bloc that gave us a relative dominance in the world beyond what it ever had during the Cold War years. In the Realist view, others countries in the world have a inevitable interest in reducing that relative dominance.

US foreign policy doesn't haven't to see the country's relative decline from its "unipolar moment" as a bad thing in itself. It was effectively inevitable. But some ways of adapting to the changed status are more sensible than others. Adopting a less trigger-happy foreign policy, for instance, would be a constructive way to so. But there are real risks in the process, too. And doing reckless things that damage relations with major allies and partners unnecessarily isn't so constructive.


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