Foreign Policy:

BY HENRY FARRELL, ABRAHAM NEWMAN

Over the years, the United States benefited from spreading a fear of contagion. When states or businesses or individuals incurred the displeasure of U.S. financial authorities, they were treated by others as though they had the plague. They worried that pariah status might be catching (even accidental or innocent contact with a sanctioned party might be interpreted in unfortunate ways), and hence they avoided all association. This sometimes turned out to be a nuisance for U.S. policymakers. For example, businesses rarely took advantage of sanctions exemptions that were supposed to allow the export of freedom-enhancing technologies to Iran for fear that they might accidentally do something that the United States would punish. However, in general, this fear increased the efficacy of sanctions, by discouraging businesses from trying to game the rules.

If the United States continues along its current path, the fear of contagion may start to have quite different consequences. Instead of leading states and businesses to minimize contact with the targets of U.S. sanctions, it may lead states and businesses to minimize their contact with the U.S.-led global financial system and to start to construct their own workarounds. Over time, those workarounds might even begin to accumulate into an effective alternative system. Financial arrangements such as SWIFT and dollar clearing were responses to the incentives and profit opportunities of globalized financial markets. Now, U.S. unilateralism is changing those incentives and profit opportunities in unpredictable ways.

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