The dollar powers American dominance: Rivals are building workarounds

U.S. allies, looking to buck American control over international trade, are developing alternate systems that don’t rely on U.S. currency.

The catalyst was the Trump administration’s decision last year to reimpose trade sanctions on Iran after pulling out of the 2015 nuclear-weapons deal. The U.K., Germany and France didn’t support the sanctions, which include a ban on dollar transactions with Iranian banks. So they are fine-tuning a system to enable companies to trade with Iran without using dollars.

India wasn’t happy either. Iran is a longtime trading partner, and India wants Iranian oil. India began using a similar alternative system in November, and shipping records show it already is being used by international companies to trade with Iranian businesses subject to sanctions.

China and Russia, also eager to break free of U.S. control, are promoting their own alternatives to the global bank-transfer system, which the U.S. effectively controls, and are striking deals to trade with yuan and rubles instead of dollars.

Global trade runs on dollars, giving the U.S. extraordinary power over nearly every entity that imports or exports anything anywhere. That clout has long frustrated America’s enemies, making them vulnerable to U.S. trade sanctions.

The new arrangements won’t change the dollar’s dominance in global trade, but they will diminish the U.S.’s power to impose its policies, including sanctions, around the globe. They also could make it easier for criminals and terrorists, who have long tried to sidestep the dollar, to move money outside of U.S. oversight.

The White House declined to comment about efforts by other countries to bypass dollar-denominated trading. A senior administration official said the U.S. is working to make sure oil is readily available in dollar-denominated markets from sources other than Iran, and to “bring Iran’s oil exports to zero.”

In congressional testimony in March, Treasury Department undersecretary Sigal Mandelker said that “those who engage in activities that run afoul of U.S. sanctions risk severe consequences, including losing access to the U.S. financial system and the ability to do business with the United States.”

Jacob J. Lew, treasury secretary under President Obama, says the U.S. is at risk of losing some of the power it has long wielded. The world, he says, now has “pathways” for those who “need to or want to avoid the U.S.”

The dollar’s status dates back to the end of World War II, when the U.S. economy was the world’s most robust and dollars were plentiful. The currency’s liquidity, and the efficient U.S. banking system anchored by the Federal Reserve, mean trading in dollars is much less expensive and more convenient than using other currencies, says Craig Pirrong, a University of Houston professor who studies payment systems.

Here’s how it works: A Canadian lumber company sells boards to a French buyer. The buyer’s bank in France and the seller’s bank in Canada settle the payment, in dollars, via “correspondent banks” that have accounts at the Fed. The money is transferred seamlessly between the banks’ Fed accounts because their status as correspondent banks means they are seen as safe counterparties.

The use of these accounts, the U.S. says, means every transaction technically touches U.S. soil, giving it legal jurisdiction. Because using most other currencies is relatively inconvenient and expensive, many countries and companies will do whatever the U.S. requires to maintain access to dollars.

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