THIS IS COUNTERINTUITIVE: Sanctions Don’t Threaten the Dollar’s Dominance. They Support It.

Different economies have different incentives for dollar adoption. For example, developing countries like Colombia or Kenya that run current account deficits must import foreign capital; therefore, their growth depends on providing assurance to international investors that their investments will not be threatened by hostile action or subject to expropriation. In these cases, countries that accumulate dollar reserves tacitly signal to foreign investors that their investments are safe, because these governments would be vulnerable to U.S. sanctions in the event of bad behavior. As Michael Dooley, David Folkerts-Laudau, and Peter Garber have argued, reserves should be seen not as U.S. liabilities, but as a form of public collateral for Western investors.

Many developing countries will eagerly expose themselves to the risk of sanctions in exchange for accelerating integration with the West. Sanctions strengthen the credibility of the commitment not to confiscate private investors’ assets, engendering more confidence, more global capital flows, and more secure reserve status for the dollar.

As current account deficit countries move up the development curve, many, like China, have transformed into current account surplus countries. These countries’ excessive productive capacity and savings create a different set of considerations for dollar access and therefore, sanctions vulnerability. Surplus economies derive a wide range of benefits from dollar usage. For example, they require a large consumer market willing and able to absorb their excess productive capacity and savings. If they were forced to recycle savings domestically, their currencies would appreciate significantly, slowing their export-driven economies. Additionally, they also need to import Western technology and, critically, must sell to deficit countries, which are incentivized to use the dollar. Exposure to sanctions is a price they pay in exchange for accessing these direct benefits of participation in the dollar system.

And: “If sanctions pose any threat to the dollar, it is from ineffective use that undermines America’s security standing, not from an active and considered approach.”

Overuse, too.