Crafting Tech Sanctions in an Era of Dollar Evasion

The eviction of our great power foes from dollar-denominated capital markets is unlikely, even in prior historical periods. Even in the Cold War, the Soviets actively participated in the offshore dollar market through dollar balances held in London at the Moscow Narodny Bank (MNB) and Paris at the Banque Commerciale pour l’Europe du Nord (BCEN). From 1958 to 1968, assets held at these banks grew nearly eightfold, ignoring geopolitical flashpoints, like the Cuban Missile Crisis or the Vietnam War. Contrary to initial intuition, the Soviets had been willing to engage in trade with the West, dating back to Vladimir Lenin’s New Economic Policy, which sought to revive many of the Tsarist-era links with the Western trading system.

Like with the Soviet Union, America once again finds itself in a global competition with Beijing today, albeit with many more consequences for Washington’s financial statecraft. Beijing’s international financial expansion, underwritten by its state banks, has led to unsustainable projects with opaque loans in many participating countries. The lending volumes of China’s overseas developers, including China Export-Import Bank and China Development Bank, now exceed the size of the World Bank. Interestingly, much of the lending tied to both of these banks’ portfolios has been dollar-denominated, tying back to China’s 2015 injection of $64 billion from their dollar FX reserves into the pair.

Unlike in the past, tackling banks of this size, or other large state and private banks in China, is no longer as simple as levying financial sanctions. While the power of such tools is self-evident, it is unclear if the end goal of sanctions, that is, a change in regime behavior, would be met by such a policy. At the same time, if such financial institutions actively evaded US sanctions by pursuing projects within specific jurisdictions, it is unclear if the Treasury would be justified in using the same tools as in the past. When levying 311 designations against entities, like the Central Bank of Iran or Macau’s Banco Delta Asia, there were few, if any, consequences for global financial stability. Against a great power competitor like China, this is no longer the case.

Sanctions policymakers have struggled acutely with this in the past, having eschewed traditional bans on correspondent banking when sanctioning Russia for its annexation of Crimea. In their place, the US and EU passed new financial sanctions restricting access to debt and equity financing of large Russian enterprises in dollar- and euro-denominated capital markets. Unlike Russia, many major Chinese state enterprises today are listed not only on China’s domestic markets, but also in Hong Kong, a major international financial center. In the past, New York enjoyed many benefits over Hong Kong, including a more relaxed listing framework and a more active investor community, but as Hong Kong has pursued reforms, such as allowing dual class share issuance, these advantages have become murkier. The delisting of SMIC last month and Alibaba’s plans for a secondary listing in Hong Kong make it clear that New York’s allure is weaker than it used to be.

Tech sanctions are one uneasy solution that could provide more immediate benefits in the interim. Given the degree of informal and opaque party influence in the private sector, it is highly unlikely that many firms will stop handling sensitive business on behalf of Beijing. These include firms, like Dahua and Hikvision, which produce many of the surveillance cameras used to spy on Xinjiang’s Uyghur population. In their place, Beijing may be more sensitive, if a major firm, like SenseTime or MegVii, which research facial recognition technology and have been linked to Xinjiang, were to be targeted. For Beijing, the Xinjiang campaign is non-negotiable: the Uyghur population is viewed by the Party as a source of domestic instability, and the region is likely to serve as a model for the rest of the country over the next several decades.

With this commitment in mind, Beijing could be more sensitive to the participation of sensitive firms, especially in the tech industry, that could be targets for Washington. At the same time, the mere possession of these tools themselves could also act as a partial deterrent to some degree. In the ZTE case, Washington demonstrated the crippling effect that an outright ban on US semiconductors could have on a major Chinese enterprise, enabling it to leverage this tool in future national security disputes.

Like with financial sanctions though, it is clear that the allure of tech sanctions’ overuse is overwhelming. In the recent dispute with Huawei, the listing of the firm on the Entity List carried wide-ranging ramifications for US businesses, occurring with little warning and little follow-through. Mirroring the experience with ZTE last year, the Commerce Department would do well to borrow from the Treasury’s experience with financial sanctions. These tech sanctions are not a strategy in and of themselves and must be met with other policy tools, including engaged diplomacy and strategic deterrence.

Further, a realistic understanding of China’s present and future role in the international trading system is woefully needed. Rolling back Beijing’s economic influence, whether in development loans or 5G, is no more realistic or desirable today than targeting the dollar balances of the Soviets in the 1950s and 60s.

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is a fellow at Harvard Kennedy School's Belfer Center for Science and International Affairs and adjunct professor at Boston University Pardee School of Global Studies. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait.