Valdai Club

American sanctions methodology necessitates the ethical legitimisation of sanctions: they are not officially introduced with the justification that it is beneficial to the United States. Therefore, the ethical issue will remain, but will soon be spun in a new way, writes Valdai Club expert Anastasia Likhacheva.

American sanctions in the coming years are likely to play an increasingly prominent role, not only in US foreign policy as such, but also in the process of the intensive global demarcation of centres of power. Since the American methodology of launching sanctions necessitates their justification through the prism of values, it is likely that Washington and Beijing will soon fall into the Henry Kissinger trap: when the issue of opposing values is ​​raised in the negotiations, their failure will be guaranteed. The already-established practice of responding to unilateral sanctions will require complex decisions from the majority of those who take part in the global economic system.

This pessimistic forecast is connected both with the structure of the confrontation between the USA and China and with the technical side of the issue. The issue of whether or not to increase US sanctions pressure on China has been de facto settled; obligations to apply sanctions against Beijing can be found in the latest public documents of the State Department, and it can be tracked quite clearly by anyone monitoring new bills in Congress. The only question that remains open is the design and pace of the new sanctions programme.

The technical aspects require a little explanation. While the world has struggled together for a sanctions-compliant banking sector, and businesses on both sides of the Atlantic and the Pacific have tried to not fall prey to the 32 US sanctions programmes (it was especially difficult for Iranian and Russian companies), the matter of observing or not observing sanctions has been resolved. If we are talking about ordinary commercial enterprises and banks that were not created to engage in potentially sanctions-breaching transactions, then they generally comply with American sanctions. They are circumvented from time to time, as import substitution programmes are rebuilt and markets diversified in order to reduce their negative effects, in any event, institutions are forced to comply. Appealing to the lack of legitimacy of such sanctions usually falls on deaf ears, and Irans case here is the most indicative: despite the highest level of political rhetoric from European politicians, the issue has been resolved unequivocally for European businesses operating on the global stage: an American no means no. If we are talking about those legal entities whose primary task is to ensure national security, then the sting of US sanctions is sharply reduced  as the examples of India, China, Turkey and other countries show.

An analysis of the combination of these two trends  the inevitability of their active application by the worlds largest economy against the worlds second-largest economy (in nominal terms, or the second-largest economy against the first, in PPP terms) and the deep integration of sanctions as a tool in international interaction  allows us to formulate three key sanction trends for the coming years: the need for new value justifications of anti-Chinese sanctions, a similar need regarding Russian scenarios, and the accelerated demarcation between the American-centric model and the rest of the global economy.

First, we can expect that soon American sanctions against China will cease to struggle with traditional value plots and will shift to open deterrence, albeit with justification in a new ethical field. After that, it will be practically impossible to soften them without a profound transformation of US national interests in relation to China in the short and medium term.

Such a development of events is indicated by the evolution of the anti-Russian programme, from the Magnitsky Act to CAATSA: the morally symbolic sanctions being rolled out with minimal economic effects is probably only the first phase of a bill that is already supported by the House of Representatives: S.178  the Uyghur Human Rights Policy Act of 2019. Later, we can expect an increase in sanctions, which will materially affect key areas of strategic competition between the two countries: investment, telecommunications and IT.

However, American sanctions methodology necessitates the ethical legitimisation of sanctions: they are not officially introduced with the justification that it is beneficial to the United States. Therefore, the ethical issue will remain, but will soon be spun in a new way: from the alleged plight of the Uyghur population, policymakers will move to addressing issues of fair trade. Fair trade will soon be able to replace the religion of free trade, and this will legitimise the US in launching a number of sanctions against Chinese enterprises operating in strategic areas where ethical norms are not yet established: from biotechnology to artificial intelligence. Historically, the logic of American sanctions has always been grounded in a purported fight against absolute evil: be it dictatorship, the violation of human rights, drug trafficking, world terrorism or cybercrime, we will see such crusades for ethics very soon.

Here its helpful to remember the architect of Nixons visit to China in 1972: it was precisely a refusal to discuss value issues during the talks that allowed Henry Kissinger to achieve their well-known results. The more values ​​play a role during negotiations between the USA and China after almost 50 years of bilateral trade, the less chance there will remain that these talks will prove fruitful.

Second, due to the strategic nature of the confrontation, the general need for inter-party consensus, and the need a cohesive foreign policy agenda, there are no signs that the approaches to sanctions tested against Russia will not be applied to China. This includes working on the general toxicity of the jurisdiction in cases where a direct prohibition causes too noticeable damage to their own companies or institutions, an increase in the number of informal restrictions, and work on advancing the constant increase of sanction pressure or, at the very least, political pressure due to the risk of introducing new sanctions. In the near future, probably, Congress will be passionate about drafting new bills from hell albeit now anti-Chinese ones.

Third, and this is the most significant shift in recent years, the issue will be reduced to dollar settlements and financial sanctions as such, and more and more to the autonomy of the two models. The situation of other countries, and companies located outside the US and China, will therefore be so unenviable, and direct sabotage so expensive, that sanctions will become a catalyst for the deep delimitation of value chains, technology platforms and financial systems. It will not be enough to conduct transactions in a different currency, it will be necessary to monitor the ownership structure of both the company and its parent companies, monitor the business of subcontractors, etc. Going forward, sanctions paranoia will become a reoccurring ailment for those who seek to go about doing business as usual.

 The issue of engaging in systemic international cooperation with the United States and China will become increasingly difficult to resolve, as other parties resort to adopting stop-gap procedures for conducting settlements in alternate currencies or using a series of tricks such as creating paper companies, using foreign intermediaries, relying on ships flying neutral flags, etc. Sanctions surveillance mechanisms today, of course, monitor the most controlled settlements and systems, but since Irans gold for gas operations, great strides have been made to collect indirect evidence of US sanctions legislation being violated  increasingly, fines are levied based on messages send by corporate email rather than on payment receipts. Circumvention can be turned to as a form of rainy day insurance, to avoid immediate sanctions-related risks, such as accessing blocked operations and accounts, but it will not be possible to rely on them when planning national development strategies.

This poses new and acute questions for a vast number of countries and companies that do not want to limit themselves to doing business with either the US or China. However, a political will to overcome new risks will not be enough: a movement of sanctions non-compliance is impossible without the fragmentation of financial, payment, insurance and logistics systems, or the establishment of new consortia for technological and IT solutions. This, of course, is not a matter that can be solved in a day, but if it remains unresolved, the situation between the hammer of the American Themis and the anvil of the Chinese market will become unstable.