Soft power is sometimes defined as a way of achieving the outcome you desire without using force. In Britain’s case, this has traditionally been exercised using subtle diplomacy, cultural and legal institutions.
The United States exercises soft power through its culture, films and music, too, but it also does through the ubiquity of the US dollar.
With power comes responsibility. There is a danger now that, in seeking to use the dollar’s reserve currency status to achieve US foreign policy aims, America is undermining that power.
A key criticism of the US sanctions on Iran, particularly the ban on Iranian banks from using the Swift payments system, is that it has created incentives for other countries to trade with Iran without using dollars. Iran itself has exploited this by using its own currency in bilateral trade deals with India, China, Russia and Japan.
It is a small step from finding ways of trading with Iran without using dollars to trading with each other without using dollars, something that has been noted by the People’s Bank of China, whose officials are talking increasingly loudly about how and when the yuan might become a global reserve currency.
The aggression shown by the New York State Department of Financial Services towards Standard Chartered has just created another incentive to avoid doing business in dollars.
Yet another example of the Law of Unintended Consequences.
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