Interesting Times Article.

MEHREEN KHAN

Trump has turned to tariffs because sanctions don’t work

Decades of financial coercion have proved ineffectual or worse so tax could be a better way of putting America First

Mehreen Khan

, Economics Editor

Monday February 03 2025, 10.30pm GMT, The Times

President Trump’s decision to impose punitive tariffs on America’s closest trading partners has roiled complacent financial markets and put the country’s allies on notice. US tariff duties are now heading back to levels last seen in the 1940s if Trump’s 25 per cent tax on Canadian imports comes into force this week.

Of the various justifications for swingeing import taxes — raising revenues, reducing the US trade deficit — the president has also consistently stated that tariffs are a better use of America’s economic might than sanctions.

“What we’re doing with sanctions is we’re forcing everyone away from us. So I don’t love sanctions,” Trump said on the campaign trail last year. The aversion to sanctions comes from the belief that the widespread use of financial coercion that prevents blacklisted individuals and entities from financial transactions involving the ubiquitous dollar will damage the US currency’s dominant role in global finance.

The Trumpian worldview sees tariffs as a way to achieve the same degree of economic coercion over rivals with the additional benefit of strengthening the global role of the greenback, as seen this week. In keeping with this thinking, the president has frequently threatened a 100 per cent tariff on the expanded Brics countries over their nascent attempts to develop a rival reserve currency.

The “tariffs over sanctions” mantra has also gained traction because of the broadly ineffectual impact of the unprecedented exclusion of Russia from the global financial system since March 2022. Supporters of sanctions assumed that landmark steps to freeze Russia’s central bank assets and to hit companies operating in the country with threats would hobble the domestic economy, collapse the currency, weaken popular support for President Putin and ultimately halt the Russian war effort. Measured against these aims, the sanctions regime, three years on, has seemingly failed. Russia’s economy grew faster than the European Union average in 2023 and 2024 and is projected to do the same again this year, driven by the war footing.

Some economists think 2025 will be the year the Russian economy finally keels over in the face of worker shortages and biting inflation but this could also be the year that the war comes to an end and it will be Trump, rather than the prolonged impact of sanctions, that will be decisive.

Pro-sanctions US officials admit that the biggest unintended consequence of the weaponisation of the dollar has been to draw Russia closer into China’s orbit and create a clunky, but ultimately effective, system of diverted trade and supply chains across emerging markets who have become the main customers of Russian oil.

The efficacy of sanctions as a weapon to thwart America’s geopolitical rivals has been dealt a blow by news that the Chinese company DeepSeek has developed a far cheaper, more efficient generative AI model that can compete with dominant American firms such as OpenAI and Google. The leap from a largely unknown Chinese start-up is in defiance of export bans of advanced chip technologies from the US giant Nvidia, put in place by the Biden administration.

Hundred of billions were wiped off Nvidia’s stock market value amid speculation about how a Chinese company could come up with an AI chatbot at a reported tenth of the cost and with inferior chips. There are plenty of competing claims that try to account for this “Sputnik” moment, including the accusation that Nvidia may have still exported chips that were close to the line prohibited by the sanctions, or that advanced chips entered China through neighbouring markets such as Singapore.

Whatever the reality, the fact that necessity is the mother of all invention has humbled the belief that chip bans will give the US a permanent advantage in AI and digital development, of the kind that China has long held in the area of clean tech.

All this is to suggest that the accumulation of sanctions, which have been the go-to weapon of US economic and diplomatic assault, could be stopped in its tracks. The number of sanctions imposed by America has risen from about 900 to more than 15,000 since the turn of the century when including measures on individuals. The Biden government alone added 7,000.

If Trump is good on his word and chooses to wield tariffs over sanctions on rivals, what will be the impact? Sanctions are supposed to block all imports, exports and transactions with a listed entity, rather than just impose taxes on them. To be successful, tariffs also rely on near total compliance from all transacting parties to be effective as any attempts at evasion can nullify the impact entirely. In this, the protean Trump era is ill-suited to enforcing a sanctions regime. Sanctions, unlike tariffs, are also far harder to remove once in place.

Since he’s been in office, Trump has been more tempted by the sanctions lever than his previous pronouncements would suggest. He has already threatened additional sanctions on Russia if Putin refuses to engage in peace talks over Ukraine and has mentioned sanctions in the same breath as tariffs when threatening Colombia. This suggests that there will be no hard break with sanctions accumulation under Trump 2.0 but rather the deployment of customs taxes mixed with export and technology transfer bans all under the banner of America First economic lawfare.

What is novel is Trump’s choice of targets. Thus far it seems that the president wants to use tariffs against America’s closest trading partners and old allies as exemplified by Canada, rather than hegemonic rivals such as China. On sanctions, Marco Rubio, Trump’s secretary of state, has opened the door to increasing measures on traditional foes such as Venezuela and Iran.

Esfandyar Batmanghelidj, an expert on sanctions, has dubbed this the shift from “pax Americana to tax Americana”. “The unipolar order remains, but it is being rebuilt through the coercive power of tariffs and other economic weapons. Trump comes knocking and countries will pay. It’s the tax for letting America stay first,” he said.

Mehreen Khan is Economics Editor of The Times