Bucking the Buck by Daniel McDowell

Author:Daniel McDowell
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2023-06-15T00:00:00+00:00

Firm-Level Experiment: US Sanctions and Trade Settlement Preferences

De-dollarization of trade settlement ultimately comes down to decisions made by individual firms. Governments can sign agreements like local currency swap deals that make it easier and more attractive for firms to settle trade in local currencies. Eventually, however, businesses must decide whether to move their cross-border transactions out of the dollar. All else equal, a government that wishes to reduce the role of the dollar in cross-border trade due to political risk concerns will be more likely to succeed if firms in the country are also concerned about dollar dependence. Firm managers who have been awakened to the political risk of relying on the dollar should be more responsive to state-led anti-dollar initiatives than those who have not. The former should be more willing to collaborate with the government and to invest time and resources into changing their payment relationships with foreign partners.

It is thus an important and open question whether firms react to US sanctions with heightened political risk concerns of their own. While US sanctions programs broadly target foreign governments, they often directly target firms. Businesses blacklisted by the US Treasury are cut out of dollar-based payments, causing tremendous harm to their global business relationships. As the United States has increased its use of financial sanctions as a tool of foreign policy, business managers’ attitudes toward the dollar may have shifted. Relying on the dollar for cross-border payments may make sense from a purely economic perspective, but the political risks of doing so may make industry executives more willing to consider currency alternatives. If sanctions generate political risk concerns among firms, then priming business managers to think about the growing use of financial sanctions should boost their interest in using non-dollar currencies for trade settlement as well as their support for initiatives that make such an outcome possible.

To explore whether priming firm managers to think about the US government’s increasing use of financial sanctions affects attitudes toward dollar alternatives, I fielded an original survey experiment in Vietnam as part of the 2019 Provincial Competitiveness Index (PCI).32 Multinational corporations (MNCs) from fifty-one countries are represented in the survey of over 1,500 firms operating facilities across fourteen national provinces. Vietnam is a useful case for assessing the impact of US financial sanctions on corporate managers’ attitudes toward the dollar. Vietnam has never been the target of US financial sanctions. This is helpful, since firms in countries that have been targeted—like Russia, Venezuela, or Iran—would likely exhibit much higher baseline levels of concern about the dollar. If interest in non-dollar trade settlement is already elevated due to experience with sanctions, this could weaken any potential treatment effect from information about US sanctions. Because Vietnam has no experience with US financial sanctions, it provides a cleaner test of how sanctions impact firm manager attitudes toward dollar payments.

Vietnam is also a useful case because it is currently one of the most important developing economy destinations for investment by MNCs.33 Between 1980 and 2013, it boasted the highest rate of annual growth of net foreign direct investment inflows in East Asia.

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