Are Trade Barriers Good for Business?  Part II: Sanctions

Trade barriers, which range from trade sanctions and import tariffs to non-tariff barriers (NTBs) such as labeling, documentation, complex or discriminatory rules of origin, and quotas, are often deployed by policymakers in an effort to protect domestic industries from foreign competition. As geopolitical conflicts increasingly influence trade policies, these barriers have become tools for nationalist governments worldwide.

As mentioned in a previous blog on tariffs, it is unclear if these policies are achieving their intended effects.  The previous article spoke to innovations in business models and product development which occurred as a result of specific trade barriers. Below, we look at the potentially perverse impact of sanctions and what this may mean for companies engaged in global commerce.  

The United States Dollar

The United States dollar was established as the world’s chief reserve currency by the Bretton Woods Agreement of 1944.  This position meant that over time the US dollar became the de facto currency for quoting and settling international transactions in goods and services.  The central role of the US dollar provided the US with a unique trade policy tool, while also simplifying the management of pricing and payment for companies engaged in international business.  

The landscape for international settlements, however, is changing.   The use of sanctions has likely (and inadvertently) accelerated the pace of change.  Innovations in the use of alternate settlement mechanisms have been fuelled by a combination of inefficiencies in the current clearing systems, the growth in the non-aligned trade blocs, and a desire to clear using regionally-based clearing solutions, as well as the efforts to mitigate the impact of sanctions which are applied specifically to transactions dependant on the US dollar.  

The following discussion explores the evolution of the dollar’s role, the influence of U.S.-based clearing mechanisms, the growing appeal of alternative financial systems, and the impact on businesses that must now adapt to a more complex, multi-currency trade environment.

1. The Changing Role of the U.S. Dollar in Global Trade

In the 1980s, the U.S. dollar was nearly unrivaled as the world’s trade currency, underpinning 70% of global foreign exchange reserves and handling the bulk of international trade. Its stability, backed by the world’s largest economy, made it the default currency for cross-border transactions. 

However, the dollar’s share in global reserves has steadily decreased, reaching approximately 58% by 2024. The shift reflects broader changes in the global economy, with emerging markets, particularly China and India, becoming major trade powers that bring their own currencies into play. 

The dollar still holds the largest share, but its waning dominance indicates a gradual shift toward a more diversified global currency ecosystem.

2. SWIFT and the Influence of U.S.-Based Clearing Systems

The global influence of the dollar is supported by key financial infrastructure, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT), based in Belgium. SWIFT enables secure, standardized messaging for international payments, with a substantial number of transactions clearing through U.S. banks in dollars. 

This gives the U.S. significant leverage over global financial flows, allowing it to impose sanctions that cut sanctioned countries off from the global financial system. For countries like Iran and North Korea, access to SWIFT and U.S. dollar accounts has been restricted, significantly limiting their ability to conduct trade.

However, SWIFT and dollar-based clearing systems are known for their inefficiencies. Transactions often take several days to settle and involve multiple intermediaries, adding costs for businesses using SWIFT to conduct trade. These inefficiencies have increasingly become a source of frustration and are spurring countries to explore alternatives that could meet the demands of modern trade more effectively.

3. The Rise of Alternative Clearing Systems and Digital Solutions

In response to the reliance on SWIFT and U.S.-dominated dollar systems, several countries are developing alternative clearing mechanisms and promoting regional currencies for trade. The European Union, for instance, established the Instrument in Support of Trade Exchanges (INSTEX) in 2019 to allow trade with Iran outside of dollar systems. 

Similarly, China’s Cross-Border Interbank Payment System (CIPS) offers a yuan-based alternative that bypasses U.S. banks, while Russia has developed its own System for Transfer of Financial Messages (SPFS) to ensure access to international markets independently of SWIFT.

A critical advantage of these alternative systems is their digital infrastructure, which reduces costs and processing times compared to SWIFT. CIPS, for example, uses blockchain technology to enable near-instant settlements in yuan, drastically improving efficiency and lowering fees. 

Digital clearing systems streamline transactions by reducing intermediaries, making them faster and cheaper—a significant attraction for businesses in a global economy where speed and cost-efficiency are paramount.

4. The Impact on U.S. Sanctions and the Global Trade Landscape

With the development of alternative clearing systems, U.S. sanctions may lose some of their impact. Countries under threat of sanctions, as well as non-aligned nations seeking to reduce their dependency on the U.S., are finding ways to conduct business outside the dollar system. 

For countries facing sanctions, these alternatives provide essential lifelines for maintaining trade, diminishing the isolation effect that U.S. sanctions are meant to create. The growth of these systems means that countries have more options to settle trades in local or alternative currencies, allowing them to build greater resilience to potential sanctions.

Conclusion: Navigating a Multi-Clearing System Trade Environment

The inefficiencies of the SWIFT system—such as delays and high costs—combined with the use of sanctions as a policy tool, have catalyzed the growth of new, digitally-driven clearing mechanisms. This evolving landscape has profound implications for businesses. 

As trade systems diversify, companies involved in international trade will likely need to adapt to a more fragmented clearing environment. Businesses may find themselves navigating a patchwork of clearing systems, each with different regulations, costs, and currency requirements, depending on trade routes and partners.

While this shift may bring challenges in terms of compliance and operational complexity, it also presents opportunities for companies that can strategically manage multiple currencies and clearing channels. The ability to engage in cross-border trade using a variety of clearing mechanisms can increase operational resilience and open up new markets. 

Ultimately, the emergence of these alternatives to SWIFT marks a pivotal change in global finance, pushing companies to be more agile and adaptable in a trade regime that is moving away from a dollar-dominated framework toward a multipolar clearing system landscape.