Colombia and the United States nearly went to war last weekend, but if you blinked, you might have missed it. Piqued by Colombia’s refusal to accept U.S. military flights bearing shackled detainees, U.S. President Donald Trump on Sunday posted on social media a blistering broadside of threats, including 25 percent tariffs on all Colombian exports, later upped to 50 percent after another heated exchange with Colombian President Gustavo Petro. Tucked away at the very bottom of the list, however, was an item that deserves more attention than it received. Briefly, it reads “IEEPA [International Emergency Economic Powers Act] Treasury, Banking and Financial Sanctions to be fully imposed.”
The implications of these words are easily missed. Most attention focused on the tariffs on popular Colombian exports such as coffee and cut flowers, which are easy for the average person to understand. Additional threats to restrict (or revoke) visas for members of Colombia’s government, and to conduct rigorous entry shakedowns for visiting Colombian nationals, were measures that would usually be aimed at a long-standing adversary, such as China, over some deep-seated dispute—as opposed to an economic and military partner, such as Colombia, raising a limited objection.
Colombia and the United States nearly went to war last weekend, but if you blinked, you might have missed it. Piqued by Colombia’s refusal to accept U.S. military flights bearing shackled detainees, U.S. President Donald Trump on Sunday posted on social media a blistering broadside of threats, including 25 percent tariffs on all Colombian exports, later upped to 50 percent after another heated exchange with Colombian President Gustavo Petro. Tucked away at the very bottom of the list, however, was an item that deserves more attention than it received. Briefly, it reads “IEEPA [International Emergency Economic Powers Act] Treasury, Banking and Financial Sanctions to be fully imposed.”
The implications of these words are easily missed. Most attention focused on the tariffs on popular Colombian exports such as coffee and cut flowers, which are easy for the average person to understand. Additional threats to restrict (or revoke) visas for members of Colombia’s government, and to conduct rigorous entry shakedowns for visiting Colombian nationals, were measures that would usually be aimed at a long-standing adversary, such as China, over some deep-seated dispute—as opposed to an economic and military partner, such as Colombia, raising a limited objection.
But the proposed banking sanctions went a giant leap further, toying with what, in economic policy, has often been called the “nuclear option.”
The details were, of course, as vague as a hastily posted threat can be. But taken at face value, the language implied all-but-wartime steps to treat Colombia as an enemy state, possibly freezing its assets (including reserve holdings of U.S. Treasurys) and cut it off from the U.S. financial system and all dollar-denominated transactions.
These are the kinds of measures imposed on countries such as North Korea and Iran or fundraising networks for al Qaeda. Even after Russian President Vladimir Putin invaded Ukraine, U.S. officials hesitated to impose such draconian sanctions on Russia, worried they might be considered an act of war—though they ended up pulling the trigger.
One reason U.S. officials wavered, in the case of Russia, involved the potential disruptions such a drastic cutoff could create for U.S. banks and businesses. A more profound concern, however, relates to America’s role as a trusted custodian of the world’s largest financial markets and reserve currency.
The effectiveness of U.S. financial sanctions depends on the perception that they are outliers in an otherwise predictable, rules-based order. Most countries, and most investors, have to believe that it would never happen to them. Sanctions on North Korea? That could never be me. Iran? Same. China or Russia? Things get a little trickier if (like Saudi Arabia or India) you do a lot of trade or investment with them or don’t always see eye to eye with the United States. But Colombia? Canada? Denmark? That could be anyone, tomorrow, based on Trump’s latest whim.
There are compelling reasons why most countries hold U.S. dollar reserves. The United States has the world’s largest and most liquid financial markets, allowing them to put their money in and out of those markets easily. It still has the world’s largest economy, ensuring that someone will always demand dollars to pay for the goods and services it produces—which mean other markets, for global commodities, are denominated in dollars, too. The United States is assumed to be good for its debts, and in moments of economic uncertainty, such as the COVID-19 pandemic, scared investors tend to abandon other assets and rush into U.S. Treasurys as a safe refuge.
But what if that safe refuge turns into a knife at your throat? Previously, that threat was reserved for rogue states and as a punishment for extreme actions such as invasions of a sovereign neighbor. Now, it seems, it might be anybody, on any given day, who happens to run afoul of Trump. Dollar holders may begin to consider alternatives, even if they come with some cost and inconvenience. Like many cataclysmic changes, it might happen gradually—and then suddenly.
Now, to be fair, dollar hegemony is not an unalloyed boon for the U.S. economy: The desire of so many foreign countries to hold dollars as reserves plays a key role in driving chronic U.S. trade deficits. But the “rapid unscheduled disassembly” (to use the SpaceX euphemism for “explosion”) of the dollar wouldn’t be a good thing either. It would translate into financial pain and a dramatically lower standard of living for millions of Americans.
Either the dollar would fall, making everyday imports a lot more expensive, or the U.S. Federal Reserve would have to hike interest rates, pushing the economy into recession. A real dollar crisis would probably mean both.
The latest standoff appears to have ended as quickly as it escalated. Trump claims that Colombia backed down, though which country actually conceded what may not become clear until flights resume. In fact, both countries had a strong incentive to fudge their differences and “agree to disagree,” if only to step away from the brink.
But to the extent that Trump walks away the perceived victor, he will be strongly tempted to make such threats again. And similar disputes—with Denmark over Greenland, the European Union over social media regulation, and Canada over Trump’s bizarre insistence that it become the 51st U.S. state—lie just around the corner. If threats of “nuclear” banking sanctions become the president’s go-to ultimatum, with friend and foe alike, Washington will be playing a very dangerous game indeed.
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