U.S. President Donald Trump’s decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA), the multinational deal that capped Iran’s nuclear program, is wrong for many reasons: The agreement was working, other signatories remain committed to it and the move casts the United States as a country that disregards international commitments. Another flaw is becoming evident and it has the potential to do the greatest damage to U.S. power and prestige: The imposition of sanctions on companies that continue to do business with Iran is invigorating efforts to work around Washington’s grip on the international financial system. Nothing could undercut the U.S. more than creating the means to do business without using the dollar or American financial institutions.

Since Trump pulled out of the JCPOA in May, the U.S. has tightened the screws on the Iranian economy to force it to the negotiating table and submit to a tougher agreement. As one American official explained, the U.S. is “aggressively enforcing these provisions to lock up Iran’s assets overseas and deny the Iranian regime access to its hard currency.” Among other things, the administration wants to reduce Iran’s oil exports to zero.

The U.S. does little business with Iran, however. If U.S. sanctions are to bite, then they must be enforced against non-U.S. companies. Since many of those companies do business with the U.S. as well, Washington’s threat to cut access to the U.S. market has teeth. As a result, dozens of non-U.S. companies have closed shop in Iran.

Other JCPOA signatories — Britain, China, France, Germany and Russia — do not share the Trump administration’s assessment of the deal. They fear that U.S. sanctions will put the squeeze on Tehran, but instead of forcing it back to the negotiating table, Iran will withdraw from the deal and resume its nuclear program. Moreover, they are aggrieved by the U.S. decision to apply its law to their companies operating in third countries. This prompted them to set up a special purpose vehicle (SPV) to allow firms to do business with Iran without accessing the U.S. financial system. Federica Mogherini, the European Union’s high representative for foreign affairs, explained to the United Nations last week that the SPV will be “a legal entity to facilitate legitimate financial transactions with Iran and this will allow European companies to continue to trade with Iran in accordance with European Union law and could be open to other partners in the world.” Japan should take note.

The SPV will be a “clearing house” for transactions in euros. Most international business transactions are conducted in dollars to minimize foreign exchange risks and large U.S. banks facilitate or route the deals. The SPV will allow companies to do business with Iran without using banks with ties to the U.S. financial system and thus reduce Washington’s ability to disrupt the deals. Skeptics note, however, that even if the arrangement is successful Washington could still impose secondary sanctions on companies that do business with Iran, forcing them to choose between the U.S. and Iranian markets. The U.S. could also sanction the SPV itself. That would be a bold move, but the Trump administration has shown no hesitation about such aggressive behavior thus far.

While it is often argued that U.S. power reflects its oversize military and its power-projection capabilities, more discerning observers note that the real source of U.S. influence and leadership is its central role in the global financial system. Attempts to circumvent that role go to the heart of American power.

That is why China seeks to conduct more of its international business in renminbi and pressed the International Monetary Fund to include it among currencies that determine the value of special drawing rights (SDR), its “alternative” international currency. Since it was included in the SDR basket in October 2016, it is now the third-largest of the five currencies included. China is also pushing for wider use of its government bonds, hoping that it will eventually become a global benchmark like U.S. Treasury bonds. That would have powerful implications for U.S. power.

The erosion of U.S. financial power is just beginning and prudent decisions in Washington could halt its decline. The extraterritorial application of U.S. law in pursuit of contested unilateral objectives is not a prudent decision; nor is a swelling budget deficit that risks devaluing the dollar. It is natural that other countries, including Japan, seek to do business with Iran not be subject to Washington’s veto. The EU wants to strengthen the role of the euro in global trade, just as China and Russia seek to expand the role of their currencies. New international financial architectures are taking shape as a result. Given the size of Japan’s economy and its role as a global trader, it must prepare for this evolution and get ahead of developments rather than be overtaken by them.

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