Trump White House accelerating toward a dollar crisis
As the US economy is heading toward its disastrous 2nd quarter results, the Trump administration is considering the expansion of the trade war to finance, which could destabilise the US dollar and derail the post-pandemic global economy.
After its failure in the COVID-19 containment and the expected -53 percent plunge of real GDP growth in the 2nd quarter, President Trump’s reelection campaign is in serious trouble. To deflect the blame, his administration has launched a series of provocative measures against China thereby fuelling elevated bilateral tensions.
Worse, the White House is reportedly considering moving from a bilateral trade war to an effort to exclude China from the dollardenominated international payment network. In Beijing, that would be seen as weaponization of the US dollar.
Created in Brussels in 1973 – after the rise of US deficits, weaker US dollar and its decoupling from the gold standard – the dollar clearing and settlement system (Society for Worldwide Interbank Financial Telecommunication, SWIFT) is ostensibly a non-profit organisation. Yet, its first CEO was a former executive of American Express and its data centres are in the US, Netherlands and Switzerland.
According to critics, the SWIFT’S status changed after 9/11, when the Bush administration, true to its unipolar stance on US security and defense, seized the payments network as an added tool in “coercive diplomacy.” In the Trump era, coercive diplomacy has been expanded in US economic engagements.
The SWIFT itself is said to oppose such measures, which could cost it a huge number of clients. After all, a contract on connecting to SWIFT is signed with each major bank separately, not the country.
Trump trade hawks’ dream of Plaza Accord 2.0
In the interdependent global economy, international trade and finance are two sides of the same coin. Cross-border trade transactions rely on an effective international payments system and a robust network of financial institutions issuing credit.
That infrastructure remains built around the US dollar, which the Trump administration would like to leverage to contain China’s rise.
In the post-war era, the Japanese yen might peak in the mid-1980s, when Tokyo agreed to a managed trade deal in New York City’s midtown Plaza Hotel. The controversial pact led the US, France, West Germany, the UK and Japan to depreciate the US dollar relative to the Japanese yen and Deutsche mark by intervening in the currency markets.
It was this exchange-rate manipulation that played a key role in Japan’s subsequent containment, by paving the way to its asset bubble in the early 1990s and the subsequent lost decades. But China is not going to follow that path.
Diversification away from US treasury bills
Through the Trump years, China has resisted protectionism and trade wars. But as a defensive measure, Beijing may now be forced to prepare against the risks of being cut off from the US dollar payment system.
Under the US dollar payment system, China remains vulnerable to potential US sanctions.
As long as China holds $1.1 trillion in US treasury bills and large investments that remain denominated in US dollars, exposure remains high. Over time, Beijing can diversify away from some of these bills and investments, while internationalisation of the renminbi would reduce reliance on the US dollar.
China is preparing for currency swap facilities as part of the Belt and Road Initiative (BRI) and in the Regional Comprehensive Economic Partnership (RCEP) with many Southeast Asian countries. Similarly, according to a recent report, sovereign wealth funds expect China to remain in the economic driving seat, despite the Trump administration’s cold wars.
Thanks to the long-term potential of Chinese economy and finance, renminbi’s role as a global reserve currency and its rising attractiveness for international transactions, the time is right for accelerated internationalisation. As China is now the first major economy to defuse the COVID-19 impact and is rebounding, global demand for renminbi assets is rising.
Augmenting dollar-based payment systems
During the 2008 financial crisis, China’s central bank’s then-chief Zhou Xiochuan revived Keynes’s idea of bancor, an international currency, while several major economies began talks about diversification away from the US dollar.
Note: the rest of this article continues in the online edition of Business Day @https://businessday.ng Dr. Steinbock is an internationally recognised strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (USA), Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see https:// www.differencegroup.net/
A version of the commentary was published by China Daily on July 29, 2020