Trump White House ac­cel­er­at­ing to­ward a dol­lar cri­sis

Business Day (Nigeria) - - COMMENT - DAN STEINBOCK

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

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