The recently announced “phase one” agreement between the United States and China has been touted as an important step toward a comprehensive deal that ends the trade war that has raged for over a year. But if you think that US President Donald Trump is ready to abandon his antagonistic China policy, think again. In fact, the Trump administration is already moving to launch another, closely related war with China, this time over financial flows.
In a highly integrated world economy, trade and finance are two sides of the same coin. Cross-border trade transactions depend on a well-functioning international payments system and a robust network of financial institutions that are willing and able to issue credit. This financial infrastructure has been built around the US dollar – the most liquid and exchangeable international currency.
The dollar’s position as the leading global reserve currency has long afforded the US what Valéry Giscard d’Estaing, then France’s finance minister, dubbed an “exorbitant privilege”: America can print money at negligible cost and use it to purchase goods and services globally. But, with the opening up of global capital markets, the US has also gained exorbitant leverage over the rest of the world.
Today, some 80% of global trade is invoiced and settled in dollars, and most international transactions are ultimately cleared through the US financial system. About 16 million payment orders transit daily through the Euro-American Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Thus, US restrictions on capital flows have more far-reaching effects than any trade tariff. And yet imposing them requires only invoking the 1977 International Emergency Economic Powers Act (IEEPA), which allows the US president to declare a national emergency and deploy a range of economic tools to respond to unusual or extraordinary threats.
The IEEPA has formed the legal basis for many US sanctions programs, with presidents using it largely to block transactions and freeze assets. For example, in the 1980s, President Ronald Reagan issued an executive order under the IEEPA blocking all payments to Panama after a coup brought Manuel Noriega to power. (Funds intended for Panama were diverted to an escrow account established at the Federal Reserve Bank of New York.)
Trump – who has proved more than willing to cry “emergency” when it suits him – has cited the IEEPA many times, including to justify tariffs on imports from Mexico and to assert his authority to demand that US companies “immediately start looking for an alternative to China.” Hoping to drive Venezuelan President Nicolás Maduro from office, he used the IEEPA to freeze the assets of state-owned oil company PDVSA.
Trump has also forbidden US investors from purchasing any debt owned by Venezuela’s government or trading in shares of any entity in which it holds a controlling stake. Meanwhile, Trump has given Juan Guaidó, the US-backed interim president, access to Venezuelan government assets held at the Fed since his predecessor, Barack Obama, froze them in 2015.
Contrary to popular belief, Trump has not imposed more sanctions than his forebears. But he has devised particularly creative ways – often taking advantage of America’s disproportionate financial leverage – to ensure that his administration’s measures impose maximum damage, regardless of the effects on third parties. Likewise, Russia faces not only standard asset freezes and transaction blocks, but also limits on access to the US banking system and exclusion from procurement contracts.
China, which is already struggling with declining exports, sluggish investment, weak consumption, and a growth slowdown, apparently is next. The Trump administration is reportedly considering restrictions on US portfolio flows into China, including a ban on US pension funds from investing in Chinese capital markets, delisting Chinese firms from US stock exchanges, and limiting their access to stock indexes managed by US firms. How such policies would be implemented remains unclear; it would be no easy feat. But lacking a well-defined strategy has never stopped Trump before, especially when it comes to using economic levers to advance geopolitical objectives.
This approach may work in the short term, but it is sure to catch up to the US. Trump’s repeated weaponisation of the dollar undermines trust among holders of dollar-backed and US-verified assets. How many foreign companies will be willing to list on a US stock exchange knowing that they may be delisted at will? And how many non-US residents will keep their assets in US banks if any geopolitical skirmish can result in a freeze?
As mistrust of the US mounts, the drive for international monetary reform, which China has been advocating for the last decade, will gain momentum. This could mean expanding the international role of other currencies, such as the euro or, if China has its way, the renminbi. It could also lead to the creation of an alternate monetary system, centered on the needs of developing countries, especially oil and commodities exporters.
By broadening the nexus between economic interest and national security, Trump is encouraging the decoupling of the world’s two largest economies and the emergence of a bipolar world order led by rival hegemons. Beyond fragmenting the trade and financial system that has underpinned the global economy for decades, the stage would be set for a devastating conflict.
Paola Subacchi, Professor of International Economics at the University of London’s Queen Mary Global Policy Institute, is the author of The People’s Money: How China is Building a Global Currency. Copyright: Project Syndicate, 2019, and published here with permission.
14 Comments
Leading Global Reserve Currency. There have been quite a lot of suggestions by quite a lot of economic commentators that the USA’s position as such is now becoming seriously challengeable. Perhaps Trump and his cohorts think, that being the case, they have nothing to lose if it is going to end up like that anyway? But more likely one would think, he is just making things up as he goes as usual, and if it does become a consequence, one that would undoubtedly hurt the US drastically, it can always be made to be somebody else’s fault.
A rather more informed view of the US-China tussle: from Spengler via Asia Times.
China has a set of weak spots. First, they’ve got a very rapidly aging population. Like all countries with aging populations, they need to export capital and employ young people and other countries to pay for the pensions of their own people. Germany does this, too. That’s part of the motivation for China’s strategy. They will have an enormous burden supporting the aged in the future. They’re hoping to deal with that through automation, through more efficient health care. Their biggest problem is the ambitions of their young people. The Chinese created a generation of which 10 million people each year take the gaokao (university) exam. A third of them study engineering. They expect opportunities.
Yes. China pays pensions.
https://www.pensionfundsonline.co.uk/content/country-profiles/china/105
Another view from Joel Kotkin: an ascendant, if inadvertent, caste system....
Tocqueville, speaking of the nineteenth century European working class, accurately predicted that the continent’s elites were “sleeping on a volcano.” This same reality could emerge in China, where there is evidence of growing labor unrest, particularly among the new generation of migrants. In recent years, migrants have protested both evictions from cities as well as labor conditions, although activists often find themselves prosecuted for threatening “the social order.” These protests have been encouraged by Marxist study groups at universities, whose working class advocacy conflicts with the policies imposed by the nominally socialist government, raising the ire of embarrassed party officials.
Re: China:
It was never accounted for how that miracle wasn’t all that miraculous; it was bought and paid for by an equally rapid advance in global eurodollars. Take away the “dollars” and the growth suddenly disappears. But that’s not in the textbooks.
China has become a gross geopolitical risk because it can no longer achieve growth. It can no longer grow because the world, as seen in repo lately, simply doesn’t have the dollars to be able to. Until that changes, this is where we are. And where we are is probably the best case. Link
The second most frustrating aspect of trying to analyze global shadow money is how the term “shadow” really applies in this case. It’s not really because banks are being sneaky, desperately maintaining their cover for any number of illicit activities they are regularly accused of undertaking. The money stays in the shadows for the simple reason central bankers don’t know their jobs; even after a somehow Global Financial Crisis in 2008, they don’t realize the full scope of what goes on offshore or why it might be so important. Link
The USA is a consumerist society, it's the so called "largest economy " because of it's spending, or consuming. China has brought millions of people out of poverty in the past few decades, while the US has allowed a large proportion of its population to become homeless. The Chinese economy reviewed its growth downward to 6%. That's 6%. How many countries have that sort of growth? Efficient health systems are fairly difficult to achieve when profit underlies every activity within an economy. I guess Americas own aging population, along with most developed nations for some reason doesn't need to be mentioned here. Growth, for most developed nations, has come through the printing of debt, and nearly all of that debt has been invested in the stock markets, through pension funds, insurance funds, mutual funds etc. The corporations buying back there own debt, to inflate share prices, especially around bonus season, and borrowing, through issuing bonds, to pay dividends, has all gone largely unnoticed, or not mentioned, or gleefully ignored, as the search for greater yields has reached fever pitch. In a system where corporations control the very bodies that are there to keep them honest, the pursuit of profit ensures the systems own demise. (The FAA being a prominent example). Who would trust Boeing now? Who will trust the USD in the future?Corporate interest demanded a bailout in 2008, for their own incompetence, ineptitude or indifference, and blamed the gfc on little people over reaching themselves. Who was it really that was living beyond their means? So in terms of being part of the American nightmare, I would suggest it's Trump that is doing China, and many other countries, a favour, by isolating itself in so many ways, afterall, who in their right minds would continue to trade with an organisation so heavily in debt. When a large % of the world stops using the USD, what will America do with all those dollars? Cryptocurrencies offer any individual a way to get their wealth off grid, and protect their wealth from those who are eyeing it up to pay THEIR debt! Every countries largest trading partner is now China, western alliances have to be redrafted, the east needs to be better understood, and the west needs to step back and have a good look at itself. To not do so will simply mean the west will be left behind. By the way, one of the things western universities do not produce in the numbers society needs, is engineers. The worlds engineers, by number, ARE Chinese, so they're not just our most valuable trading partner, they're the ones most capable of actually building the future. Anyway, just a thought.
The USA is a consumerist society, it's the so called "largest economy " because of it's spending, or consuming. China has brought millions of people out of poverty in the past few decades, while the US has allowed a large proportion of its population to become homeless. The Chinese economy reviewed its growth downward to 6%. That's 6%. How many countries have that sort of growth? Efficient health systems are fairly difficult to achieve when profit underlies every activity within an economy. I guess Americas own aging population, along with most developed nations for some reason doesn't need to be mentioned here. Growth, for most developed nations, has come through the printing of debt, and nearly all of that debt has been invested in the stock markets, through pension funds, insurance funds, mutual funds etc. The corporations buying back there own debt, to inflate share prices, especially around bonus season, and borrowing, through issuing bonds, to pay dividends, has all gone largely unnoticed, or not mentioned, or gleefully ignored, as the search for greater yields has reached fever pitch. In a system where corporations control the very bodies that are there to keep them honest, the pursuit of profit ensures the systems own demise. (The FAA being a prominent example). Who would trust Boeing now? Who will trust the USD in the future?Corporate interest demanded a bailout in 2008, for their own incompetence, ineptitude or indifference, and blamed the gfc on little people over reaching themselves. Who was it really that was living beyond their means? So in terms of being part of the American nightmare, I would suggest it's Trump that is doing China, and many other countries, a favour, by isolating itself in so many ways, afterall, who in their right minds would continue to trade with an organisation so heavily in debt. When a large % of the world stops using the USD, what will America do with all those dollars? Cryptocurrencies offer any individual a way to get their wealth off grid, and protect their wealth from those who are eyeing it up to pay THEIR debt! Every countries largest trading partner is now China, western alliances have to be redrafted, the east needs to be better understood, and the west needs to step back and have a good look at itself. To not do so will simply mean the west will be left behind. By the way, one of the things western universities do not produce in the numbers society needs, is engineers. The worlds engineers, by number, ARE Chinese, so they're not just our most valuable trading partner, they're the ones most capable of actually building the future. Anyway, just a thought.
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