At the end of World War II, the US accounted for more than half the world’s economic output and gold reserves. The UK was effectively bankrupt, with the remnants of the sterling area bound together by capital and trade controls. Once the British pound became convertible in July 1947, owing to US insistence, it succumbed to overwhelming selling pressure. The dollar, which was pegged to gold at US$35 an ounce, was buoyed by the US’ privileged position within the newly formed International Monetary Fund and quickly established itself as the bedrock of global trade and finance.
While the US today accounts for only 25 percent of global output, the dollar remains involved in nearly 90 percent of all foreign-exchange transactions.
Despite its central role in cross-border trade and borrowing, however, the greenback’s share of central bank foreign exchange reserves has fallen from 72 percent in 2000 to 59 percent today. Given the recent harsh criticism of US currency policy by officials in China, Russia, Brazil, Saudi Arabia and elsewhere, it might therefore appear that the dollar’s uncontested reign is coming to an end, with far-reaching global economic consequences.
Illustration: Tania Chou
Importantly, the biggest threat to the dollar’s dominance comes not from competitive alternatives, but from the US government itself. The recent standoff over the federal debt ceiling, which threatened to trigger global financial instability, is a case in point. The prospect of endless repetition of such reckless partisan conflict prompted Fitch Ratings to downgrade the country’s credit rating from “AAA” to “AA+,” highlighting doubts about whether global investors can continue to trust the “full faith and credit of the US government.”
However, an even more immediate threat to the greenback’s dominance is its growing weaponization. Whereas US-led sanctions have been largely ineffective in changing the behavior of autocratic regimes in North Korea, Iran and Russia, they have inflicted considerable economic pain. Just as with the overuse of antibiotics fuels antimicrobial resistance, excessive use of sanctions prompts targeted countries, as well as potential targets, to reduce their engagement with the US financial system. Although this avoidance is costly, the costs are trivial compared to those of, say, having one’s central-bank reserves frozen or even seized. Prominent US commentators have advocated such seizures in the case of Russia, in order to compensate Ukraine for the horrific costs of Russia’s invasion.
However, if the dollar should lose its privileged place, what could replace it? At present, the euro, which accounts for 20 percent of global central bank reserves, is the only currency that could realistically serve as a substitute. Its appeal, however, is undermined by the fragmentation of Europe’s national sovereign-debt markets, as well as lingering doubts about the EU’s long-term viability in the wake of the UK’s departure.
The Chinese renminbi, which accounts for less than 3 percent of global reserves, is not a serious threat to dollar hegemony. Given China’s deteriorating legal protections, stringent capital controls, and relatively underdeveloped bond markets – from which foreign investors withdrew a record US$91 billion in 2022 — the renminbi is still far from a credible store of value.
The currency’s internationalization stalled a decade ago when capital inflows driven by expectations of perpetual appreciation came to an end.
So, whereas the dollar’s continued dominance should not be taken for granted, there is currently no viable single alternative. Instead, many commentators have pointed to the probable emergence of a “multicurrency” world in which the dollar plays a much-diminished role. Such a world, however, is not compatible with the multilateral trading system as we know it.
To be sure, countries can sidestep the dollar through barter trade, using commodities such as gold or oil. Iraq, for example, swaps oil with Iran in exchange for natural gas. However, governments will not accumulate currencies for which they and their citizens have no practical use. Thus, the greenback’s fading dominance could mark the demise of a highly efficient structure of global commerce in which the flow of goods and services is determined by cost and quality.
Instead, this flow would reflect whether a bit more or less of a given foreign currency is wanted in an exporting country.
Once countries abandon the practice of stockpiling currency through current-account surpluses, they are compelled to implement trade restrictions and other distortive measures to maintain flat, bilateral trade balances. That is why the dollar, despite its drawbacks as a global reserve currency, remains integral to the multilateral trade system built up under the 1947 General Agreement on Tariffs and Trade and its successor, the World Trade Organization. Although this regime is often criticized in the US for helping China rise through mercantilist means, it has played a critical role in spurring global innovation, reducing costs and lifting hundreds of millions of people out of poverty.
Although the US can and should do more through better education, job training and stronger social safety nets to support its citizens left behind by globalization, it must also ensure that its currency remains reliable enough to continue supporting world trade. That means putting an end to periodic partisan default brinkmanship, and exercising greater prudence and restraint in the use of unilateral financial sanctions.
Benn Steil is the director of international economics at the Council on Foreign Relations and the author of The Marshall Plan: Dawn of the Cold War.
Copyright: Project Syndicate
The return of US president-elect Donald Trump to the White House has injected a new wave of anxiety across the Taiwan Strait. For Taiwan, an island whose very survival depends on the delicate and strategic support from the US, Trump’s election victory raises a cascade of questions and fears about what lies ahead. His approach to international relations — grounded in transactional and unpredictable policies — poses unique risks to Taiwan’s stability, economic prosperity and geopolitical standing. Trump’s first term left a complicated legacy in the region. On the one hand, his administration ramped up arms sales to Taiwan and sanctioned
The Taiwanese have proven to be resilient in the face of disasters and they have resisted continuing attempts to subordinate Taiwan to the People’s Republic of China (PRC). Nonetheless, the Taiwanese can and should do more to become even more resilient and to be better prepared for resistance should the Chinese Communist Party (CCP) try to annex Taiwan. President William Lai (賴清德) argues that the Taiwanese should determine their own fate. This position continues the Democratic Progressive Party’s (DPP) tradition of opposing the CCP’s annexation of Taiwan. Lai challenges the CCP’s narrative by stating that Taiwan is not subordinate to the
US president-elect Donald Trump is to return to the White House in January, but his second term would surely be different from the first. His Cabinet would not include former US secretary of state Mike Pompeo and former US national security adviser John Bolton, both outspoken supporters of Taiwan. Trump is expected to implement a transactionalist approach to Taiwan, including measures such as demanding that Taiwan pay a high “protection fee” or requiring that Taiwan’s military spending amount to at least 10 percent of its GDP. However, if the Chinese Communist Party (CCP) invades Taiwan, it is doubtful that Trump would dispatch
Taiwan Semiconductor Manufacturing Co (TSMC) has been dubbed Taiwan’s “sacred mountain.” In the past few years, it has invested in the construction of fabs in the US, Japan and Europe, and has long been a world-leading super enterprise — a source of pride for Taiwanese. However, many erroneous news reports, some part of cognitive warfare campaigns, have appeared online, intentionally spreading the false idea that TSMC is not really a Taiwanese company. It is true that TSMC depositary receipts can be purchased on the US securities market, and the proportion of foreign investment in the company is high. However, this reflects the
RSS