An attempt to freeze China out of the US dollar system will hasten decoupling, but not to America’s advantage
- The reported US plan to target China in a financial war, if put in motion, would be the latest Trump move to leverage the US dollar’s privileged position to advance geopolitical objectives. It would deepen mistrust of the US and hasten the search for an alternative financial system
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 per cent 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.