Source:
https://scmp.com/comment/opinion/article/3180619/why-it-us-interests-give-its-dollar-privilege-forge-more-neutral
Comment/ Opinion

Why it is in US interests to give up its dollar privilege to forge a more neutral financial order

  • A system in which the global financial commons can be weaponised by the dominant power may favour the US now, but not when it slips from its perch
  • American industry and people are also paying a price for their country to maintain its exorbitant privilege
A woman leaves a currency exchange office in St Petersburg, Russia. Photo: AP

Much ink has been spilled speculating over the longer-term consequences for the US dollar of the unprecedented financial sanctions imposed on Russia in the wake of military action in Ukraine. Will it lead the world to de-dollarise? And will it contribute to greater international adoption of the renminbi?

Perhaps. But these lines of discussion miss a more profound point: what do we risk by weaponising the global financial commons?

In conventional warfare, there is a long-established principle of non-combatant immunity. Financial warfare respects no such rule. The immediate impacts of the latest sanctions on Russia were a spike in oil prices and a short-lived run on the rouble. However, Sri Lanka – which has no direct involvement in the Ukraine situation – has subsequently experienced violent protests, precipitated by fuel price inflation that has exacerbated an economic crisis.

It is unlikely that the South Asian nation will be the last innocent bystander to be buffeted by the fallout from the sanctions. As is the case so often, the world’s poorest are the most vulnerable.

Long queues form at petrol stations in Sri Lanka as fuel prices hit record high

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Long queues form at petrol stations in Sri Lanka as fuel prices hit record high

Then there are the third-order effects. Given the complex intertwining of markets through globalisation, these are hard to predict. Many exporter nations, particularly in Asia, have built up large dollar reserves as a result of international trade.

If they lost confidence that they would be able to access those savings in the event of a rainy day, would they still be willing to sell their goods and labour in return for dollars? If not, how might this impact inflation in advanced nations? And what are the knock-on consequences for social stability?

Evidence of the effectiveness of financial sanctions is, at best, mixed. The US has maintained a wide-ranging embargo on Cuba since 1962 but has failed to achieve regime change there.

More recently, following the 2020 passage of the national security law for Hong Kong, the US State Department targeted a raft of sanctions at mainland Chinese and Hong Kong officials deemed to have been behind it.

Unable to access banking services, Hong Kong’s chief executive drew her salary in cash. But does anyone seriously believe that forcing Carrie Lam Cheng Yuet-ngor to stuff banknotes under her mattress is going to bring about any change in Chinese policy towards Hong Kong?

Hong Kong leader Carrie Lam says she gets around sanctions by collecting her salary in cash

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Hong Kong leader Carrie Lam says she gets around sanctions by collecting her salary in cash

While targeting individuals associated with unpopular policies makes for good political theatre, it is hard to discern any benefit from such puerile tit-for-tat. In fact, a European diplomat recently shared with me a challenge that he faces following the election of Hong Kong’s next chief executive. Since John Lee Ka-chiu is a sanctioned person, the diplomat’s country will be unable to officially host the territory’s new leader.

Just when better communications and mutual understanding are sorely needed, sanctions have simply created another barrier.

Equally of concern is that, at a time when Hong Kong is in dire need of more competent people in government, the potential risk of becoming subject to financial sanctions is likely to deter many of the most qualified candidates.

The dollar and influence over the infrastructure supporting the dollar-based global monetary system are significant sources of American power. In recent decades, the US has displayed a growing willingness to weaponise the dollar against its strategic rivals, even in the face of opposition from its allies – such as when the Trump administration reimposed sanctions on Iran in 2018 after withdrawing from the UN-backed nuclear non-proliferation deal.

Given the unilateral power it enjoys over the arteries of international finance though, why should the US agree to surrender this?

Although the dollar is commonly seen as an “exorbitant privilege”, Americans have borne a high cost for allowing their currency to serve as a global utility. As US growth has fallen behind that of other countries, the balance of payments deficits needed to supply dollar liquidity to the rest of the world have spurred precarious levels of debt.

The US Treasury Department in Washington. Although the dollar is commonly seen as an “exorbitant privilege”, Americans have borne a high cost for allowing their currency to serve as a global utility. Photo: Bloomberg
The US Treasury Department in Washington. Although the dollar is commonly seen as an “exorbitant privilege”, Americans have borne a high cost for allowing their currency to serve as a global utility. Photo: Bloomberg

Structural overvaluation stemming from international demand for dollars in trade and investment has exacerbated a loss of industrial competitiveness, hurting US workers.

And while the dollar has long defied the doomsayers, US policymakers would do well to consider what a post-dollar world might look like. The accumulated pressures of high indebtedness, unrestrained monetary expansion and abuse of financial sanctions are eventually likely to lead to a tipping point, where the baton of dollar hegemony passes to another currency. How would they feel about a rival power enjoying the same dominance of the arteries of global finance as the US enjoys today?

America remains in a position to take the lead in reforming the international monetary system and defining a new framework of international rules. Foregoing its financial arsenal to create neutrality in the global financial commons might be viewed as an act of enlightened self-interest.

James A. Fok is a veteran financial and strategic adviser to corporations and governments, and a former senior executive at Hong Kong Exchanges and Clearing