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
Perhaps. But these lines of discussion miss a more profound point: what do we risk by weaponising the global financial commons?
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.
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.
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?
Just when better communications and mutual understanding are sorely needed, sanctions have simply created another barrier.
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Given the unilateral power it enjoys over the arteries of international finance though, why should the US agree to surrender this?
Structural overvaluation stemming from international demand for dollars in trade and investment has exacerbated a loss of industrial competitiveness, hurting US workers.
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