Transforming Global Trade: The Shift from U.S. Dollar Dominance

The Challenge of Abandoning the U.S. Dollar

Shifting away from the U.S. dollar for global trade and reserve accumulation would be a formidable task for U.S. adversaries, necessitating significant economic adjustments. While this change could ultimately benefit the United States by reducing its economic burdens, it would also alter global trade patterns. The recent sanctions on Russia have underscored the geopolitical clout that control over the global currency system affords. However, these sanctions have also prompted other nations to seek alternatives to the dollar to avoid potential penalties in the future.

The Debate on Alternative Currencies

A heated debate has emerged over whether countries like China can establish a credible alternative to the U.S. dollar. While there is much discussion about the feasibility of such a shift, less attention is given to the potential trade impacts. Trade and capital flows are intertwined, as savings represent the excess production of goods and services. Therefore, a world less reliant on the dollar would also see significant changes in global trade dynamics.

The Complexity of Overturning Dollar Dominance

First, it is extremely difficult for countries like China and Russia to disrupt the dominance of the U.S. dollar. Even sophisticated economic policy advisers in these countries acknowledge this, albeit cautiously.

Second, ending the dollar’s dominance would primarily require U.S. policymakers to limit foreign access to U.S. financial markets, which absorb global savings imbalances. While many analysts doubt the U.S. will willingly take such steps, the rising costs to the U.S. economy might eventually compel action. Resistance from Wall Street and the foreign policy and military establishments would be strong, but the growing economic burden could make this outcome more likely.

Third, a global economy without the dollar as the primary currency would find large, persistent trade and savings imbalances impossible to maintain. This could benefit the global economy overall but would necessitate deep institutional changes in countries dependent on trade surpluses, potentially causing significant political disruptions.

Can the World Find an Alternative to the U.S. Dollar?

The dollar’s dominance in international trade stems not just from network effects but also from factors like deep and flexible U.S. financial markets, transparent corporate governance, and minimal discrimination between domestic residents and foreigners. For China’s renminbi to compete, Beijing would need to offer similar benefits, which is unlikely given its current economic policies and control over credit growth and financial liabilities.

The Role of the Dollar in the Global Trading System

The dollar remains dominant partly because of the unbalanced global trading system. Large economies like China, Germany, Japan, and Russia rely on trade surpluses to offset weak domestic demand caused by unbalanced income distributions. These surplus economies need to acquire foreign assets, which is where the U.S. plays a crucial role by allowing unfettered access to its assets and running permanent trade deficits. Other major economies are neither willing nor able to accept this burden.

Will Acquiring Commodity Reserves Provide an Alternative?

Some analysts suggest that global reserve accumulation might shift towards commodities in response to sanctions on Russia. However, this is impractical for commodity exporters and importers alike, as it would exacerbate economic volatility. For most countries, especially those looking to escape dollar dominance, investing in commodities as reserves would be counterproductive.

Will the United States Force Other Countries to Stop Using the Dollar?

The debate often assumes that foreigners want to limit the dollar’s global use while Americans resist. However, the issue is more about economic sectors within the U.S. than national interests. Wall Street and the foreign affairs and defense establishments benefit from dollar dominance, while American workers, farmers, producers, and small businesses bear the economic costs. These costs include higher unemployment, increased household debt, or larger fiscal deficits to compensate for lost domestic demand.

The Future of the Dollar’s Dominance

For the U.S. economy, the dollar’s global role imposes significant burdens rather than benefits. Ultimately, Washington must lead in steering the global trade and capital regime away from excessive reliance on the dollar. This might involve unilateral actions to constrain foreign financial inflows or negotiating new trade agreements to resolve domestic demand imbalances. While these steps would be challenging, they would help the U.S. economy and maintain some control over global trade and capital flows.

Impact on Global Trade

If the U.S. and other Anglophone economies reduce their role as absorbers of foreign savings, global trade surpluses would need to contract significantly. This adjustment would force surplus economies to address domestic demand deficiencies, which could involve increasing unemployment, boosting consumer lending, expanding government deficit spending, redistributing income, or surging investment. Each option poses significant challenges and reinforces the crucial role the U.S. plays in the global economy.

Conclusion

The world is stuck with the U.S. dollar, not because of its privilege for the U.S. economy, but because it allows many of the world’s largest economies to grow by tapping into American demand. While the dollar’s dominance benefits certain American constituencies, it imposes an economic burden on the broader U.S. economy. The end of this dominance hinges on U.S. political decisions, not the desires of foreign antagonists. Washington must recognize the costs and take steps to move the global economy away from its dependence on the U.S. dollar for the long-term benefit of both the U.S. and the world economy.