a discussion of potential reforms to US and Chinese policies and to the global monetary system that could help rebalance the world economy and de-escalate Sino-US tensions.
The sheer scale of the imbalances that have built up means that they cannot be quickly unwound and many of the challenges are not well understood. Reforms will require key decision makers in China, the US and other major nations to put their heads together, seek truth from the facts, and cooperate with each other in designing appropriate policies. It will be a daunting task. However, for the sake of our future peace, stability and prosperity, it is a task that we can no longer put off.
Notes
1 1. (Fukuyama, 1992).
2 2. IMF data, which can be accessed at: https://data.imf.org. Figure given is for 31 December 2020.
3 3. A ‘Gilt’ is the common term used for a British government bond.
4 4. (Rajan, 2019, p. 248).
5 5. See, for example, (Klein & Pettis, 2020) and (Magnus, 2018).
6 6. See (Kolodko, 2020).
7 7. (Saunders, 2020).
8 8. China conducted a series of live-fire exercises in the Taiwan Strait in the run-up to Taiwan's presidential election on 23 March 1996 to express displeasure at the apparent independence leanings of Taiwanese President Lee Teng-hui (李登辉).
9 9. (Yergin, The New Map: Energy, Climate, and the Clash of Nations, 2020, p. 138).
10 10. (Wong, 2015, p. 14).
11 11. (Naughton, 2020, p. 129).
12 12. (Wong, 2015, p. 14).
13 13. In 2018, before worsening Sino-US relations and the 737 Max recall affected its sales, China accounted for 13.6 percent of Boeing's worldwide revenues. Notwithstanding ongoing trade tensions, China contributed 18.8 percent, 11.0 percent and 9.3 percent, respectively, of the worldwide sales of Nike, Starbucks and Disney in 2020.
14 14. See (Magnus, 2018) and (Mahbubani, 2020).
15 15. HKEX and Dealogic data for the 10 years up to 31 December 2020.
16 16. For the 10 years ending 31 December 2020, Mainland China-listed A-shares traded at an average premium of 18.2 percent versus their Hong Kong-listed H-share counterparts.
17 17. (Mahbubani, 2020, pp. 33–37).
18 18. For example, President Trump suggested publicly that the Covid-19 virus originated in a Chinese laboratory. See (BBC, 2020). Meanwhile, the Chinese Foreign Ministry accused the US of inciting anti-government protests in Hong Kong in 2019. See (Westcott, 2019).
19 19. (Ferguson, 2020).
20 20. (Brands, 2020).
21 21. (Klein & Pettis, 2020, p. 96).
22 22. (Sargent, 2011).
23 23. (Blackwill & Harris, 2016, p. 49).
24 24. See (Steil, 2013) and (Klein & Pettis, 2020, pp. 19–23).
25 25. (Steil & Litan, 2006, pp. 2–3).
Chapter 2 How the US Dollar Took Over the World
Dollar bills have absolutely no value except in our collective imagination, but everyone believes in the dollar bill.
– Yuval Noah Harari
If we were to imagine the global economy as a human body, then you could say that America controls its circulatory system. Flowing through the arteries and veins of the global financial system are US dollars, which serve as the primary means of exchange in international trade and investment, and as a universally recognised store of economic value. The dollar was used for around 39 percent of all global payments and dollar-denominated securities (largely in the form of US Treasuries) made up roughly 60 percent of global foreign exchange reserves in 2020,1 far exceeding America's share of either world trade (11 percent2) or nominal global GDP (24 percent3). In other words, the US currency plays a role in the world that stretches way beyond US borders and has, in effect, become a global utility.
At least one former US Treasury Secretary has acknowledged that the dollar's role is a source of great power for the US, since it has allowed the US government to ‘pay lower rates … than it otherwise would’ on its borrowings and ‘enables the country to run larger trade deficits, reduces exchange-rate risk, and makes American financial markets more liquid’.4 Another commentator put it more bluntly: ‘By generating a steady flow of customers who want to hold the currency … it allows the privileged country to … fund a lifestyle well beyond its means’.5
At one time, the dollar was backed by a fixed quantity of gold; however, since President Nixon's abandonment of the gold standard in 1973, the currency has had no intrinsic value beyond ink, paper and faith in the US government and its financial system. That the rest of the world continues to confer what former French president Valéry Giscard d'Estaing called this ‘exorbitant privilege’ on the US undoubtedly
