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For U.S., No Worries in Brazil-China Currency Swap

Today’s FT carries some news that is bound to raise a few eyebrows in America: Brazil and China have agreed to a currency swap deal that constitutes a “vote of confidence” in China’s efforts to promote the renminbi as a reserve currency.

There is a tendency among some at home—and many abroad—to see China’s push for renminbi internationalization as part of a dangerous trend that could “dethrone” the dollar as the world’s reserve currency, crippling, they think, the U.S. economy and U.S. power.

But this view is based on a lack of understanding of the interrelationships between economics and geopolitics. The role of the dollar is not a cause of American power; it is a consequence of it, and it is very unlikely that anything foreign governments could do would weaken the dollar in ways that would affect U.S. strength. Only the U.S. can accomplish that (for example, by combining huge deficits with extremely loose monetary policy over a significant period of time. Ahem.)

Germany, the U.S., Japan, China, Korea, even the UK all became great economic success stories without their currencies being world currencies. In the case of the UK, the definitive establishment of the pound as the world’s major currency actually came just as UK power was beginning to wane.

In fact, the swap agreements China is pursuing are steps toward something we actually want: the increased use of the renminbi as a “normal” currency subject to normal market fluctuations, making it much harder for China to promote exports by keeping its currency artificially undervalued. Increasing China’s global trading engagement and integrating its currency more smoothly into international markets are very important steps toward normalizing China’s economic relations in the world—and that overall greatly benefits the U.S. and will help make trade competition more fair.

The real threat to American power—and it is secondary rather than strategic—is that countries angered by America’s repeated use of sanctions will gradually find ways around the U.S. financial system. Currency swap agreements, like those between China and Brazil, could become building blocks in this.

The U.S. needs to understand that the overuse of financial market sanctions to force other countries to go along with our sanctions policies is extremely expensive. In the Iran case, it is worth it, but in most cases it is not. Sanctions are almost always a secondary tool of limited strategic value, so the weakening of our power to use sanctions is not a massive blow from which we could not recover. However, they’re useful enough that we shouldn’t be too eager to degrade their effectiveness through overuse.

In the case of both the strength of the dollar and the ability to impose sanctions, the ultimate limit on American power is American wisdom, not opposition by other powers. If we pursue smart economic policies and smart monetary policies, the dollar cannot help but remain a valuable, in-demand, and trusted currency. And if we limit our use of extraterritorial financial market sanctions to truly vital issues, we minimize others’ incentives to work around them.

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  • John Minehan

    I like their take better, especially since China is buying lots and lots of Gold.

    I quite like the idea of a gold-backed reserve currency. May not work, but a clever idea.

  • Luke Lea

    Renminbi as a reserve currency? Let’s see, state owned banking system, controlled by a Leninist Party, in a highly secretive, corrupt society with no rule of law, and zero experience. What could possibly go wrong?

  • kev

    “If we pursue smart economic policies and smart monetary policies, the dollar cannot help but remain a valuable, in-demand, and trusted currency”

    HAHAHA!! This last decade of fiscal and monetary policies has been a joke. A national deficit that has gone parabolic by Bush and Obama and Bernanke pursuing twist and QE.

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