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Despite the current glut of article’s questioning the status of the currency of the United States and its role as the global reserve currency, the US dollar will continue to be the world’s reserve currency for an indefinite period of time.
Even though the People’s Republic of China is promoting changing its currency to the E-Yuan, the basic fundamentals of economics will still apply. Along with China’s reluctance to allow monetary capital flight from China, the overall state of the Chinese economy, its lack of an impartial judicial system, the drift back to an economy reminiscent of the Mao Zedong era, the lack of intellectual freedom necessary for a vibrant and growing economy, and the ongoing demographic crisis in China; the Chinese economy is not capable of assuming the role of the United State as the major reserve currency of the world.
The Fundamentals of the Chinese Economy
Since the opening of the Chinese economy to the world in 1978, the economy of China has boomed, and is currently regarded as the 2nd largest economy in the world. One of the main reasons for the white-hot growth of the Chinese economy was the status of the Chinese economy when the Chinese Communist Party (CCP) opened up the economy and allowed its economy to flourish. In December of 1978, China’s GDP was $149.5 billion. In December of 2020, China’s nominal GDP was $14.72 trillion. This type of growth was to be expected due to the constraints placed on China’s economy by the CCP under Mao Ze-Dong. While impressive, this type of growth can only happen once. Now that the economy has reached a saturation point, the natural laws of supply and demand will emerge, and the Chinese growth rate will be subject to world-wide market-place fluctuations. Interference by the Chinese government into the market, which it frequently does, only serves to distort the true status of the economy, and inevitably will exact a heavy monetary price when the market finds its natural equilibrium point.
One of the characteristics of a strong economy is the ability by investors to transfer funds from one country to another and to allow unrestricted inflows and outflows of capital.
China maintains strict capital outflow restrictions, making it difficult, if not impossible, for investors in China, both foreign and domestic, to take their capital out of China if the situation warrants it. China began restricting capital outflows in 2016 after losing $1 trillion USD defending its currency. The Chinese loosened up, but in 2018 tightened again at the beginning of the U.S. and Chinese trade war. By maintaining capital controls, China restricts the free flow of financial intermediation, and imposes controls on a free market economy.
While the Chinese economy has a nominal GDP of $14.72 trillion, this does not show the true state of the Chinese economy. The Chinese economy is divided into two distinct parts; the State-Owned Enterprises (SOEs) and the private enterprise aspect of the Chinese economy. The SOEs are solely to provide jobs and income for the Chinese population. The SOEs are not subject to the ebbs and eddies of a free market economy, and are more concerned with providing jobs than making a profit. While the SOEs only account for 25% of the Chinese economy, they are given lower interest rates on loans, and are backed explicitly by the Chinese government. Twice, the bad loans made by SOEs have been bailed out by the Chinese government. While private market firms make up some 87% of employment in China, the SOEs account for 85% of the 109 Fortune 500 Companies in China. SOEs continue to be a drag on economic growth in China and carry immense loads of debt.
While China may have an economy of over $14 trillion, it also has a debt level of 290% of its GDP; this would translate to over $40 trillion.
Unlike the West, where contract law in non-partisan and subject to written law and enforced by courts and state-owned police, the judicial system in China acts as an arm of the CCP, and law is subject to change arbitrarily without prior warning or comment from the public. A public commission undertaken by Senator Jeff Merkley and co-chair Congressman James P. McGovern found that:
“China’s judiciary continues to be subject to a variety of internal and external controls that significantly limit its ability to engage in independent decision making. Several internal mechanisms within the judiciary itself limit the independence of individual judges. A panel of judges decides most cases in China, with one member of the panel presiding at trial. Despite recent reforms to enhance the independence of individual judges and judicial panels, court adjudicative committees led by court presidents still have the power to review and approve decisions in complex or sensitive cases. Finally, judges in lower courts frequently seek the opinions of higher courts before making decisions on cases before them. Some legal reformers in China oppose this practice, arguing that it undermines the right of appeal. China experts differ on whether the practice has become more or less frequent as reforms have progressed in recent years.”
With intellectual property rights more of a joke than a reality, the incentives for ground- breaking research are absent in China. Without any type of incentive for the expense and time needed for the creation of new technology, no currency can have a solid foundation.
China is facing an unprecedented demographic crisis. An outgrowth of the one child policy has left China with a rapidly aging population, with fewer younger being able to fill the factories, and its armed forces. The one child policy implemented by the Chinese Communist Party in September of 1980 has left China frantically trying to jumpstart birth rates in China, with little or no success. The demographic chart below graphically demonstrates this crisis:
The population crisis in China works against the Chinese in establishing its currency as a replacement for the US dollar. While it is fashionable amongst those writers schooled in political science and social sciences to argue that the E-Yuan will soon replace the US dollar as the world’s major reserve currency, the above economic and mathematical facts argue against any such outcome, specifically given the natural resources of the United States, coupled with the strong independent and non-partisan judicial system in the United States as to real property and intellectual property rights.
The Fundamentals of the United States Economy
In sharp contrast to the fundamentals of the People’s Republic of China, the fundamentals of the United States are strong and vibrant.
The United States is blessed with fertile ground and can not only feed itself, but in fact is one of the major breadbaskets of the world. With the Mississippi and Missouri river systems, the agricultural richness of the United States has a cheap way of transporting its bounty to the coasts of the United States, but also to the rest of the world in general. While there are many pretenders to the throne, there is only one champion, and that is the United States of America.
The modern judicial system of the United States is one of the oldest and most stable judicial systems in the world. The law does not change from day to day based on the political whims of political parties, both Republican and Democratic, but on the rule of written law. While the law may be changed, modified of eliminated altogether, it is done so under the rule of democratic guidelines, with the public being given ample time to weigh in on changes to the law, and the either approve or disapprove attempts by lawmakers to change the judicial system. With strong protection for individual real property and intellectual property rights, the United States provides a fertile ground of innovation and the creation of wealth. This provides for a stable and safe environment of investors, both domestic and foreign.
The demographics of the United States compares favorably for the environment of economic growth and internal domestic consumption. The following demographic pyramid shows the continuing dynamics of population growth in the United States:
There are currently two major research projects proposing the E-Dollar backed by the United States Federal Reserve Bank.
There is the Digital Currency Initiative at MIT in collaboration with the Federal Reserve Bank in Boston. There is also the Digital Dollar Project with the backing of 5 of the 7 Federal Reserve Banks in the United States.
While the United States does face challenges in the world in relationship to a changing political world landscape, the fundamentals of its economy is not one of them.
The United States monetary unit, the United States Dollar is the world’s reserve currency and will continue to be so into the future.
Speculative articles based more on rumor and innuendo’s are exactly that, speculative and not grounded in fundamental economic or in reality.
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I am a retired economist, and a retired soldier. I have a degree in Economics and a degree in Liberal Arts. While in the military my specialty was in Intelligence and Administration.
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My fascination with international trade has always been both intriguing and unsurprising. As a scholar of the contemporary global political economy, my focus was naturally predisposed to the political thought underpinning respective national policies – especially in the milieu of international relations after World War II. And rarely (if ever) did I consider the interconnectivity of the post-war world in the context of interdependence. Yet gradually, the machinations of correlative trade as a bedrock to prevent further conflict and catastrophe dawned on me. Soon I realized that the globalized economic order, which I am accustomed to, was a deliberate structure forged to ensure lasting peace while mutual prosperity followed as a by-product.
Now, this well-conceived model is being threatened by one of its own architects – leading the world into the abyss of the unknown.
In the aftermath of the war, Europe was early to realize that constitutional limits and demilitarization of extremist elements were not enough to prevent another fascist uprising. It might not be the dismembered Nazi Germany or an emaciated imperialist Japan. But soon, another Hitler was bound to seek to establish hegemony through decimation and genocide. This fear led to the collective quest for a lasting remedy: Political, economic, and social interdependence. Thus came into being the original blueprint of the European Union – initially envisaged on the foundation of the Coal and Steel Community – but predominantly aimed to etch mutual reliance in Europe on such a scale that turns war disadvantageous to both the victim and the tyrant nation.
The genesis of this interdependence was not only limited to Europe. In 1947, a revolutionary trading system materialized after stemming from the echelons of the US government of President Franklin Roosevelt. Historically known as the General Agreement of Tariffs and Trade (GATT), the mechanism set forth ground rules to guide trade among market economies to boost economic recovery in the post-war era. Despite the tumult and tribulations of the Cold War, the system not only survived but flourished. And in 1994, GATT was folded into the rules of the World Trade Organisation (WTO) – an intergovernmental organization responsible for regulating and facilitating a multilateral trading system. By virtue of cogent logic, we could assume that much of the Western order would abide by the charter of the WTO. After all, it is the modern-day rendition of the covenants of free trade prescribed under the GATT framework. But this is precisely the fault line that highlights the complexities and contradictions of the escalating power competition in a globalized world of the 21st century – designed through decades to establish mutual interdependence.
Most of us would recall the turbulent presidential tenure of Mr. Donald Trump. The jabber of the far-right induced QAnon movement and the advocacy for the ‘Make America Great Again’ rhetoric – infamously known as the MAGA campaign. Since the switch of the US Presidency, many political and trade policies have been reversed. But apparently, China is the notable exception.
The Trump administration began enacting the process of American economic decoupling from an emergent China. The US Department of Commerce imposed Section 301 tariffs on China – barring billions of dollars of imports – in the context of national security concerns. Now I could have just discounted this as a typical Trumpist witch-hunt. Evidently, he also used Section 232 to levy tariffs on steel and aluminum products imported from almost every country – including US allies – to de-stress American industries. Yet, while most of such mercantilist policies have been rescinded since, the Biden administration has not only maintained tariffs on Chinese imports but also expanded controls on exports to Beijing.
A recent manifestation of the regressive American trade posturing is the enactment of the CHIPS Act: legislation that authorizes billions of dollars in subsidies to companies propagating the American domestic chip industry and extricating US supply chains from China. The US government has further imposed restrictions on technology exports to China. The official narrative is to restrict the flow of sensitive technology to the communist regime of China – to mitigate the risks of espionage and cyber warfare. But the self-evident reality is the growing protectionist sentiment in the United States, driven to undercut the meteoric economic rise of China and hobble its technological capacity.
I am acutely aware that many pseudo-patriots would now criticize my purview, paint me as a communist sycophant, and justify American policies by emphasizing the Chinese threat to the Taiwanese economy – primarily its mainstay semiconductor industry. And thus, before I proceed any further, let me make it abundantly clear: Critiquing unilateral American policies is by no means an endorsement of the draconian practices of China. My opposition to trade protectionism in a globalized order, established on the premise of free markets and trade, is bereft of my political disposition.
About a week ago, the WTO – the same trade body that enshrines the GATT framework in governing global commerce – termed the American tariffs on Chinese imports as “illegitimate.” The WTO categorically rejected the notion of US national security reservations. And how exactly did the rule-abiding American administration respond? Well, it simply spelled out what we already knew: The WTO has no jurisdiction over this matter. In other words, China could file a complaint, but it would be redundant. Because it is up to America to determine if its trade actions are necessary for national security, and no international organization has any right to second-guess that judgment. Umm, really? I mean, to me, it is pretty ironic and self-righteous! Apparently, it is the American prerogative to decide its economic policies, impose tariffs in sheer violation of the WTO rules, and conjure export restrictions – all in the name of sovereign policymaking. Then why exactly was the decision of Saudi Arabia to cut its oil supply so contentious? Why was it sensationalized as a betrayal of American trust? Was it not the sovereign prerogative of Saudi Arabia to ensure economic profitability in line with global demand projections? But because it was against American interests, it was deemed controversial, threatened with “consequences,” and termed ‘siding with Russia.’
Are other countries not entitled to chart independent policies that suit their own national security, economic, and strategic agenda? Or is it just a privilege enjoyed by almighty America?
Such protectionist tendencies of the United States are unfortunately not limited to political rivals and economic adversaries. The flagship policy of the Biden administration to fight climate change extends this anti-competitive gesture to allies all the way across the Atlantic. The Inflation Reduction Act (IRA) has an acerbic nationalistic element under the guise of environmental protection. Under the Act, the US government would offer tax credits on buying electric vehicles assembled in North America – an unwarranted advantage to domestic automobile manufacturers over European and Asian counterparts. The clean energy subsidies under the massive state aid schemes of the IRA would make it cheaper to produce low-carbon fuels, such as hydrogen and ammonia, in the United States than in the Eurasia region. While it would bring back manufacturing to America, it holds the potential to destabilize industrial prospects around the globe.
Mr. Leo Varadkar – the Irish Trade Minister – recently lamented: “What the US has done really isn’t consistent with the principles of free trade and fair competition.” While I absolutely do not detest the American vision of investing in clean energy practices, I loathe the duplicity of American policies. On one front, American analysts rail about the erroneous European reliance on Russian energy leading to its unraveling economic misery. But on the other front, they somehow overlook how these unilateral climate laws could spark a wave of deindustrialization in an already battered Europe.
Admittedly, I acknowledge the economic supremacy of the United States. And with the war of attrition playing out on the periphery of Europe and the unprecedented economic slowdown of China, I reckon that supremacy is not under any immediate duress. Nonetheless, the global outlook might have changed since the 40s; the political and economic dynamics have not changed much. Economic interdependence is not just a precaution anymore; it is a prerequisite to maintain regional clout and global political relevance. While the Chinese economy battles the throes of a resurgent pandemic, Chinese diplomacy is rapidly courting allies – from the Pacific islands to the African Union to the estranged Gulf states. America would remain an economic powerhouse, but it might soon lose its position to garner leverage with larger-than-life linguistics and lofty dictions of alliance and cooperation. This stage of the power competition necessitates a close-knit network of partners worldwide to gain strategic depth, not self-erecting protectionist barriers to isolate in an exceedingly fickle global landscape.
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Since February 2022, the Western states have rapidly tightened their policy of sanctions against Russia, which has become the undisputed leader in the number of restrictive measures imposed against it. The United States has shown the most zeal and resolve in this regard. At the same time, Washington has continued to expand restrictions on China, particularly with respect to export controls. The policy of reducing China’s access to technology through the introduction of export restrictions has been accompanied by targeted financial sanctions against individuals and legal entities, investment restrictions and other measures. The United States has maintained momentum in terms of sanctions pressure on Iran and other countries.
Washington has continued its policy of strictly enforcing existing sanctions regimes. Characteristically, in this regard, not only persons from third countries, but also American citizens and companies have found themselves under attack. At the same time, the use by the United States of the instrument of fines, which performs a number of functions at once, is especially indicative. In particular, for those persons subject to punitive measures, they can serve as a signal that they should accept the conditions of US regulators, or otherwise, more serious consequences, such as blocking, may occur. For organisations that have not faced enforcement measures, fines serve as a warning to comply with sanctions regimes. As a result, in a number of cases, companies have improved compliance programmes and independently monitor the status of counterparties, thereby adopting the US sanctions. Along with other agencies, and in some cases in direct cooperation with them, penalties are systematically used by the Office of Foreign Assets Control of the US Department of the Treasury (OFAC).
The US Treasury’s punitive measures are a type of enforcement taken in response to violations of financial sanctions, involving that the object, in order to settle the violations committed by participating in the settlement agreement, assumes the obligation to pay a fine imposed by the US Department. Infringement in this context refers to the conduct of transactions prohibited in accordance with US regulations. According to RIAC, during the period from January 1, 2009 to October 20, 2022, 262 individuals and legal entities were fined. About 30% are organisations operating in the financial sector, which, due to the specifics of their activities, face an increased risk of enforcement. In particular, they regularly conduct a large number of transactions. Consequently, they may lack the resources, financial, technological or human, to verify these transactions, but deliberate violations cannot be ruled out.
Interestingly, Americans are the leaders in terms of getting fined by the US Treasury: 76% of the people who have faced this type of coercive measure during the period under review were American companies or their joint ventures. This fact once again emphasises the difference between sanctions, which place costs on businesses, and trade wars, which are mainly aimed at creating better market conditions for their companies.
The experience of applying penalties against Chinese companies is noteworthy. The amounts of fines can be impressive. For example, in 2017, the Chinese company ZTE entered into an agreement with OFAC to pay $100 million for transactions in violation of US sanctions against Iran. At the same time, the punitive cases themselves are not widespread, despite the continuing growth of the Sino-American confrontation. There were three of them during the period under review. In addition to ZTE, Hong Kong Sojitz Limited in 2022 and the Jereh Group in 2018 were fined in 2018.
This is partly due to the active use of blocking secondary sanctions by the Treasury, as well as the fact that the US Department of Commerce plays a leading role in this area, since sanctions against China to a greater extent affect the issues of technology and “dual-use” goods.
The total amount of all payments to the US Treasury amounted to a little over $5.7 billion, $5.3 billion of which was paid by financial sector companies, mainly from the European Union, Switzerland and the UK. The bank BNP Paribas paid a record fine – more than $963 million, for violating the US sanctions regimes against Sudan (in force at that time), Iran, Cuba and Myanmar. The bank conducted 3,897 prohibited transactions through US financial institutions. The management was aware of this, which was an aggravating circumstance in this case, as OFAC considers a number of criteria when calculating the fine, including management awareness. Moreover, there was collusion, which was the reason for the involvement of the US Department of Justice in the investigation. As a result, in total, the bank had to pay about $9 billion.
It may seem paradoxical that US individuals and entities, which accounted for 76% of punitive damages for 2009-2022, paid less than 5% of the total payments, i.e. about $260 million, while their allies bear the brunt. However, this asymmetry may be due to the fact that EU companies were more involved in work with sub-sanctioned jurisdictions, for example, with Iran. In addition, it is important that a large proportion of companies from Europe and the UK that have been fined are large banks that have committed hundreds and thousands of violations. The top ten companies that paid the largest amounts of fines accounted for 54,783 violations. In 74 cases, the number of violations committed by American individuals and legal entities does not exceed ten, and the companies themselves are willing to cooperate with the American regulator: for example, Western Union voluntarily reported minor violations to OFAC and cooperated with the investigation.
Meanwhile, concerns remain in the United States about the damage that American businesses are suffering as a result of sanctions. The US Treasury Department’s 2021 Sanctions Policy Review noted the intention to adapt sanctions to accommodate smaller companies that may not have the resources to comply effectively, and as a result, according to the regulator, tend to forego opportunities to develop business relationships in order to avoid such costs. Translating this idea into reality is difficult. Moreover, we are not talking about the refusal to apply coercive measures.
However, OFAC still reserves the right to take into account all the circumstances of the company in making a decision.
As a rule, companies faced with a fine proceed from the assumption that they cannot avoid a financial fine, but they can influence its final amount. 143 companies cooperated with OFAC during the investigation, eight did not. The most popular measures to “correct” behaviour are software upgrades (taken in 38 cases), the organisation of training for staff (in 60 cases), as well as hiring new employees in specialised departments, conducting an external audit, and investing in a compliance programme.
Thus, the United States continues to be guided by the goal of increasing the effectiveness of sanctions, which is considered an essential condition for ensuring compliance with existing regimes through coercive measures. They often cover US legal entities (and less often individuals) but the largest amounts are paid by European financial companies. This causes dissatisfaction among the allies and encourages them to look for ways to protect business, however, on a global scale it does not affect Euro-Atlantic solidarity in terms of applying sanctions against other countries.
From our partner RIAC
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At the far end of the U.S.-Africa Leaders Summit in Washington, the official documents indicated that the United States and the African Union, under the leadership of President Joseph R. Biden, Jr., President of Senegal and Chair of the African Union Macky Sall, and African Union Commission Chair Moussa Faki Mahamat, have re-affirmed collective commitment to reinforce longstanding areas of cooperation and expand partnership to better meet the shared challenges – and opportunities – of the dynamic era.
The United States and Africa have further recognized that the world is quickly changing and the summit reflected how the relationship is evolving with it. The leaders have agreed to deepen collaboration towards finding practical solutions to global problems and shape the rules of the road for technology, space, cybersecurity, trade, environmental protection, and economics.
At the summit, new investments and initiatives were announced that will equip American and African institutions and citizens to respond to emerging opportunities and challenges in an increasingly interconnected world.
“We are resolved to enhance our collaboration to promote inclusive growth and sustainable development. We will bring together business and government leaders to advance two-way trade and accelerate investment in quality infrastructure,” the document stated.
“We will leverage our institutions and programs, in addition to strengthening enabling environments, to realize this shared aspiration. This will include expanded engagement and cooperation between the United States and African countries to support the aims of the agreement establishing the African Continental Free Trade Area (AfCFTA),” it further stated.
At the U.S.-Africa Business Forum’s Deal Room, the White House’s Prosper Africa initiative also announced an ambitious set of multimillion-dollar investments to boost African exports and infrastructure and mobilize private investment to accelerate African innovation.
Prosper Africa is the U.S. Government initiative to increase two-way trade and investment between African nations and the United States.
Prosper Africa’s Chief Operating Officer Leslie Marbury said: “Africa offers some of the greatest growth opportunities for shared prosperity in African nations and the United States. We are committed to investing in Africa’s transformative growth and untapped market opportunities. On behalf of the U.S. Government, Prosper Africa is excited to announce bold commitments that reflect the Africa of today – home to the world’s largest free trade area, growing economies, and an increasingly young, urban, and digitally connected population.”
New partnerships that will connect thousands of U.S. buyers and African suppliers to expand supply chain operations on the continent, increase access to trade preferences under the African Growth and Opportunity Act (AGOA), and advance the implementation of the African Continental Free Trade Area (AfCFTA).
An e-commerce and digital trade alliance with major U.S. companies to fuel Africa’s technological revolution. Recognizing the tremendous growth potential of Africa’s technology sector, the Prosper Africa Tech for Trade Alliance will accelerate e-commerce and digital trade in Africa and address legal, regulatory, and logistical bottlenecks.
Prosper Africa also announced new partnerships to mobilize an investment target of $1 billion in private capital to advance African infrastructure and innovation. And also a package of commitments to boost African exports to the United States by $1 billion dollars in the next five years.
A $25 million partnership with TradeMark East Africa and the U.S. Agency for International Development (USAID) to establish Trade Catalyst Africa, an investment facility that is expected to leverage at least $90 million dollars of private financing for African infrastructure with the potential to expand continent-wide.
New partnerships with the Institutional Investor Network and global advisory firm MiDA Advisors that will channel large-scale investments into African infrastructure and build enduring relationships between the trillion dollar U.S. pension community and their African counterparts.
Investments in five pioneering partnerships to grow the African asset management space and drive investment of over $200 million in African small businesses. The combination of these five partnerships, with a focus on addressing global challenges like climate change, food security, and women’s empowerment, will benefit hundreds of thousands of people and generate millions of dollars in revenue for businesses.
According to the Prosper Africa Commitment fact sheet, since 2019, the U.S. Government has helped close 1,100 deals across 49 African countries for a total estimated value of $65 billion.
The U.S. Africa Leaders’ Summit – which brought together African heads of state, and U.S. and African investors, business leaders, and government officials to advance trade and investment partnerships that create jobs and drive inclusive and sustainable growth on both sides of the Atlantic.
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