Gao Bai on Challenges to the Dollar Standard

Gao Bai, “Trade Wars, Hot Wars and the Rise of the Global South: The Future of the Dollar Standard”[1]

Introduction and Translation by David Ownby

Introduction

Gao Bai is a professor of sociology at Duke University who did his undergraduate and MA degrees at Beijing University his Ph.D. at Princeton. He spent the first part of his career working on the Japanese developmental state, publishing for example his 2002 volume on Economic Ideology and Japanese Industrial Policy (see a very positive review here). He has since gone on to work on a variety of other topics, including Chinese innovation in the context of its high-speed rail system (see here), and in recent years has turned his focus toward China’s developmental state and the challenges it faces (see here).

Gao Bai was not on my radar before I worked on this text, and I happened upon him in a roundabout way. In late December, the New York Times columnist David Brooks gave out his annual Sidney Awards, which go to what he considers to be the best articles published in relatively obscure journals, which struck me as an interesting idea (the articles were interesting too). I then began wondering where the equivalent thing might happen in the Chinese intellectual world, in other words, where would people publish obscure ideas or pieces. There may be low-flying journals in China – indeed, I suspect that I may be following a couple of them – but I don’t know how to find more of them or to identify who is interesting, so my mind made the leap to Chinese intellectuals working outside of China, where they have more freedom to follow their ideas where they lead them, although if they are going to publish in China they still have to stay abreast of what to say and what not to say, a tension that can produce interesting things.

I can’t quite remember how this led me to Gao Bai, because the piece translated here is not from an obscure journal, but instead from the Beijing Cultural Review, very mainstream, much translated on this site. To celebrate its 15-year anniversary, Beijing Cultural Review is commissioning a series of talks – to be published as articles – in which various intellectuals talk about “the next 15 years,” and Gao’s talk is part of this series.

His text is a winningly lucid history of the dollar-standard and how the dollar-standard has shored up U.S. power in the post-war world. The basic idea, which will come as no surprise to people who work in international relations or finance, is that the use of the dollar in oil and other commodity transactions, and the subsequent purchase of U.S. debt by certain countries amassing dollars, has made the U.S. government into much of the world’s banker. This in turn means that the U.S. government does not have to pay its debts, because money keeps rolling in from outside even if the books are not balanced at home, which they have not been for a very long time. I don’t know if Gao is claiming to innovate here; to me his argument looks like some version of what you could find in books like Barry Eichengreen’s Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford, 2011).

In any event, most of Gao’s text is given over to an explanation of how recent events have challenged the dollar-standard, and I found his observations quite insightful. The rise of fracking in the U.S. for example, has turned the U.S. from an energy importer to an energy exporter, fundamentally reshaping its relationship with the Middle East, and particularly Saudi Arabia, which is now selling vast amounts of oil to China. The petrodollar is one of the major props underpinning the dollar standard, and if the market makes the petrodollar irrelevant, then something else will emerge to take its place, and it may not have the same relationship to the U.S. dollar. Similarly American trade wars and decoupling with China may bring some manufacturing back to the United States (or perhaps move it to Vietnam or India), but these countries to date are not playing the same game that China did for so long, which was to buy U.S. Treasury bonds with their profits, thus financing continuing American consumption of Chinese exports. So whatever geopolitical victories the U.S. declare with its China containment policy, it is paying the price as China buys less U.S. debt. Gao extends this analysis to issues like the Russia-Ukraine War, the rise of BRICS, and the current war between Israel and Gaza.

The dream of a post-dollar-standard world is fairly common in the writing of some Chinese intellectuals, and is a theme in Chinese propaganda as well, but Gao’s piece is the most even-handed and insightful I have seen. It is worth reading to get a sense of how someone from the world’s second largest economy understands some of the perks that the first largest economy affords itself, as well as how the current world financial order may be evolving into something else – although Gao admits that this is not for tomorrow.

Translation

My talk today is basically taken from two already published articles: "From De-risking to De-Dollarization: BRICS Currencies and the Future of the International Financial Order" published in October 2023 in Beijing Cultural Review; and "The U.S. Dollar: The Origin of the Rise and Fall of Great Powers" published in January 2019 in the Journal of the Shanghai University of International Business and Economics, to which I add some conjectures regarding changes in the international political and economic situation since the beginning of this year.

I will first briefly discuss the transformation of the international financial order from the Bretton Woods system to the dollar standard, after which I analyze the mechanism of the dollar standard's operation. Between the 1980s and the beginning of the 21st century, the operation of the dollar standard was supported by two major dollar cycles, or periods: the cycle of petrodollars, and the cycle of trade surplus dollars in the form of purchases of United States treasury bonds by countries running major trade surpluses with the United States. Since the 1980s, Japan has been the most important such country, although China replaced Japan as the largest holder of U.S. Treasury bonds for a time in the 21st century, with Japan returning to the top spot at the present time.

Around 2006, historian Niall Ferguson (b. 1964) and economist Moritz Schularick (b. 1975) proposed the idea of "Chimerica," a model in which the United States consumes, China saves, China uses its trade surplus to buy United States Treasury bonds, and the United States uses its domestic market to support Chinese exports.

When the global financial crisis broke out in 2008, this model began to run into problems. On the one hand, since 2008, the driver of China's economic development model has been evolving from exports to domestic demand. At the same time, in order to reduce risks, China has begun to invest its foreign exchange reserves in real goods, such as African minerals, in addition to large investments in countries connected with the One Belt – One Road project. On the other hand, trade protectionism is gradually rising throughout the world, and the threshold of market access is getting higher and higher. Especially after the start of the U.S.-China trade war, the risk to China of holding U.S. financial assets has only become more important, and China has begun to gradually reduce its holdings of U.S. Treasury bonds. This trend has become increasingly pronounced over the past few years.

The massive printing of money by the United States during the pandemic led to liquidity problems in many countries during the dollar cycle. This change has been compounded by major geopolitical influences, such as the Russia-Ukraine war and the Israeli-Palestinian conflict, and the dollar standard is facing unprecedented challenges.

From Bretton Woods to the Dollar Standard

Scholars in the United States have tended to interpret the institutional arrangements of the post-war international economic order from the unique angle of economic theory, while paying relatively less attention to the close relationship between the international economic order and the Cold War. In fact, without the Cold War, many of the developments in the post-war international economic order cannot be explained.

For example, the post-war international financial order, including both the Bretton Woods system and the subsequent dollar standard, are directly related to the Cold War. This is particularly true of the commercial order.

In the immediate post-war period of 1945-1947, Britain particularly wanted the United States to provide liquidity to the world economy, but the United States was unwilling to do so. Why did the United States later propose the Marshall Plan?

There were two major background forces driving this development. One was the dollar drought in Europe at the time. Europe had suffered greatly in World War II, its industrial base having been almost completely destroyed, and its consumer market was unable to absorb U.S. exports. At the same time, the U.S. defense industry, which had expanded dramatically during the war, urgently needed to demilitarize. Assisting in Europe's post-war economic recovery via the Marshall Plan had a dual purpose: first, to position Europe as a key export market for American products, and second, to aid the United States in mitigating the potential economic crisis resulting from the demilitarization of the post-war economy. In this way, the initiative served the mutual interests of both parties.

Another driver was the progression of the Cold War. At the time, left-wing parties in several European countries, including Greece, Turkey, and France, were in a position to win upcoming elections. Speeding Europe's post-war recovery through the Marshall Plan was meant to stop the spread of communism across the continent. During the Cold War era, the Marshall Plan played a pivotal role not only in shaping the post-war international trading system, as exemplified by the General Agreement on Tariffs and Trade, but also in enhancing the functionality of the post-war international financial system embodied in the Bretton Woods system. By offering liquidity to European allies, the Marshall Plan contributed significantly to this. Together with institutions like the North Atlantic Treaty Organization and various multilateral and bilateral military defense agreements between the United States and its allies, these economic frameworks collectively constituted the international order that bound the Western camp together throughout the Cold War.

The United States-led Bretton Woods system had two pillars, the first being the United States dollar as the key currency and the second being the United States as the main provider of liquidity. During the Cold War, the United States provided liquidity to its allies through a variety of channels, including the World Bank, the International Monetary Fund, foreign military assistance, garrison expenditures, and foreign economic aid.

At the same time, in order to gain Allied support in the Cold War confrontation with the Soviet Union, the United States Government pursued a strategy of "asymmetric cooperation" in the area of trade by allowing the Allies to practise trade protectionism against United States exports, while at the same time opening up the United States market to the Allies, and repeatedly delaying the timetable for the restoration of the free convertibility of the currencies of the European countries. Of course, part of the purpose of this was also to help the Allies accumulate dollars in the face of dollar shortages.

In the long term, the continued use of asymmetric trade policies eventually led to the collapse of the Bretton Woods system. The Allies at the time had accumulated large amounts of dollars, and they used two channels to guard against the depreciation of the dollar that could be caused by the circulation of large amounts of dollars in the world.

The first was that the central banks of the Allied countries exchanged their dollars for gold with the U.S. Federal Reserve, in an effort to guard against the depreciation of the dollar the market expected. Immediately after World War II, the United States official gold reserves amounted to 60% of world holdings, but by 1971 the U.S. had lost 60% of this. President Nixon thought that if this continued, gold coffers in the United States would eventually be empty, so he removed the dollar from the gold standard.

The second was the establishment of the European dollar market. Beginning in 1955, depositing dollars in financial markets in London earned a higher interest rate than in the American market, while the interest rate when borrowing dollars was lower. This situation attracted European dollars to London. In the late 1950s and early 1960s, the dollar market in Europe grew so rapidly that even American banks wanted to send their money to London, and the Kennedy administration had to impose severe restrictions, which was one of the reasons why the American financial community in the 1980s lobbied hard for financial liberalization.

The dollar's role as a key currency and the United States' role as a major provider of liquidity have a significant impact on the domestic political economy of the United States, which is most visible in the lack of fiscal discipline in American policy making.[2] Major expenditures in U.S. public policy are concentrated in three areas: defense, taxation,[3] and social spending. Logically speaking, if taxes are cut, government revenues will decrease, and spending should be reduced accordingly. However, U.S. policymakers always want to cut taxes and increase defense and social spending at the same time. Any other country faced with this policy choice dilemma would have to choose one out of two, or at most two out of three, and would not be able to adopt all of these costly policies at the same time. But U.S. politicians, in order to gain maximum support from voters, promote these conflicting policies at once to meet the demands of various interest groups. The main reason why the United States can do this is that the dollar is the key currency, and the United States is the main provider of liquidity, and it can borrow money from other countries to spend through the issuance of treasury bonds.

The first time this kind of unfettered policy freedom was practiced on a large scale in post-war U.S. history was during the Johnson administration in the 1960s. At the time, Kennedy campaigned on the promise of tax cuts, and after his assassination, Johnson, who became president in his place, decided to fulfill Kennedy's promise. However, even as he did so, the United States was expanding the Vietnam War, with military expenditures increasing daily, and in addition was implementing Johnson’s "Great Society" program. Many public museums, national parks, many public infrastructures, and various social welfare systems in the United States today are the legacy of the Great Society. The simultaneous implementation of these three costly policies led to government budget deficits, which had to be financed by the issuance of debt.

At the time, international markets generally expected the U.S. dollar to depreciate. After the first gold crisis in 1962, there was a second one in 1968, causing major changes in the exchange rate between gold and the U.S. dollar, which ultimately led to Nixon's announcement in 1971 that the U.S. dollar and gold would be decoupled.

Reagan did much the same thing as Johnson. He pushed for the largest tax cuts in U.S. history, but at the same time proposed the "Star Wars" plan to bring down the Soviet Union by dramatically increasing defense spending. Although Reagan campaigned on a vow to drastically reduce social spending, health care expenditures skyrocketed as a result of a rapidly aging population. The combination of these three costly policies led to a sharp rise in the U.S. trade deficit in the 1980s and a rapid increase in the national debt.

Such policy behavior reached its peak in this century, initially with George W. Bush Jr.'s massive tax cuts combined with the wars in Iraq and Afghanistan, and the war on terror, alongside his emphasis on compassionate conservatism, which resulted in budget deficits that could only be solved by issuing debt. If one looks closely at the policies of the subsequent Obama, Trump, and Biden administrations, it is easy to see that this pattern has gotten out of hand.

The Yom Kippur War and the First Oil Crisis

The Middle East is the birthplace of the dollar standard, which is directly related to the 1973 Yom Kippur War. The reason why the Middle East is so important to the dollar standard is that the dollar standard was indirectly created by the fact that oil is denominated in dollars.

For Israel, the Yom Kippur War was a war that brought a half a century of peace. After their defeat, the countries of the Middle East completely gave up on the idea of destroying Israel. The first to completely concede defeat was Egypt, and Egypt and Israel signed the Camp David Accords, in which the two sides pledged to avoid future direct military conflict.

Although the Yom Kippur War was a lost war for the Middle Eastern countries, these countries nonetheless changed the direction of world history.

First, without the Yom Kippur War, the first oil crisis would have been much less intense, although it could still have occurred in other ways and at other moments. After the de-pegging of the dollar from gold in 1971, the dollar had already started to depreciate, which inevitably led to an increase in the price of oil, but not a dramatic increase. It was the outbreak of the Yom Kippur War and the OPEC countries' oil embargo against Europe and the United States that caused energy prices to skyrocket by 400 percent in six months that year.

Second, the Saudi-led oil embargo against Europe and the United States, which had supported Israel, led to the outbreak of the first oil crisis. This crisis dramatically increased the cost of energy imports and put an end to the post-war period of high economic growth in the developed countries, which had lasted more than twenty years, from the early 1950s through the early 1970s. The economies of the developed countries entered into a period of stagnation that lasted several years.

Furthermore, this period of stagflation became a turning point in post-war history, which produced two profound effects. The first is that stagflation meant that developed countries were no longer lucrative investment opportunities, and international capital began looking toward developing countries, a great deal flowing toward Latin America. When Paul A. Volcker was elected chairman of the Federal Reserve, he pushed interest rates up to 21% in order to combat inflation in the United States, which brought dollars back to the U.S. from the developing world, directly leading to the outbreak of the Latin American debt crisis in 1982. This was the first large-scale demonstration of the dollar cycle effect in history.

The second impact was that, following the period of stagnation in the 1970s, social protections long guaranteed by developed countries in the post-war period came to be seen as inefficiencies. This provided the political impetus for reforms of the welfare state, and the rise to power of Reagan and Thatcher in the early 1980s marked the beginning of a wave of neo-liberalism around the world, and with it a general shift towards marketization, privatization, and de-regulation. Once supply chains, outsourcing, and the Washington Consensus became the order of the day, the world economy reached the climax of globalization, moving at full speed towards unleashing market forces.

China's reform and opening is also directly related to the same historical background. After the first oil crisis, the central authorities commissioned Chen Yun 陈云(1905-1995) to study the impact of the crisis on the international economy. He concluded that developed economies were no longer prime opportunities for investment, and that international capital was looking for opportunities in developing countries. China's subsequent opening up to the outside and establishment of special economic zones was based precisely on Chen’s judgment.

The Yom Kippur War also brought a series of profound changes to the entire Middle East region. Prior to the war, the most influential countries in the Middle East were Egypt and Iran. Under the 18-year leadership of the pro-Soviet Gamal Abdel Nasser (1918-1970), Egypt had been the leader of the Muslim world, while Iran under the Shah Mohammad Reza Pahlavi (1919-1980), was the most stalwart ally of the United States. However, once Saudi Arabia led the oil embargo against Europe and the United States after the outbreak of the Yom Kippur War, it became overnight the most influential country in the Middle East and one of America's most important allies in the region. After the defeat, Egypt lost its influence in the Middle East, and Iran broke completely with the United States due to the 1979 Islamic revolution. In order to shield itself from the effects of the Islamic revolution in Iran, Saudi Arabia began to build a wall between Sunnis and Shiites on the basis of religious ideology. Saudi Arabia and Iran became the leaders of their respective religious denominations and began a bitter struggle that lasted more than 40 years until 2023, when China brokered a rapprochement.

Foundations Underpinning the Dollar Standard and Changes in Recent Years

After the outbreak of the first oil crisis, OPEC countries had been seriously considering a replacement to the dollar for pricing oil, and solutions considered included both the International Monetary Fund's Special Drawing Rights (SDRs), as well as a basket of currencies. During 1974-1975, however, the U.S. government reached two agreements with Saudi Arabia through secret diplomacy: first, OPEC countries would continue to price their oil in dollars; and second, petrodollars would be recycled to the U.S. for the purchase of U.S. treasury bonds at a preferential rate of interest. This secret agreement remained unknown for a long time, until it was finally revealed at the end of the 20th century by a doctoral student at Princeton University in his doctoral dissertation.

As the currency in which oil is denominated, the U.S. dollar indirectly guarantees its status as a key currency. Since all countries need to import oil, all countries use the dollar as a reserve currency in order to avoid the problem brought by exchange rate fluctuations in their purchase of oil, which could affect the domestic economy. Because oil is priced in dollars, other commodities are as well, thus consolidating the foundation of the dollar standard. Since 1971, when America abandoned the gold standard, the dollar no longer has any material anchor and is based solely on other countries' trust in the United States Treasury.

Throughout the entire 1970s, Saudi Arabia demonstrated its considerable skill in geopolitics: on the one hand, it led a group of Middle Eastern countries to sanction Europe and the United States, and quickly became a regional leader; on the other hand, it was able to negotiate with the United States in secret, becoming the great savior of the dollar and one of America’s most reliable allies.

The dollar standard is not only based on pricing oil and other commodities; it is also based on the exchange of benefits between the United States and Saudi Arabia, as well as other Gulf States. On the one hand, the U.S. has always been heavily dependent on the Middle East for crude oil and the circulation of petrodollars, and the Middle East has thus become a key area of U.S. foreign policy. On the other hand, Saudi Arabia and other Gulf States are also heavily dependent on the U.S. oil market, and even more so on U.S. military protection.

The most important material basis of the dollar standard is essentially the exchange of structural benefits between the two parties: Saudi Arabia exchanges oil and petrodollars in return for the United States’ providing the largest oil market and military protection. The sizeable U.S. military presence in the Middle East not only provides protection for the region, but also serves as a deterrent. It is through such a geopolitical equilibrium that the dollar standard has long been maintained.

During the two oil crises of the 1970s, OPEC countries' revenues from oil exports increased spectacularly, contributing significantly to the GDP growth of these countries. In 2016-dollar prices, OPEC countries' GDP grew by 48% from 1973-1976 and 31% from 1978-1981. Large amounts of petrodollars from the Middle East returned to the United States in the form of purchases of U.S. Treasury bonds, allowing the U.S. to sustain its own expenditures by borrowing money in the form of Treasury bond issues.

However, in recent years the exchange of interests that supports the dollar standard has begun to change significantly. First, the fracking revolution in the United States has profoundly changed the world energy landscape. Statistics show that the United States’ net energy imports have gradually declined, and the calculated total for 2020 is down to zero, while energy production has risen substantially, even considering the simultaneous climb in energy consumption. The United States has not only achieved energy self-sufficiency, but today, the United States has become a significant energy exporter.

As a result of this change, the United States has not only ceased to be a major purchaser of energy from Middle Eastern countries but has also become a strong competitor with them in international energy markets. In terms of sources of imported energy, the Middle East and the Persian Gulf region have become substantially less important to the United States, while Canada has become more important. These major changes in the structure of mutual interests have weakened the significance of the petrodollar for the dollar standard and have created a great deal of uncertainty about the future.

While the United States' dependence on Middle East oil has been significantly reduced, China has become Saudi Arabia's largest energy customer, and the significance of China and the United States to Saudi oil exports has undergone a fundamental reversal. The Chinese market currently accounts for nearly 28% of Saudi Arabia's oil exports, compared to only 5.64% for the United States. In the face of such a change in the interest structure, from a purely economic perspective, Saudi Arabia should be sufficiently motivated to promote the use of the RMB in oil sales to China. Of course things are more complicated when international political factors are taken into account. In recent years, Saudi Arabia and other Gulf countries have expanded their investments in China in pursuit of the structural transformation and diversification of their economies.

Russia's dollar-denominated assets were frozen after the outbreak of the Russia-Ukraine war, which should serve as a reminder to Saudi Arabia of the potential geopolitical risks of dollar-denominated assets. The rapprochement between Saudi Arabia and Iran in the first half of this year, with China’s help, has objectively weakened its geopolitical need for U.S. military protection. It also indirectly weakened the link between the petrodollar and the dollar standard.

The U.S.-China Trade War and U.S. National Debt

The purchase of U.S. Treasury bonds by countries with large trade surpluses with the U.S. is the second cycle underpinning the dollar standard. Since the 1980s, Japan has played the largest role in such purchases, although for a time at the beginning of the 21st century, China replaced Japan as the country with the largest trade surplus and the largest holder of U.S. Treasury bonds.

China rapidly became the world’s factory after its formal accession to the WTO in 2001. In the first few years after joining the WTO, China's exports grew by more than 30% per year. As the country with the largest trade surplus with the U.S., China for a long time supported U.S. consumption by returning its trade surplus through large purchases of U.S. Treasury bonds. At its peak, China's holdings of U.S. debt reached more than $1.3 trillion USD. The concept of "Chimerica" suggests a strong interdependence between the two, with China lending money to support U.S. consumption in the form of U.S. debt purchases, thus allowing the US market to continue to absorb Chinese exports. During the 2008 financial crisis, China purchased a large amount of U.S. debt, which greatly helped the U.S. during the bailout. Statistics show that China and Japan, both running major trade surpluses with the U.S., have been the biggest purchasers of U.S. debt. At the peak moment in July of 2011, China and Japan together purchased 25% of U.S. Treasury bonds.

Since the 2008 global financial crisis, however, China has begun to diversify its investment exposure. A portion of its trade surplus has been invested in physical goods such as resources and energy, while another portion has been invested in infrastructure development in countries that are part of One Belt – One Road. The trade war that began in 2018 increased the geopolitical risk of China's dollar-denominated asset holdings, and the subsequent "decoupling" and "de-risking" proposed by West has further intensified the pace at which China has reduced its holdings of U.S. debt.

In addition, in response to the coronavirus pandemic and with an eye toward rebuilding the United States manufacturing sector, the United States government has issued a huge amount of debt, the total amount of which has reached historically high levels similar to that of World War II. The U.S. government is now facing not only a heavy burden of interest repayments, but also an increasingly negative effect on U.S. domestic economic growth should it continues to issue national debt and keep interest rates high. High interest rates mean low purchasing power, which will lower the borrowing capacity of enterprises and inevitably depress demand and investment and thus affect economic growth.

The dollar cycle is another reason for countries to reduce their holdings of United States debt. When high interest rates in the United States attract international capital flows to the United States, all countries began to have dollar liquidity problems. At that point, holders of United States debt have to rely on reducing their holdings of United States Treasury bonds to solve their own liquidity problems.

For a combination of reasons, China and Japan's holdings of U.S. debt fell to an all-time low of just 7.8% of total U.S. debt in June 2023. At its peak, China alone used to hold 14% of U.S. Treasuries, but that fell to 3.4% in June of this year.

At the same time as it weakens China's supply chains, the trade war is also undermining the foundation of the dollar standard. First, in objective terms, the high tariffs imposed by the U.S. government on Chinese products have led some supply chains to abandon China but have also blocked the export of certain Chinese products to the U.S. market. This result may be in the interest of the United States from a geopolitical perspective, but it has a negative impact from the perspective of the dollar standard. This is because while high tariffs lead to a reduction in Chinese exports to the United States, they also reduce the funds available for China to invest in U.S. debt and the need to hold U.S. dollars. At the same time, growing bilateral tensions greatly increase the geopolitical risk of China's holding dollar-denominated assets and reduce China's willingness to purchase U.S. debt.

A bigger problem is that those countries that replaced China in the supply chains have not purchased the same level of U.S. debt as China. The main destinations of the supply chain shift from China in recent years have been countries such as India, Vietnam, Malaysia, and Mexico. However, if we analyze the data in July 2023, India held more than $233 billion of U.S. Treasuries, Mexico held $74 billion, Vietnam had only $32.9 billion, and Malaysia's U.S. debt was so small that it didn't even make it into the rankings. Taken together, these countries are still far from the $821.8 billion held by China. In fact, even as the U.S.-initiated trade war has undermined the exchange of benefits between China and the U.S., it has failed to find a replacement for China's purchases of U.S. debt in terms of volume. This means that the trade war is weakening China while also weakening the foundation of the dollar standard.

Among the countries with important trade surpluses with the United States, Japan still holds a large amount of United States debt. Most of the other major European holders of U.S. debt are purchasing this debt for the purpose of investing for profit, and do not participate in the same cycle as do Japan and China. These European funds lack relative stability in the face of market volatility.

In the current competition between China and the United States, there will be no negotiation until both sides realize that they will both lose if them continue on the same path, following which they can negotiate as equals.

The Impact of the Russia-Ukraine Conflict on the U. S. Dollar: BRICS Expansion

The outbreak of the Russian-Ukrainian conflict has lent unprecedented prominence to the concept of the Global South in the world. The criterion for identifying the Global South in the current context is whether or not it is involved in the economic sanctions against Russia. Those participating in sanctions are basically North American and Western European countries, and in Asia only Japan, South Korea, and Singapore, as well as Australia and New Zealand in Oceania, have joined. The Global South, in turn, includes a group of countries that takes a different position from these developed countries on the issue of sanctions against Russia.

In fact, the weaponization of the dollar during the Russo-Ukrainian war did great harm to the dollar standard. First, the freezing of Russia's foreign exchange reserves was a wake-up call to all countries to the effect that it is difficult to guarantee the safety of funds lodged in Western banks in the event of geopolitical conflict. Second, once kicked out of SWIFT, a country's international trade faces major problems, which prompts people to start thinking about alternative mechanisms.

On the eve of this year's BRICS summit, the Western media was focused on two possible summit topics: BRICS expansion and de-dollarization. Under the pressure of the US government, the South African government did not include de-dollarization as an official topic of the BRICS meeting, and India was also firmly opposed to expansion and de-dollarization. China took a different position on both issues: on the one hand, it pushed hard for expansion and succeeded; on the other hand, it kept a relatively low profile on de-dollarization. Unlike Putin and Lula, who explicitly advocated de-dollarization, President Xi Jinping only devoted one sentence of his speech to the topic: "We should give full play to the role of the New Development Bank, promote the reform of the international financial and monetary system, and enhance the representation and voice of developing countries." This relatively moderate stance is closer to that of most countries of the global South.

BRICS expansion will have a significant impact on the future international order. Of the five countries approved for membership this year [it appears to me that there are in fact six: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates], four are located in the Middle East, at the geographic nexus of the Persian Gulf, the Red Sea, and the Suez Canal. This seems to indicate that in the future, China will attach great importance to opening up a continental bridge between Asia and Africa, via Middle Eastern countries.

Another major potential significance of BRICS expansion is to lay the groundwork for the eventual creation of a BRICS currency. Among the new BRICS members, the UAE, Iran, and Saudi Arabia are all important oil exporters, and Argentina is also an important energy exporter, if on a lesser scale. After the expansion, the BRICS countries account for 43% of global oil production, 46% of world population, 30% of GDP and 25% of merchandise exports. Among post-expansion BRICS countries we find six of the top ten oil producers in 2022 and five of the top seven oil consumers in 2021. Given a material foundation of this size, the creation of a BRICS currency for intra-BRICS trade settlements is very attractive to the BRICS countries, as it would allow them to avoid the financial risks associated with the dollar standard, as well as associated geopolitical risks.

Next year's BRICS summit will be held in Russia, where U.S. pressure has little purchase, so the possibility that Russia will include the BRICS currency as an official topic of the summit is very high. Whether next year’s summit can finally create a BRICS currency is another matter.

The Impact of the Israeli-Palestinian Conflict on De-Dollarization: Is a BRICS Currency Possible?

To date, I have seen no discussion of the impact of the Palestinian-Israeli conflict on the dollar standard. However, if one merely analyzes the series of events since the outbreak of the conflict, it is easy to see that the conflict has increased the likelihood that the new BRICS members in the Middle East will support the creation of a BRICS currency, at least on an emotional level.

Since the outbreak of the conflict, the United States position in support of Israel has been loud and clear. Following the outbreak of the conflict, the United Nations General Assembly adopted a resolution on October 27 with 120 votes in favor, 14 votes against and 45 abstentions, condemning all acts of violence against Palestinian and Israeli civilians and calling for an immediate, durable, and lasting humanitarian truce. There were only 12 countries besides the U.S. and Israel voting against the resolution. However, this is in complete opposition to the position of the entire Islamic world. On November 11, the 57 countries participating in the Joint Extraordinary Summit of Arab-Islamic Leaders issued a common statement calling on the International Criminal Court to investigate Israeli violations in the Gaza Strip, condemning Israel's attempts to forcibly relocate the Palestinians, and requesting that the U.N. Security Council pass a binding resolution to halt Israel's attacks on the Gaza Strip.

In contrast, the BRICS countries have clearly demonstrated their preference for the Palestinian position on similar questions. On November 15, the UN Security Council adopted its first draft resolution calling for "the establishment of urgent humanitarian pauses and corridors throughout the Gaza Strip for a sufficient number of days," and on November 20, a joint delegation comprising Arab and Islamic foreign ministers and the secretary-general of the Organization of Islamic Cooperation (OIC) arrived in Beijing to begin an international good offices mission to promote an end to the conflict in the Gaza Strip. On November 21, BRICS countries collectively spoke out on the Palestinian-Israeli issue. Two days later, Palestine and Israel reached a ceasefire consensus for the first time.

From the perspective of international politics, the goodwill of the entire Islamic world towards the United States is declining as a result of the United States' position in support of Israel. The United States is paying a huge international political cost, and its interests are clearly being damaged, while the BRICS did indeed play a role in brokering the Palestinian-Israeli ceasefire. If Russia pushes for the creation of a BRICS currency at next year's BRICS summit, for the new Middle Eastern BRICS members, the divergence in their positions in the face of the Israeli-Palestinian conflict will increase the likelihood that they will support issues such as de-dollarization or the creation of a BRICS currency.

India's position against the BRICS currency might well change, or at least weaken, as a result of the Israeli-Palestinian conflict. As soon as the Palestinian-Israeli conflict broke out, India declared its support for Israel in no uncertain terms, but subsequently sought to walk this support back on seeing that the 57 countries of the Muslim world unanimously took the exact opposite position. The Israeli-Palestinian conflict may have prematurely closed the window of opportunity for India's efforts to become a leader of the global South. At next year's BRICS summit, when four Muslim countries become new members, it will be interesting to see whether India will continue to be adamantly opposed to the BRICS currency.

However, at least for the time being, I still believe that even if a BRICS currency is created at next year's summit, it does not mean the immediate collapse of the dollar standard. On the one hand, we can see that the structural conditions that have undergirded the dollar standard to this point have begun to change profoundly, so that the dollar standard is encountering unprecedented challenges, especially since the two major cycles that have supported it in the past have both begun to experience problems. On the other hand, however, this does not mean that the dollar standard system is facing a fatal crisis. The highly developed financial markets and instruments of the United States, its large and still growing economy, and the institutional inertia of various international trade and international financial orders will continue to support the current system. It is also unlikely that the countries of the Middle East will completely stop using the United States dollar to price their oil, as the presence of United States troops in the Middle East remains an important check.

At the same time, even if the BRICS member countries unanimously agree to create a BRICS currency, it does not necessarily signal the birth of a BRICS currency. The devil is always in the details, and any number of complicated technical issues may still become important obstacles to the creation of the BRICS currency. If a new international financial order is established, it will remain merely a passing thought if it does not have the ability to deal with technical details.

In fact, the ultimate decision on the fate of the dollar standard system may still rest with the United States itself. The United States is currently facing a series of major problems: Can the rate of growth of the debt be effectively curbed? If bringing the debt under control provokes an economic crisis, how will they deal with it? How will they deal with the de-risking and de-dollarization trend in the Global South after the outbreak of the Russia-Ukraine war? How will they rebuild the trust of others so that the dollar cycle of petrodollars and major trade-surplus countries can recommence?

Looking ahead, one thing is clear: the dollar standard is entering an historical period of great uncertainty.

Notes

[1] 高柏, “贸易战、热战和全球南方的崛起：美元本位制的未来,” published on the online platform of Beijing Cultural Review/文化纵横 on December 27, 2023.

[2]Translator’s note: Literally, “Americans' unfettered choice preferences in domestic policy-making 美国人不受束缚地制定国内政策的选择偏好.” The author includes “preference for policy autonomy” in English, which may be technical language from the author’s academic field. In any event, what the author means is that the dollar standard is part of a set of tools that gives American policymakers much greater choice than that available to policymakers in other countries.

[3]Translator’s note: To my mind, taxation is not an “expenditure,” but Gao’s meaning is clear: how much a government taxes generally determines how much it can spend.