The future of the dollar, one of the most important parts of US global hegemony, is being debated. While countries, especially China, Iran, and Russia, are trying to expand the use of their national currencies in their bilateral trade, even the Gulf kingdoms, which can be described as the “backyard” of the United States, are looking for an alternative to the dollar in trade with China. While the ratio of central banks’ assets in dollars is decreasing around the world, we are not facing a new ‘hegemonic currency’ for now, but a variety of portfolios.
While the dollar dominance in trade has declined relatively, we can still speak of ‘hegemony’ in financial flows. Prof. Dr. Korkut Boratav, one of Turkey’s most prominent economists, points to the distinction between ‘de-dollarization’ in trade and industrial capital and dollar dominance in finance capital. The U.S., which maintains its leadership in capital exports and financial markets, achieves this position by being the center of global finance capital. Maintaining its leadership in capital export and financial markets, the United States provides this position by being the center of global financial capital. Therefore, China, which exercises capital controls and uses foreign investments as a ‘peripheral’ country, is unlikely to replace the U.S. in the financial markets without becoming a classic imperialist country.
However, Boratav points out that there is an unbreakable link between the political hegemony of the U.S. and the financial hegemony of the dollar. The shock created by the 2008-9 crisis, along with the challenge of China and Russia, has been the most important indicator of the decline of U.S. hegemony. With the addition of the countries of the “South”, the situation in the neoliberal period has changed. In the absence of the left, the anger of the blue-collar workers, who went through a difficult period due to immigration to the northern countries and deindustrialization in the same countries, has evolved into an anti-immigrant and anti-Chinese policy with Trump; the Ukrainian war is also fueling this trend. Ironically, according to Boratav, while the banner of ‘globalization’ has passed to China, ‘protectionism’ became U.S. economic policy.
Two elements are said to ensure U.S. global dominance: the dollar and military power. Does the erosion of one of these, i.e., the dollar’s status as a reserve currency, directly translate into a weakening of American supremacy?
The economic hegemony of U.S. imperialism also depends on the dollar. It would not be wrong to call this dimension “dollar imperialism”. Political hegemony, on the other hand, is exercised by the U.S. state and its alliances (primarily NATO), which are reinforced by military power.
The monetary basis of economic hegemony must also be supported by production and foreign trade. For a period following 1945, the United States was the forerunner of the capitalist world economy in all three aspects. In terms of state power, there was a period of a bipolar world due to the existence of the Soviet system. Until the 1980s, the existence of the non-aligned bloc, supported by the Soviet Union, also curbed the political hegemony of the United States. After 1970, U.S. economic power began to erode with the rise of Western Europe; the US was running astronomical foreign trade and current account deficits.
The collapse of communist regimes in the Soviet Union and Eastern Europe prevented the economic decline of the United States from being reflected in politics. Germany, the only possible competitor in the economy, could not embrace Europe’s mission of being an autonomous powerhouse. During this period, neoliberalism became widespread; the domination of capital was integrated into the unipolar new world order.
After 2000, the neocon philosophy designing this new era as the U.S. Century was implemented, but it failed. First, attempts by the U.S. and its allies to transform the Middle East through regime change operations failed. The limits of military power were revealed. Secondly, it was not Yeltsin’s Russia that emerged from the wreckage of the Soviet Union, but Putin’s Russia, which rejected the dependence on the Western alliance with a nationalist attitude. Third, and most importantly, in 2008-2009, Western capitalism was dragged into the worst economic crisis since the Great Depression. The legitimacy of capitalism as a system was severely damaged. At the same time, China, as an alternative economic power unaffected by the crisis of capitalism, prevented the U.S. and European crisis from turning into a world crisis.
Amid this crisis, it became clear that the United States is economically dependent on China, which has become the second largest economy in the world. China’s new leader, Xi Jinping, assimilated this new situation by embracing globalization. But two years later, he also came face to face Trump’s economic war against his country. The Trump administration soon turned the economic war into an ideological war against the Chinese Communist Party. This stance meant that anti-U.S.-Chinese sentiment moved to a Cold War, and was later adopted by the Biden administration, NATO, and increasingly by EU bodies.
The above-mentioned political stumbles of the U.S. dominance were combined with the decline of its economic supremacy. The dollar’s position as a world currency began to erode in this environment.
It is a fact that central banks reduce the dollar rate in their portfolios and turn to other instruments. However, we do not seem to be entering a world where the dollar is being replaced by another ‘hegemonic’ instrument, but rather a world where instruments are multiplying. Does this mean a crack in the hegemony not only of the United States but of global finance capital?
Yes, the instruments used in international economic transactions are diversifying. This diversification is due to the decline in the dependence of industrial and commercial capital on the dollar rather than finance capital. The leading country in world trade is China with a 15 percent share. It is clearly far ahead of the United States. It occupies a strategic position as an exporter of industrial products and an importer of raw materials and intermediate goods at the beginning, end, and some intermediate stages of supply chains. Mineral exporters from Russia, Brazil, OPEC members and the Southern region are located at the other ends, partly in a mixed position. These countries account for most of the tradable output of the world’s national product. The use of the dollar as a medium of exchange in foreign trade is not mandatory. It was once claimed that it was impossible to export oil with non-dollar currencies. It was recently announced that Saudi oil would be sold to China in exchange for the renminbi (RMB); the U.S. remained silent to.
The economic basis for the US dollar being a world currency is international capital flows, in other words, from international finance capital. The volume of international capital flows, together with a wide range of short-term financial transactions, which can also be expressed as “making money out of money”, exceeds foreign trade transactions many times over. The United States is the world leader in capital exports. New York is also the center of the international financial system. The indispensability of the dollar depends on these things.
Is the renminbi likely to replace the dollar in the short term? Countries such as Brazil, Saudi Arabia, Russia, Malaysia, and Singapore have expressed their willingness to trade with renminbi instead of the dollar. On the other hand, some commentators argue that biggest obstacle to the renminbi is that China still maintains capital controls and is not an ‘open market.’
Foreign trade (primarily as “trade in goods”) is the exchange of commodities between countries; it is the necessary condition for the continuation of production. If it were only a question of financing foreign trade, there would be no need for the dollar. The RMB and ruble could take over this function together. It is noteworthy that Russia is the leading exporter of oil, grain, and minerals, complementing China in international specialization.
The U.S., as a net exporter of capital, is at the top of international capital flows. In addition, short-term (partly speculative) financial transactions are also largely made in dollars. Because of these two functions, the need for dollars is inevitable and this privilege is independent of trade. After 1945, even in periods of foreign trade surplus, the U.S. created the international liquidity required for the functioning of world trade by printing dollars.
China, on the other hand, is in a different position. It maintains current account surpluses and has accumulated reserves that have reached $3.3 trillion today. It supervises its own capital movements as a guarantee of economic independence. It controls and limits the “flight” or export of capital as a dependent peripheral economy rather than as a leading element of the world system. Most of the capital export comes from the state-owned Chinese Investment Corporation (Wealth Fund), where part of the reserve accumulation is transferred. Foreign investment by private Chinese companies is in the background. Some Chinese economists advocate melting down the Chinese government’s reserves with foreign investments. Only then, they argue, will the RMB become an international currency that is rooted in China’s productive power. In a sense, this proposal advocates the transformation of China into a typical imperialist country.
To what extent do the tensions of American domestic politics play a role in the escape from the dollar? There are financial circles that think that especially Joe Biden’s steps such as ‘new industrialization’, ‘transition to green energy’, ‘Inflation Reduction Act” have pushed the United States into an isolationist, neo-mercantilist policy and that the dominance of the dollar has weakened because of this. With or without Biden, is there a chance for the United States to step back from this policy?
This question is linked to the political extensions of the economic war against China. During his presidential campaign, Trump openly adopted an anti-globalization rhetoric; he advocated a protectionist foreign trade policy, targeting China in particular. He campaigned against the capital circles driving U.S. companies’ productive investments in China and Mexico, accusing them of “shifting jobs out of the country.” He imposed quantitative restrictions on imports from China, with which it signed foreign trade agreements with the “free trade principle” that have strict mercantilist characteristics.
Biden has also raised Trump’s bar. His “green energy, inflation reduction” acts have also provoked an open reaction from the EU. He also shifted the economic war against China to the field of technology. He imposed export bans on high-tech products and pressured the EU to impose these bans on allies such as Japan and Korea.
The roles of “liberal West, protectionist South” have changed today. In Davos, Xi Jinping and his aides have emerged as fanatical advocates of globalization, especially the doctrine of free trade. They are taking a principled stance against the US-led economic sanctions. The addition of Russia to countries such as Iran, Venezuela, and Cuba, and the seizure of Russian central bank reserves by the central banks of the United States (FED), Europe and the United Kingdom was the last straw. This is why many countries are reducing their dollar holdings in central banks and their allocation to Western financial institutions.
In the background, the losses of the “indigenous” working classes of the West from globalization are effective. Western industrial capital shifted production to peripheral economies (such as China and Mexico) in search of cheap labor. The traditional industrial sectors of the blue-collar working class were quickly liquidated. On the other hand, neoliberal policies have increased unemployment and poverty in Latin America and Africa. The aggression of imperialism (in the Middle East, for example) have had different impacts. The flow of millions of workers from the East and South to the West and North as migrant workers has increased as a result of these factors. Wages in the West are also under pressure due to the immigrants.
The liquidation of traditional industries and migrant workers… The result is the spread of tensions and unrest among the working classes of the West. In a conjuncture where the Left is weakened, these reactions feed a political environment that blends anti-immigrant and anti-Chinese sentiments in the West. The example of Trump and the Republican Party has shown that central politics could easily shift to neo-fascism. The war in Ukraine is feeding this tendency in a dangerous direction.
