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Financial rationale and power of the US dollar system: monetary and financial background of the Sino-US trade disputes

LI Xiao1,2

(1.School of Economics, Jilin University)
(2.China Society of World Economics)
【Knowledge Link】poison pill clause; Credit rating; debtor

【Abstract】The Sino-US trade disputes not only expose our misunderstanding of the United States, but prompt us to think about the deep-level background of the Trump administration’s willful “America First” behavior. This paper argues that the current disputes between the United States and the rest of the world, especially the trade disputes with China, are built on the country’s strong financial and monetary advantages. For a long time, the theory of “America’s decline” has only focused on the topic of the decline itself and turned a blind eye to the changes in its economic structure and the resulting political and economic implications, especially the changes in the core interests of the United States. The US economic structure has been increasingly finance-oriented since the 1970s, which has led to two important results: one is the formation and strengthening of the US dollar system; and the other is the formation of the global industrial chain featuring the US technological innovation and its transfer of its manufacturing capacities to other countries. It is an important background or guarantee for Trump’s launch of trade protectionist actions. The formation and development of the US dollar system is the most crucial change of the world economy in the 20 th century. It allows the United States to build a world control system that is totally different from the hegemonic countries in the past. Its exploitation and control of the world has become more secretive; more importantly, it has changed the long-standing financial rules of mankind, namely, the creditor-centered rule has been changed into the debtor-centered rule. Such a change is an important foundation for all its economic behaviors in today’s international community. The implementation of debtor-centered rule is mainly backed by the US dollar system. The core interest of the system lies in maintenance of an international monetary order that allows the US to take advantage of the debtor-centered rule to borrow heavily without being restrained by any other country. Based on the discussion of the financial rationale and operational mechanism of the US dollar system, this paper analyzes the nature of the system and its global strength, before putting forward China’s overall strategy for dealing with the Sino-US trade disputes and its future development.

【Keywords】 US dollar system; creditor-centered rule; debtor-centered rule; financial power;


【Funds】 National Social Science Fund of China (2015ZDA017)

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    [1]. [1] On September 30, 2018, the US-Mexico-Canada Agreement (USMCA) was signed and replaced the previous North American Free Trade Area Agreement (NAFTA), in which the discriminatory provisions for “non-market economy countries,” the so-called “poison pill clause,” are very obvious. The USMCA introduced discriminatory provisions rarely seen in previous trade agreements to impose restrictions on its defined “non-market economy.” On the one hand, the discriminatory provisions for “non-market economies” are set out in the provisions on the Settlement of Investment Disputes in Annex D of Chapter 14 of the USMCA. On the other hand, Article 10 of Chapter 32 stipulates that if a country is recognized as a “non-market economy country” by the domestic trade remedy law of either party of the United States, Mexico and Canada, and at the same time, neither of them has signed a free trade agreement with it, then other parties of the USMCA shall be notified at least three months prior to the commencement of free trade agreement negotiations between that country and either party of the three parties; if any party enters into a free trade agreement with a “non-market economy country” identified in this paper, the other parties shall have the right to terminate the application of the USMCA agreement on the condition of six months’ notice in advance and replace it with bilateral agreement. The United States has made it clear that it hopes that this clause will apply when it signs free trade agreements with other developed countries such as European countries and Japan in the future. [^Back]

    [2]. [2] Li, X. World Economy Studies (世界经济研究), (3): 3–6 (2018). [^Back]

    [3]. [1] Objectively, China’s dependence on the United States at present is all-round, whether in primary technological innovation, market or monetary and financial fields. Given the limitations of space and topics, this paper focuses on the analysis of the US monetary and financial rationale and its global power. Other related studies can be found in Li, X. & Li, J. World Economics and Politics (世界经济与政治), (1): 114–141 (2014). [^Back]

    [4]. [2] It is undoubtedly an important international political background for the Sino-US conflicts that the established powers do their best to contain the late-developing powers. [^Back]

    [5]. [3] The US finance-oriented economy is a major change in the US economic structure since the 1970s, especially since the 1980s. Its domestic and international political and economic impacts are tremendous. Due to the limited space of this paper, it cannot be discussed further. Interested readers can refer to Li, X. 国际货币体系改革:中国的视点与战略. Beijing: Peking University Press, 5–9 (2015). [^Back]

    [6]. [1] According to statistics, the US external debt (including intergovernmental debt and national debt) has increased rapidly from about USD 7 trillion at the end of 2003 to about USD 22 trillion at the end of October 2018 (The US Treasury website: https://www.treasurydirect.gov [2018-10-31]). [^Back]

    [7]. [2] For a systematic analysis of the hegemonic status of the United States at the present stage, see Li, X. & Li, J. World Economics and Politics (世界经济与政治), (1): 114–141 (2014). [^Back]

    [8]. [3] In order to relieve the antagonism between the two plans, in fact, a so-called “Scarce Currency Clause” was retained in the Bretton Woods system clause, as a compromise to some extent. The clause states that when a member’s balance of payments continues to run a large surplus, the currency of the surplus country can be declared as Scarce Currency and allotted according to the needs of deficit country. The deficit country also has the right to adopt temporary restrictive exchange measures for the scarce currency. [^Back]

    [9]. [1] [Britain] Ferguson, N. The Cash Nexus. Tang, Y. (trans.) Beijing: CITIC Press, 99 (2012). [^Back]

    [10]. [2] American scholar, Francis, has elaborated on this thrilling process with a long space. See [America] Gavin, F. Gold, Dollar and Power: The Politics of International Monetary Relations, 1958–1971. Yan, R. (trans.) Beijing: Social Sciences Academic Press (China), 124–301 (2016). [^Back]

    [11]. [3] In fact, one of the important initiatives of the Roosevelt’s New Deal was to abandon the gold standard system, which was considered one of the significant driving forces for the United States to get out of the Great Depression. As a result, the United States has already set a precedent for abandoning gold restrictions to stimulate economic expansion. [^Back]

    [12]. [1] [Japan] Eiji Yamashita. in Li, X. (ed.) 后危机时代的国际货币体系改革. Changchun: Jilin University Press, 15–36 (2012). [^Back]

    [13]. [2] There is no uniform and clear criterion for the definition of the US dollar system in academic circles currently. Generally speaking, the definition is mainly based on the dominant position of the dollar in various functional areas of international currency. McKinnon defines the current international monetary system as the “dollar-based system” on the basis of a comprehensive assessment of the dollar-denominated international trade, its proportion in international settlement and reserves of countries, as well as the sustainability of the hegemony of the dollar. And the domestic commodity prices of the United States have become the “nominal anchor” (Ronald I. McKinnon, “The International Dollar Standard and the Sustainability of the U.S. Current Account Deficit,” Brookings Papers on Economic Activity, No.1, 227–239, 2001). Since then, Devereux and others have outlined the US dollar system as a system in which all commodity transaction prices are denominated in dollars. In the decades since the implementation of the floating exchange rate system, the US dollar has been the most important currency in international trade and finance, which is the core of the dollar standard system (Michael B. Devereux, Kang Shi, Juanyi Xu, “Global Monetary Policy Under a Dollar Standard,” Journal of International Economics, 2004, 71 (01): 113–132). Apart from this, Gilpin R. and Robert A. Mundell believed that the Jamaican system represents the end of the old Bretton Woods system, but it is far from enough to be called a new system. Under this system, countries have their own ways without normative management and regulatory mechanisms, which is called “Non-system System” (Gilpin R., The Political Economy of International Relations, Princeton University Press, 1987; Robert A. Mundell, Currency Areas, Exchange Rate Systems and International Monetary Reform, Social Science Electronic Publishing, 2000, November: 217–256); while Dooley, Folkerts and Garber, called it the “Revived Bretton Woods System,” whose operating mechanism is essentially the same as that of the Bretton Woods System, and both are “center-periphery” model with the US dollar as the core. As a central country, the United States exports dollars, and other countries are on the periphery, supporting the hegemony of the dollar (Michael P. Dooley, David Folkerts-Landau, Peter M. Garber, “An Essay on the Revived Bretton Woods System,” NEBR Working Paper No. 9971, 2003). In response to the viewpoint that some scholars call the international monetary system after the US closure of the “gold window” in 1971 as the “dollar standard,” Japanese scholar Koji Okuda pointed out that the so-called “currency standard” refers to the standard of monetary value, such as using silver or gold as the standard of monetary value, but there is no “standard” in the international monetary system after 1971. See Li, X. & Ding, Y. 亚洲的超越:构建东亚区域货币体系与“人民币亚洲化”. Beijing: Contemporary China Publishing House. 3–8 (2006). [^Back]

    [14]. [1] As of August 2018, China held about USD 1.165 trillion in US Treasury bonds and Japan held about USD 1.029 trillion in US Treasury bonds, both accounting for about 35% of the total foreign holdings of US Treasury bonds, which reached 40% in 2015 (US Department of Treasury TIC database https://www.sury.gov/resource-center/data-chart-center/tic/Pages/index.aspx [2018-10-31]). [^Back]

    [15]. [2] The dollar-denominated mechanism for oil trading is the result of the combination of typical market choice and political arrangement. The key way to solve the oil crisis lies in the fact that developed countries borrow from oil exporting countries to make up for trade deficit, that is, to make up for current account deficit with capital account surplus. The key problem is which currency oil exporting countries lend. If oil exporting countries lend money in their currencies, it will not only expand the trade surplus between oil-producing countries and oil-consuming countries and increase inflation in oil-producing countries, but also make oil-consuming countries seize oil wealth of oil-producing countries free of charge. It is precisely because the US dollar has an unparalleled ability to buy oil, goods and services worldwide that the birth of the oil dollar is largely the result of market choices. But at the same time, how to form a dollar cycle between the oil producers and the oil consumer - the United States requires political arrangements. The reason for this is that, on the one hand, the Organization of the Petroleum Exporting Countries (OPEC) headed by Saudi Arabia is willing to hold the US dollars, on the other hand, they are willing to lend surplus dollars to the United States instead of using them to import goods and services from other developed countries. Therefore, how to persuade Saudi Arabia, the largest oil producer in OPEC, to convert its trade surplus into US dollar financial assets and to work closely with the United States for this purpose have become an important political choice. How the United States and the OPEC countries headed by Saudi Arabia reached relevant transactions, see Liang, Y. The Secret of American Hegemony: Financial Logic Behind American Power (称霸密码:美国霸权的金融逻辑). Beijing: Xinhua Publishing House, 169–174 (2012). [^Back]

    [16]. [1] Essentially, when the core of the international monetary system replaced the gold standard by the “credit monetary system,” it became the “debt standard.” Its core rule is that: money is debt, debt is money, holding money is holding debt, and no debt, no money. As a result, debt growth is faster than money creation (leverage), and money creation is faster than commodity wealth growth. This is a kind of economic growth driven by debt. The more debt one owes, the more favorable it is to economic growth. [^Back]

    [17]. [2] Li, X. 国际货币体系改革:中国的视点与战略. Beijing: Peking University Press, 11 (2015). [^Back]

    [18]. [1] Christopher Cocker, a British scholar, pointed out that the followers of “American First” tend to be internationalists, “not because they love the world, but because the institutions that claim to represent the world, from the World Bank to the International Monetary Fund, are designed by the United States and are still inspired by liberal ideology.” See [Britain] Cocker, C. The Improbable War: China, The United States and Logic of Great Power Conflict. Qing, S. (trans.) Beijing: Xinhua Publishing House, 52 (2016). [^Back]

    [19]. [2] Compared with the three US major rating agencies, the financial functions of the four major accounting firms of the United States are relatively limited. They provide professional services such as auditing, taxation and consulting for customers and earn business profits, thus are not analyzed here. IPA100 (Global 100 Accounting Firms) published by INSIDE Public Accounting in 2018 showed that the top four American accounting firms, namely PWC, KPMG, DDT and EY, ranked high with a total revenue of USD 56.5 billion, taking up 75% of total IPA 100 revenue. DDT took the top spot with USD 18.6 billion (https://ipainsider.sharefile.com/share/view/9335b7ab91f75a6 [2018-10-31]). [^Back]

    [20]. [1] From 1975 to 1992, the US SEC only approved four rating companies, Duff & Phelps (1982), MCM (1983), International Bank Credit Analysis (IBCA) and Thomson Bank Watch (1992) as NRSROs, and since then no rating agency has been authorized NRSRDs. MCM was acquired by Duff & Phelps in 1991, and Duff & Phelps, IBCA and Thomson Bank Watch were merged into Fitch from 1997 to 2000. Therefore, NRSRDs in the United States was still dominated by Moody’s, Standard & Poor’s and Fitch by 2000. After Enron event, the NRSRDs accreditation system has been criticized. The US SEC began to accept applications from other rating agencies from 2003. After the outbreak of the subprime mortgage crisis, the US SEC accelerated the approval of some credit rating agencies that have applied for NRSRO for many years but have not been approved, namely Egan-Jones Rating (December 2007), Lace Finance (February 2008) and Realpoint (June 2008). See Chu, J. Economic Research Guide (经济研究导刊), (11): 138 (2011). [^Back]

    [21]. [1] Chen, S. Contemporary Finance & Economics (当代财经), (3): 62 (2009). [^Back]

    [22]. [2] The main business objects of the three major rating agencies are as follows: first, to carry out “sovereign credit rating” for all countries in the world; secondly, to carry out market credit rating for the world-famous listed financial companies and industrial and commercial enterprises; thirdly, to conduct investment and financing risk rating for various financial instruments and financial derivatives of countries. [^Back]

    [23]. [1] Zhang, H. China Finance (中国金融), (23): 65 (2010). [^Back]

    [24]. [2] There are various signs showing that in the European sovereign debt crisis, the US three major rating agencies have fully exerted their functions of “built-in institutions.” For example, the three major agencies punish “disobedient” companies or countries by lowering or threatening to lower ratings. The Washington Post has pointed out that in 2003, Hanover Insurance accepted the rating from two rating agencies and rejected another rating agency. The rejected rating agencies reduced Hanover’s credit rating to “junk rating” subsequently when it offered “free ratings,” resulting in a market sell-off that caused a loss of USD 180 million in market value in a few hours. There are also information showing that the Southeast Asian financial crisis is a political retaliation against ASEAN’s adoption of Myanmar, in which Moody’s and S&P’s role cannot be ignored. Malaysian Prime Minister criticized Western rating agencies for their lack of objectivity and helplessness. The United States insisted on launching the war in Iraq, and Germany opposed it all the time, which had deepened the rift between the two countries. In March 2003, German companies were downgraded successively by S&P, which led to a record low of the share prices of related companies, including ThyssenKrupp, the largest steelmaker. German politicians and businessmen generally believed that this was revenge due to Germany’s “say no” to the United States. It was quite coincidental that Australia fully supported America starting war against Iraq, and S&P upgraded Australia’s foreign exchange debt rating to AAA. See Bai, Q. & Tan, Q. Financial Theory and Practice (金融理论与实践), (11): 10 (2012); Huang, H. International Political and Economic Research (国际政治经济研究), (6): 69 (2011). [^Back]

    [25]. [1] Concluded according to related reports of Xinhuanet (http://www.xinhuanet.com/[2018-11-04]), People online (http://www.people.com.cn/[2018-11-04]), and Guangming online (http://www.gmw.cn/ [2018-11-04]). [^Back]

    [26]. [1] SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is an international cooperative organization initiated by European and American banks. It holds board seats and voting rights as shareholders and operates a world-class financial messaging network. Banks and other financial institutions exchange messages with peers to complete financial transactions through the secure, standardized and credible channels provided by this organization. CHIPS, the Clearing House Interbank Payment System, is a private institution established by domestic banks in the United States. It operates and manages the New York clearing house interbank payment system, which mainly carries out liquidation of cross-border dollar transactions. CHIPS also requires the cooperation of FedWire system. FedWire, the Federal Reserves Wire Transfer System, is a US dollar payment system in the United States. It is the main artery of payment and liquidation in the United States, owned and operated by the Federal Reserves. [^Back]

    [27]. [2] In 2006, in the name of the threat of terrorism against the United States, the SWIFT providing transaction information to OFAC was disclosed. The European Union perceived that it might pose a threat to the privacy of its citizens, and launched a dispute with the United States regarding SWIFT. After nearly four years of two rounds of negotiations, the EU and the United States agreed that SWIFT data could be transmitted to the United States under the supervision of EU representatives. Europol also has the power to approve and reject the US Treasury’s request for SWIFT data. The EU somewhat restricts the US control over SWIFT though, considering that the EU restrictions are limited to preventing the mass transfer of European citizens’ transaction data to the US, the US can suppress the EU economically and politically, and there are many common interests between the US and Europe, the EU enjoys weak binding force on the United States to access SWIFT data and use it to impose financial sanctions. The United States basically has control over SWIFT. [^Back]

    [28]. [3] Since Bank X and Bank Y may be two unrelated banks in any corner of the world, and they do not have a unified opening bank, they entrust their acting Bank A and B to handle the transfer of funds. How do bank A and B open accounts with each other? Certainly, they can choose to complete the transaction through the interbank clearing system, but in the presence of many similar businesses and a large number of business transactions with other banks C and D, the way banks set up accounts with each other becomes complex. If Bank A and Bank B belong to different countries, they should also conform to the supervision process of funds allocation in different countries. In this case, the appearance of SWIFT is to remove all obstacles during this period. Bank X and Bank Y only need to become members of SWIFT (with BIC identification number) and then submit remittance instructions to the bank in accordance with the SWIFT message standards. [^Back]

    [29]. [1] In August 2018, following the resumption of sanctions imposed by the United States on Iran, the European Union and Iran held a joint press conference in Tehran on 21 October. The two sides proposed to establish a currency settlement channel as a means for the European Union and Iran to circumvent the US financial sanctions against Iran. The main way is that the European Union will establish a legal entity to conduct trade with Iranian enterprises that have been affected by the US financial sanctions (http://www.xinhuanet.com/english/2018-10/27/c_137562677.htm [2018-11-03]). Obviously, this response is temporary, unless the EU sets up a separate international settlement system, but it is obviously unrealistic in the short term. [^Back]

    [30]. [2] The US dollar cross-border clearing and payment system, in addition to CHIPS, is supplemented by HSBC (Hong Kong)-dominated USD CHATS, a Hong Kong US dollar clearing system, and Tokyo US dollar clearing system established by Chase Bank in Japan. However, its final settlement is still done under the respective accounts of the US dollar domestic system CHIPS, which is subject to the United States, and the business model does not enjoy an advantage, accounting for less than 5%. [^Back]

    [31]. [1] Polanyi believed that the economic activities of human society are not an autonomous or self-disciplined process as economic theory suggests. They are always embedded in society and must be subjected to political, religious and social relations. See Polanyi, K. The Great Transformation: The Political and Economic Origins of Our Time. Huang, S. (trans.) Beijing: Social Sciences Academic Press, 25–30 (2013). [^Back]

    [32]. [2] For a comprehensive analysis of the sustainability of the US dollar system, see Li, X. et al. 国际货币体系改革:中国的视点与战略. Beijing: Peking University Press, 29–63 (2015). [^Back]

    [33]. [1] For relevant content of this study, refer to Li, X. & Zhou, X. The Journal of World Economy (世界经济), (12): 130–155 (2012); Li, X. & Zhou, X. Studies of International Finance (国际金融研究), (2): 29–42 (2014). [^Back]

    [34]. [1] See http://futures.eastmoney.com/news/1517,20180830936709840.html [2018-11-05]. [^Back]

    [35]. [2] As early as 1993, China had launched crude oil futures contracts, but they were aborted due to the shortcomings of infrastructure, economic development level, market openness, relevant laws and regulations, and regulatory system. Previously, the Tokyo Commodity Exchange also introduced crude oil futures. However, in order to facilitate Japanese domestic enterprises to avoid the risk of rising or falling crude oil prices, the Tokyo Commodity Exchange stipulated that crude oil futures use the yen as the denomination currency, which led to little participation of foreign investors. Due to the lack of participation of overseas crude oil traders and investment institutions, Japan’s crude oil futures trading activity and trading volume had long been sluggish. Even as a major importer of crude oil, Japan has not been able to exert influence in the global crude oil futures pricing system. [^Back]

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This Article


CN: 11-3799/F

Vol , No. 06, Pages 52-71+5-6

November 2018


Article Outline



  • 1 Financial rationale and operational mechanism of the US dollar system
  • 2 Nature and power of the US dollar system
  • 3 Conclusions and implications
  • Footnote