Consequences of Elimination of USD from China Commodity Exchange

2020/05/17 | Economy, Note, top news

Strategic Council Online: The removal of the US dollar from trading on the China Commodity Exchange, given its significant contribution to the financing of European, Latin American and even African goods, means that global demand for the USD will decline. A drop in global demand for the USD would weaken the value of the currency and further destabilize its position as the dominant international currency. Reza Majidzadeh - Developmental Political Economy Researcher

China has removed the US dollar from trading on its commodity exchange and replaced it with yuan. The move by China comes following reports about the elimination of the US dollar in international trade between Russia and China earlier this year. Earlier, Donald Trump’s approach to trade and economic warfare with European, American and Asian countries prompted some other states, including Turkey and Iran, to take steps to remove the US dollar from their exchanges. The practical realization of China’s elimination of the dollar as one of the major players in the global economy will have far-reaching economic and political implications. In particular, the current situation in the global oil market is exacerbating the sensitivity of China’s move.

Since the 1940s, and especially during the reconstruction of post-World War II Europe in the form of the Marshall Plan, the dollar has become the dominant international currency. Determining a stable relationship between the dollar and gold was a key feature of this international currency system (the Bretton Woods system), which was announced in the early 1970s by Nixon, the then President of the United States. However, the supremacy of the US dollar as the dominant international currency did not disappear, and even the introduction of the single currency of the European Union, the euro, did not shake its position.

But several domestic and international developments in the United States are gradually threatening the dominant position of the dollar, including the gradual introduction and strengthening of the digital currency, including Bitcoin, the Bush administration’s monetary overdraft to pull out of the September 11, 2001, terrorist attacks. He noted the US administration’s massive financial assistance to the economy in the 2007 financial crisis and Donald Trump’s aggressive approach since 2016.

Among the above factors, the role of Trump’s approach to international economics and trade has had a greater impact. Donald Trump’s “America First” ​​strategy, in contrast to the long-term “Made in China 2025” strategy, led to a fierce trade war between the two countries. Concurrently, Trump had declared a trade war with the European Union and its neighbours and allies in North America.

Trump’s approach in violating the Iran Nuclear Agreement (known also as the Joint Comprehensive Plan of Action) and imposing international sanctions on various countries, including Iran, was another aspect of this aggressive approach in advancing the “America First” ​​strategy. But the world of conflict of interest and conflict of strategies is a world of action-reaction, and economic-trade wars, the scope of which extends to political interactions, are a chess game.

On the other side of the chessboard, countries under sanctions and trade wars began thinking about replacing the US dollar in their exchanges; bilateral or multilateral monetary agreements, the use of non-dollar interbank exchange systems, and barter were among the initiatives. Russia, for example, announced last year that it would issue yuan-based bonds to prevent the dollar from dominating. Although the decision has not yet been implemented in practice, China’s new decision to remove the dollar from its commodity exchange will have far-reaching economic and trade implications.

China’s significant contribution to the financing of European, Latin American and even African goods means that global demand for the dollar will decline. A drop in global demand for the USD would weaken the value of the currency and further destabilize its position as the dominant international currency. Although China is one side of the story, it is working hard to develop a “Made in China 2025” strategy, and developments in international political economy are coming close to the observation of Farid Zakaria in his book “The Post-American War”, which believes the American power is on the decline. Corona’s global epidemic complicates the situation because compared with the issue of weakening the value of the US dollar, the challenge of overcoming the corona recession is more important and a priority.

But in such a situation, the easiest way to offset China’s approach would be to increase demand for the dollar, including manipulating US interest rates to attract foreign capital, which should take place with caution based on the negative impact of US investment spending and taxpayers’ sensitivity to the escalating recession.

However, the Federal Reserve, as the body responsible for monetary policy in the United States, is highly independent, and Trump appears to prefer reactions based on threats to impose customs restrictions. Trump also used the tactic in threatening Saudi Arabia to agree with Russia to reduce oil production. Also, other options, such as realizing the threat of large companies leaving China for secrecy over Corona, are on the table, but overall China’s seriousness in eliminating its dollar transactions could determine the future of the USD’s role in international trade.

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