OPINION:
The U.S. dollar as the world’s reserve currency and the SWIFT global money transfer system represent the twin pillars of a transparent international financial system capable of policing criminal activities and deterring rogue nations from conduct outside international norms.
Today, both pillars are crumbling as China strategically pushes the adoption of its new digital currency, the digital yuan.
Since the 1944 Bretton Woods Accord, the U.S. dollar has served as the world’s primary reserve currency, with central banks around the world holding about 60% of their foreign reserves in greenbacks, compared with about 20% for the euro and around 5% for the Japanese yen and British pound.
This global dollar demand has, in turn, artificially increased its value as measured in its exchange rate.
For U.S. citizens, the big advantage of this stronger dollar is that it pushes interest rates and mortgage rates lower than they would otherwise be.
On the other hand, and this was a point I often made in the Trump White House, a strong dollar also spikes the U.S. trade deficit as imports are cheaper and our exports less competitive — effectively exporting American jobs and factories.
These pros and cons notwithstanding, the geopolitical advantage of the dollar is this: With so much of foreign transactions and trade in dollars, the U.S. can impose financial sanctions on countries that engage in behavior outside international norms, e.g., China’s crushing of Hong Kong, Russia’s invasion of Ukraine, and Iran’s development of weapons of mass destruction to attack Israel.
It is in America’s fulfillment of this geopolitical policing function where the Society for Worldwide Interbank Financial Telecommunication comes in.
With SWIFT representing the go-to system to transfer money around the world, its financial institution members serve as “cops on the beat” not just to police criminal activities such as money laundering but also to enforce U.S. financial sanctions on rogue nations. The U.S. wields such power only because of its reserve currency status.
As I likewise warned in the Trump White House, the repeated use of sanctions has spurred China to develop the yuan as a substitute reserve currency capable of insulating China from U.S. sanctions.
This process began in October 2016 when the International Monetary Fund added the yuan to its Special Drawing Rights basket as an international reserve asset.
Since that time, the yuan has steadily gained ground against the greenback.
What matters here is not aggregate global statistics, where the dollar remains quite dominant.
Rather, China’s strategy is to concentrate yuan usage in a bloc of countries seeking to escape the long arm of U.S. sanctions. The poster child here is Vladimir Putin’s Russia, which holds nearly one-third of its reserves in yuan.
The growing list also includes Iran, Iraq, Bangladesh, France, Argentina, Saudi Arabia, Pakistan, Thailand, Brazil and India.
Yet it’s not just sanctions that China, with its growing “yuan bloc,” is seeking to avoid. China’s authoritarian leaders, all the way up to Xi Jinping, have realized that a digital form of the yuan provides yet another tool of social control both within and outside of China’s borders.
Such a digital currency immediately creates a permanent record for the government of all transactions, with each traceable right back to the wallets of its citizens, and it won’t just be Chinese citizens that the government will be able to surveil and track through their purchases.
All foreigners transacting in the digital yuan, both inside and outside China, will likewise be traceable — and sanctionable, and all foreign nations holding digital yuan in their foreign reserves will be vulnerable to Chinese censorship.
For example, any citizen in China that engages in behavior unacceptable to the government — with criticism of the government at the top of the list — can have his or her funds immediately frozen.
The same can happen to any foreign government holding digital yuan in its foreign reserves or any foreign company transacting in digital yuan.
Criticize China for its human rights abuses in Xinjiang, its coercive threats to Taiwan, its suppression of religion, its mercantilist trade policies, its role in spawning COVID-19 or its support for Mr. Putin’s Ukraine invasion, and the digital yuan may go up in censored smoke.
It should be clear, therefore, that broad global acceptance of a digital yuan is an Orwellian dream for a country that already runs the world’s biggest internet spy system through its Great Firewall of China.
Meanwhile, unlike the transparent SWIFT system, outside authorities such as law enforcement will be shut out from the digital yuan’s black box — unless, of course, the Chinese government wants to play ball with them.
What could go wrong here? Plenty. And to say the Biden administration and Congress are behind the curve on this is to state the obvious.
• Peter Navarro served in the Trump White House as manufacturing czar and chief China strategist. This article originally appeared at www.peternavarro.substack.com.
Please read our comment policy before commenting.