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The Future of the United States Dollar: Weaponizing the Us Financial System THE FUTURE OF THE UNITED STATES DOLLAR: WEAPONIZING THE US FINANCIAL SYSTEM THE FUTURE OF THE UNITED STATES DOLLAR: Weaponizing the US Financial System Michael B. Greenwald 1 ATLANTIC COUNCIL The GeoEconomics center works at the nexus of economics, finance, and foreign policy with the goal of helping shape a better global economic future. The Center is organized around three pillars - Future of Capitalism, Future of Money, and the Economic Statecraft Initiative. THE FUTURE OF THE UNITED STATES DOLLAR: Weaponizing the US Financial System Michael B. Greenwald ISBN-13: 978-1-61977-135-2 Cover image: “Image of president on American dollar bill” by Skyler Ewing, Pexels https://www.pexels.com/photo/ image-of-president-on-american-dollar-bill-4597810/. This report is written and published in accordance with the Atlantic Council Policy on Intellectual Independence. The au- thors are solely responsible for its analysis and recommendations. The Atlantic Council and its donors do not determine, nor do they necessarily endorse or advocate for, any of this report’s conclusions. **Disclaimer: Opinions, conclusions, and recommendations expressed or implied within are solely those of the author and do not necessarily represent the views of the Air University, the United States Air Force, the Department of Defense, or any other US government agency. December 2020 THE FUTURE OF THE UNITED STATES DOLLAR: WEAPONIZING THE US FINANCIAL SYSTEM Table of Contents Part I: What COVID-19 Means For the United States’ Economic and Financial Statecraft 1 Part II: International Monetary Exchange and Illicit Financial Activity 3 Part III: Bretton Woods and the Weaponization of the Dollar 4 A) Capital Flows 4 B) The Effects of Bretton Woods 4 C) Policy Actions 5 D) Beyond Sanctions 7 E) Moving Forward 8 Part IV: The Dollar Used Against Iran 9 Part V: The Role of the Dollar in Great-Power Competition 10 China 10 Russia 13 Implications 14 Part VI: Era of Digital Dollar and Digital Currencies 20 Part VII: Outlook and Recommendations 21 About the Author 23 II ATLANTIC COUNCIL THE FUTURE OF THE UNITED STATES DOLLAR: WEAPONIZING THE US FINANCIAL SYSTEM Part I: What COVID-19 Means For the United States’ Economic and Financial Statecraft OVID-19 has triggered a deeper recession than relations. In December, US efforts saw the World Trade that of the 2008–2009 global financial crisis. Organization’s (WTO’s) Appellate Body, normally a sev- As in that crisis, monetary authorities at the US en-member committee, lose two of its final three judges Federal Reserve have taken unprecedented ac- amid Washington’s blocking of new judges. Earlier this Ctions to support liquidity in global markets. These steps month, Washington escalated its campaign by accusing have included support for domestic debt markets, including Zhao Hong, the final trade official in the body, of compro- a recent expansion in the corporate bond market, as well mising ties to the Chinese government. Against the context as swap lines targeting the global dollar shortage. Beyond of accelerating unilateral protectionism, the WTO’s ineffec- these moves, the broader policy response during and after tiveness in this period may set the stage for more confron- the COVID-19 outbreak may drive longer-term changes in tation ahead. the global trading system. Ensuring sufficient stores of medical equipment, especially Last December, the Phase One US-China deal signing spared in the face of COVID-19, is a strong argument for expanding US consumers from increased tariff burdens on key consumer incentives for domestic manufacturing. As the rest of the goods. As COVID-19 triggered large shutdowns in the Chinese world faces the same dilemma, it is almost certain that other economy, disrupted supply chains immediately raised ques- nations will respond, and that response will almost certainly tions about the deal’s purchase targets. Under the arrangement, come at the expense of US multinationals. Should this path China is slated to buy $200 billion in US exports, but this num- be pursued, the tools of US statecraft will have to manage ber is increasingly dubious amid subdued Chinese economic the foreign fallout of these policy moves, but doing so will data. Even before COVID-19, the outlook for a more compre- be far from easy. hensive Phase Two deal was hazy—but after, it is a pipe dream. Cooperation and coordination with allies may be the solu- Much of the developed world is now experiencing the tion to mitigating these migrations from triggering greater greatest economic disruption since the Second World War. instability in the global economy, but Washington’s tra- Pharmaceutical supply chains have found themselves at the ditional partners have been spurned by an increasingly center of discussion as countries face shortages of ven- burdensome statecraft. Outside of trade, the US Treasury tilators, facemasks, and other key commodities. In 2020, Department’s expansive sanctions program have enflamed several nations, including South Korea, Taiwan, Germany, transatlantic tensions by weaponizing the dollar’s role as and Russia, placed restrictions on medical equipment ex- the leading global currency. Despite harsh rhetoric about ports. The European Union (EU) even imposed temporary exploring alternatives, major European firms and govern- export-authorization requirements for exports of personal ments have remained connected to the infrastructure of the protective equipment outside of the European Union. global dollar, but COVID-19 may be changing this. Though not particularly disruptive in and of themselves, these The dollar’s role as a central reserve currency has rested not moves raise questions about the longer-term focus of trade on political coercion, but on vital economic incentives. The policy in a post-COVID world. Pharmaceutical supply chains of depth and liquidity of dollar-denominated financial markets is all stripes, beyond protective equipment, may be a renewed unparalleled globally, particularly in debt markets. For decades, victim of trade pressures, as different nations focus on alleviat- US debt markets have absorbed the savings of European in- ing future shortages. Such policy moves may, in fact, be justifi- vestment banks, Japanese pension funds, Taiwanese insurers, able, given the significant national security concern associated and even the People’s Bank of China. In simple terms, were with pandemics like COVID-19. Full free and fair trade may be those dollar haven seekers to switch to the euro, there simply little consolation amid another global outbreak that once again would not be enough safe bonds to go around. strains healthcare systems internationally. Seeking to finance the continent’s response to the virus, Should the US-China trade war return with a vengeance, nine Eurozone nations have pushed for a pan-European it will do so at a uniquely weak juncture in global trade debt issue. This action would correct one of the monetary 1 ATLANTIC COUNCIL THE FUTURE OF THE UNITED STATES DOLLAR: WEAPONIZING THE US FINANCIAL SYSTEM U.S. Federal Reserve Chair Jerome Powell testifies before a House Financial Services Committee at a hearing on oversight of the Treasury Department’s and Federal Reserve’s coronavirus disease (COVID-19) pandemic response on Capitol Hill in Washington, U.S., September 22, 2020. Caroline Brehman/Pool via REUTERS union’s key flaws in pushing the euro as a reserve currency: Should the COVID crisis, in fact, be the Eurozone’s moment its lack of a common fiscal policy. Though Berlin will ulti- of truth, there will be serious consequences for the trea- mately have the final say, Germany has already launched sury. A more united and stable Eurozone—and, with it, a an $814-billion stimulus package in response to the virus’ more international euro—is in Washington’s economic in- effects, with slated debt issuance of about 4.5 percent of terest. Though a transatlantic economic rapprochement gross domestic product (GDP). German government bonds, is long overdue regardless of the crisis’ outcome, these known as Bunds, have functioned as the Eurozone’s de effects would make it necessary to return to a more multi- facto safe asset, in lieu of pan-European bonds. President lateral approach to statecraft or risk deep, long-lasting con- Christine Lagarde and the European Central Bank still have sequences to the United States’ global standing. considerable flexibility to achieve the same goal of mutual- ized debt, even without the Eurobond name. 2 ATLANTIC COUNCIL THE FUTURE OF THE UNITED STATES DOLLAR: WEAPONIZING THE US FINANCIAL SYSTEM Part II: International Monetary Exchange and Illicit Financial Activity s the world has grappled with kleptocrats, terrorist groups, and rogue states in the twenty-first centu- ry, there has been no greater lifeblood for these bad actors than the international financial system. ToA the average person, money means a paycheck, savings account, or even the physical cash inside of one’s wallets. People can use loans to increase their own effective cash supply, but this comes with an embedded cost of paying in- terest in the future. Interest is one of the many costs that can consume one’s money, ranging from interest on car loans to interest on mortgage loans to interest on credit-card loans, and many more examples. In sum, money relates to an indi- vidual’s life in how it can be used to consume goods or pay off expenses. For a bad actor internationally, money adds an even more significant political role. Take the example of North Korea, wherein there exists a semblance of a legitimate, competi- tive economy in the form of state trading companies. These companies, owned by the Korean People’s Army, Workers’ North Korea’s leader Kim Jong Un sits in his vehicle after arriving at Party of Korea, or other state apparatuses, have become a railway station in Dong Dang, Vietnam, at the border with China, more and more significant to the regime’s survival, as eco- February 26, 2019.
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