China and a New Bretton Woods

At an annual meeting on October 15, 2020 Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva, claimed the global economy presently faces a "new Bretton Woods moment". Much like the post-war global economy of the 1944 Bretton Woods conference, the 2020 global economy faces staggering economic contraction and an anachronistic monetary system. Georgieva's speech called for international cooperation on a monetary response to the COVID crisis, but also to consider the chronic maladies of the past fifty years: slow growth in developed economies, immense inequality, and a looming climate crisis. A new Bretton Woods seems prudent.

The Bretton Woods Conference was the birth of a new global monetary order. In the interwar period, countries settled liabilities in gold. This system, the gold standard, made intranational account settlements difficult. As countries paid war debts, they manipulated or cut gold to currency value ties. These alterations caused hyperinflation and contributed to the Great Depression and the Second World War. Thus, in the post-war period, 44 countries gathered and pegged their currency values to the US dollar. Since the US was flush with gold reserves, it could peg its currency to gold at $35 an ounce to insure foreign exchange rates. Pursuant to the fixed exchange, two organizations were created to enforce rules and settle disputes: the IMF and the World Bank.

As the most powerful economy after the Second World War, the US was well-positioned to distribute dollars as an international intermediary. Liabilities between countries for international commerce were settled in dollars and dollar demand skyrocketed. For years after Bretton Woods, the US ran a trade surplus of $2 billion annually.

To further develop European markets, the US created the Marshall Plan. Through which, the US realigned exchange rates and invested in European economic development. A cynical gesture, the US ensured not only that Europe remained a consumer of its products, but further entrenched itself as the international economic hegemon. 

Even though Bretton Woods collapsed in 1973 with the introduction of a floating-exchange system, the US dollar remained the international reserve currency. Dollar demand remained high, US financial markets remained the backbone of international finance, and the US retained significant sway over international institutions. US economic dominance came with benefits which ensured US interests around the world were respected and enforced.

Given the context, Georgieva's speech takes on new significance. A new inflection point for monetary policy implicates the current system as insufficient. The West understands this. Anti-democratic sentiment abounds. Those left behind by post-war globalization are making themselves heard. Liberal democracy is backsliding around the world. And in its midst, a replacement arises.

Where the US, under Donald Trump, has stepped back from international institutions, China has stepped forward. In international bodies like the World Trade Organization, United Nations, and the IMF, China has filled the vacuum left by a reclusive United States. 

But China's ambitions do not stop with institutions. They extend also to currency hegemony.

As the US fails to address the pandemic, the dollar has weakened on international markets. Helpfully, the Federal Reserve signaled its willingness to support the global financial system with unprecedented portfolio expansion. But this may not be enough to maintain dollar dominance in the long-run. The initial crash from the coronavirus recession in global dollar value points to structural weaknesses and vulnerability in US economic institutions. This has only been exacerbated by increasingly polarized and broken politics. As the dollar flounders, the international economy will look for more stable alternatives.

Quixotic policy wonks claim the IMF's Special Drawing Rights (SDRs) will replace the dollar as the global reserve currency. Others, contend the future of international finance is crypto currency. But SDRs are difficult to produce en masse and crypto's decentralized nature threatens the interests of international elites. Instead, a world seeking a stable alternative to the dollar, sees the yuan standing at the ready.

For years, China has expanded the Yuan's role in foreign exchange markets, opening swap lines and trading hubs around the world. In 2016, the yuan was added to the IMF's basket of reserve currencies, followed by calls for greater convertibility. What's more, China is investing in foreign markets through its Belt and Road Initiative-- loosely analogous to the Marshall Plan. The initiative is creating liabilities-owed to stand up global demand for the yuan. In so doing, China is insuring markets for its goods and services as the US did-- and to similar ends.  

When the US dollar became the global reserve currency, it offered international influence as a benefit. The US was able to set norms, create institutions, and punish defectors through control of international finance. For better or worse, the US began exporting the ideologies and government structures which were in its interest. In some places this meant right-wing authoritarians to crush leftist governments. In others like Europe, the US incentivized liberal democracies. 

Regardless of intent, the international community has the US to thank for global liberal institutions and the strong democracies of Europe. It also has the US to blame for disarray in developing countries around the world, particularly in Central America.

Certainly then, the implications are lost on no one. China is moving toward financial hegemony. What institutions will it export? What governments are beneficial to its global interests?

Already, China has demonstrated how it intends to lead. It is exporting technology to help authoritarians control and surveil their people. Through development assistance, China is promoting its own methods to dominate civil society and to "guide" public opinion online through censorship. Xi Jinping has publicly stated he believes China's model of development should be emulated around the world. And China is increasing its role in established international institutions whilst creating new ones, like the New Development Bank.

China is an authoritarian state. It has 1-3 million people in concentration camps. If it is not democratic domestically, there is no reason to think it will support democracy abroad. 

China's increasing influence threatens to establish authoritarianism as the international norm. 

The democracies of the world must be careful with this "new Bretton Woods". Whoever holds sway over international finance has significant power. China could block exchanges, institute punishing sanctions, and coerce influential countries in international disputes. 

If a new Bretton Woods is indeed upon us, it must be redefined by social democracy. If the moment has arisen for a new monetary regime, liberal states and institutions must insist on their values. The United States cannot afford to offer a paltry example at home. It must ameliorate venomous domestic politics with robust investment in its own people. This investment must necessarily be met with investment in fledgling democracies abroad. It cannot afford the neo-colonialism of the past. Instead, domestic interests must lead and civil society allowed to flourish on its own terms. 

Without this dual investment, the future of liberal institutionalism is grim. If illiberal forces are allowed to profligate, and the liberal states of the world refuse to offer an alternative to China, democracy as we know it will cease to backslide. It will collapse.