There is a global movement afoot that isn’t getting much attention, but will potentially have a huge impact on how the world conducts business. In March, China announced that its own currency, the yuan, had surpassed the American dollar for use in cross-border transactions for the first time. This was a major milestone in what is called de-dollarization, or the de-emphasizing of the US dollar as the primary global currency.
Given the current strains in the relationship between the United States and China, it might not come as a surprise that China wants to put its own currency front and center in its international dealings. But several other countries over the last year have expressed support for either limiting the reach of the American dollar, or even replacing it globally with the yuan.
But so what? It’s not as if changes in international trade are going to force Americans to start paying for dinner at Chili’s in yuan. What impact would a change in global trade have on your pocketbook?
While there has been talk about de-dollarization in the past, the movement has gained steam recently thanks to recent developments. One of those is China’s ongoing Belt and Road Initiative (BRI), where China is spending billions to build infrastructure and partnerships around the world. As China has increased its influence in BRI nations, it is also pushing its own currency as an alternative to the dollar.
The other development has been Russia’s ongoing war in Ukraine. When Russia launched its invasion of Ukraine last year, the United States and other Western nations responded by announcing economic sanctions, freezing Russian financial assets, and removing Russia from key financial systems such as the Swift bank messaging system. Nations saw how the United States brought its financial weight down to bear, and decided that the world’s reliance on the American dollar gave the US too much leverage. These developments have led countries to seriously consider currency alternatives.
Back to the question at hand though. If countries around the world decide to trade in yuan or some other currency instead of dollars, what impact would that have on your wallet? In the short term, probably nothing. Internal US policy sets the value of the dollar, not its use around the world. And if nation-states start trading in yuan, that won’t affect the willingness of individuals and businesses to accept dollars from tourists, traders, or anyone else doing business globally.
Over time (a long period of time, to be sure), however, a dollar with less global impact will lead to an America with less global impact. Russia is not the only country the US has leaned on financially. The United States has used financial coercion to influence friends and foes alike, all based on the power of the dollar. Nations and even international corporations may be less willing to toe the American line if there’s an alternative financial system to participate in. Instead of setting the agenda, our country could find itself competing hard against other countries emboldened to choose their own financial destiny. This could be a good thing or a bad thing, but it will certainly be different than the current state of affairs.
Finally, there’s the psychological aspect of the change. The United States has dominated the world militarily, culturally, economically, and financially since the end of World War II. Over the last 20 years though, we’ve seen America’s lead in all these areas challenged. The return of the Taliban in Afghanistan after the US withdrawal showed that our military power is not absolute. Entertainment such as K-Pop and anime have shown that other countries can impact international culture as profoundly as American products. Even the American economy is not as prolific as it once was. Where the US economy accounted for 60% of global GDP in 1960, it made up only 24% in 2019 – still outsized, but not nearly as much as before.
The last unchallenged bastion of American empire was the financial hegemony of the US dollar. We’re seeing that advantage erode before our eyes, and only time will tell how it plays out.