10/10/23, 10:48 cfr.

org/blog/future-dollar-hegemony

from Renewing America

The Future of Dollar Hegemony

The United States has benefited from the dollar’s dominance of global markets for decades.
Washington should be wary of squandering those benefits through political infighting and reckless
policymaking.

In this photo illustration, one dollar bills are seen displayed Igor Golovniov/SOPA Images/LightRocket/Getty Images

Blog Post by Upamanyu Lahiri, Guest Contributor

August 22, 2023 3:04 pm (EST)

Exorbitant Privilege

https://www.cfr.org/blog/future-dollar-hegemony 1/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

The U.S. dollar has dominated global financial markets since the end of World War II.
Almost 60 percent of global foreign exchange reserves are held in dollars, with the euro
a distant second at around 20 percent. Around 90 percent of transactions in foreign
exchange markets are invoiced in dollars, as is half of international trade. Reinforcing
the dollar’s standing is its status as a safe haven currency during times of crisis. For
example, during the Great Recession of 2008 and the Covid-induced financial crisis in
2020, investors sought U.S. dollars, expecting them to retain their value through the
crises.

The U.S. government, economy, and citizenry reap huge benefits from the dollar’s
“exorbitant privilege,” as a former French finance minister called it, in global financial
markets. Because of the strong global demand for U.S. dollars and dollar-backed
securities such as U.S. treasury bonds, the United States can borrow at far lower interest
rates than other countries. The U.S. government and firms are also able to borrow from
foreign creditors in dollars rather than foreign currencies, so the value of the debt does
not change with fluctuations in exchange rates. A high demand for the dollar also
strengthens its value vis-à-vis other currencies, leading to cheaper products for U.S.
consumers—although, on the flipside, it also makes U.S. exports less competitive. The
global hegemony of the U.S. dollar also gives the United States government the power
to impose far-reaching and effective sanctions on its adversaries, a powerful foreign
policy tool. However, despite its continued dominance, domestic and international
challenges to the U.S. dollar are mounting.

Domestic Challenges

Ironically, in part because of its extremely low borrowing costs, the United States has
accumulated a staggeringly high amount of debt, at $32.11 trillion, that is unsustainable
in the long term and could undermine confidence in the U.S. dollar. Politically, it is
difficult for leaders to address the issue of spiraling debt. Though the American public

https://www.cfr.org/blog/future-dollar-hegemony 2/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

supports reducing debt and spending, specific steps to do so—such as tax increases and
reforming entitlement programs like Social Security and Medicare—are unpopular,
especially among older Americans.

Renewing America
Ideas and initiatives for renewing America’s economic strength.

No soy un robot
reCAPTCHA
Privacidad - Condiciones

Email Address

Subscribe

View all newsletters >

The ceiling on the amount of debt that the United States can legally hold is a more
immediate threat. This rather unusual mechanism is a limit not on actual spending, but
rather a limit on the Treasury’s ability to borrow to pay off debt it already owes, which
cannot be raised without authorization from Congress. The United States is one of few
countries in the world with such a debt ceiling. Breaching the debt ceiling would lead to
default. That is why, since it was first instituted in World War I, the debt ceiling has
been raised dozens of times by Congress. However, as demonstrated yet again recently,
rising political polarization has made default a real possibility. Whenever the time
comes to raise the debt ceiling every few years, one or both parties initiate a game of
political brinkmanship to extract concessions from the other side. A default would be
catastrophic and could severely undermine confidence in the U.S. dollar and its status as

https://www.cfr.org/blog/future-dollar-hegemony 3/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

a safe haven. The credit rating of the United States would be downgraded drastically,
thus ending the exorbitant privilege of the dollar. Even coming close to it can have
consequences. In 2011, Standard and Poor’s downgraded the country’s credit rating
when it got two days away from hitting the debt ceiling. More recently, Fitch Ratings
did the same, despite the last-minute agreement between President Joe Biden and
House Speaker Kevin McCarthy averting a default. The debt limit does not even help
address rising debt, as evidenced by the national debt’s continued growth despite
numerous debt ceiling standoffs in recent years.

International Challenges

The dollar’s global hegemony gives the U.S. government power to impose crippling
sanctions and wage other forms of financial warfare against adversaries. Since 9/11, it
has used this power with increasing frequency. In 2022, more than twelve thousand
entities were under sanction by the Treasury Department, a more than twelve-fold
increase since the turn of the century. U.S. sanctions have not had the best record in
changing regimes’ behaviors, but they do ensure that targeted adversaries pay a
significant price for continuing to engage in actions the United States opposes. Often,
their usage is noncontroversial, as in the case of the sanctions on Russia for its invasion
of Ukraine. However, if used excessively, they can make countries, including allies, want
to move away from the dollar-based financial system. For example, European countries
opposed the United States’ unilateral withdrawal from the Iran nuclear deal. However,
due to the secondary sanctions, which were a part of the “maximum pressure” campaign
on Iran, they were forced to cut off trade with Iran. This made them consider
developing an alternative to the SWIFT and dollar-based systems. While this proposal
went nowhere, if even U.S. allies have considered alternatives to the dollar-based
system, then it is unsurprising that adversaries like Russia and China have been
attempting to undermine the dollar’s hegemony.

https://www.cfr.org/blog/future-dollar-hegemony 4/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

Additionally, given the dollar’s global reserve status, the effects of the Federal Reserve’s
monetary policies are not restricted to U.S. borders. For instance when the Federal
Reserve hiked interest rates to fight inflation over the past year, it led to money supply
decreasing, and investors moving funds from developing countries to the “safe haven” of
U.S. treasury bonds, thus leading to massive capital outflows. This influx also leads to
the exchange rate appreciation of the U.S. dollar vis-à-vis other currencies, and an
increase in the dollar-denominated debt held by developing countries. Unsurprisingly,
this impacts highly indebted countries more. The Latin American debt crisis of the
1980s was caused in part by the Fed’s aggressive rate hikes to control inflation. While
the Fed may not be expected to take this into account when combatting inflation, it
should still be noted that emerging markets could diversify their reserve holdings to a
more multi-currency portfolio to have more autonomy over their monetary and fiscal
policies.

A Move Away from the Dollar?

Due to the domestic and international factors highlighted above, international appetite
to diversify from the dollar-based global reserve system is high. Have those factors led
to a decline in the dollar’s power? Russia, unsurprisingly, has been forced to ditch the
dollar as it looks to evade Western sanctions, but China, which has long pushed for
internationalization of its currency, is the country at the forefront of efforts to weaken
the dollar’s power. China recently expanded its currency swap agreement with
Argentina. China also recently reached an agreement with Brazil, with which its annual
trade is $150 billion, to trade in their own currencies instead of the U.S. dollar. In
isolation, it may not seem much, but China is pursuing similar agreements with other
countries. If they succeed, it would present a challenge to the U.S. dollar as the world’s
default currency of trade given China’s dominance in global commodities trade. Global
reserves have seen a gradual movement away from the U.S. dollar, too. The dollar’s
share of global foreign-exchange reserves stood at slightly below 60 percent in the last

https://www.cfr.org/blog/future-dollar-hegemony 5/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

quarter of 2022, down from over 70 percent in 1999. China, the largest overseas holder
of U.S. treasuries, has cut its holdings of dollars as its relations with the United States
have nosedived. Its current holdings are at their lowest point since May 2009.

Despite all this, it is important to remember that the U.S. dollar remains dominant in
global foreign-exchange reserves mostly because there is no clear alternative. Despite
China’s efforts, the renminbi accounts for a mere 2.7 percent of global reserves. Due to
the strict capital controls and limited convertibility to other currencies, fully
challenging the dominance of the dollar remains unlikely. However, the United States
should be cognizant of the domestic and international challenges to the status of the
U.S. dollar, and act to quell doubts internationally so that it can retain its status even if
a credible alternative emerges. Those steps could include tackling the United States’
public debt, and additionally, either eliminating the debt ceiling or linking it to
congressional authorization of spending to promote good faith debates about spending
increases or cuts without risking default. The United States should also use sanctions
more judiciously. Sanctions are an essential tool of U.S. economic statecraft, and their
usage is often justified, but they should not be used excessively. The dollar has stood
strong for over seven decades. Its decline, if it happens, should at least not be due to the
United States’ own missteps.

This post was written for the Council on Foreign Relations’ Renewing America initiative—
an effort established on the premise that for the United States to succeed, it must fortify the
political, economic, and societal foundations fundamental to its national security and
international influence. Renewing America evaluates nine critical domestic issues that
shape the ability of the United States to navigate a demanding, competitive, and dangerous
world. For more Renewing America resources, visit https://www.cfr.org/programs/renewing-
america and follow the initiative on Twitter @RenewingAmerica.

Creative Commons: Some rights reserved.

https://www.cfr.org/blog/future-dollar-hegemony 6/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

from Renewing America

Congress Asserts Its Trade Authority With Taiwan

Trade Deal
A first step to getting U.S. trade policy back on track

The U.S. Capitol Building seen shortly before sunset in Washington, D.C. Zach Gibson/ Reuters

Blog Post by Inu Manak

August 8, 2023 2:50 pm (EST)

A slow-brewing battle between Congress and the executive branch over who holds the
authority to enter into trade agreements has finally boiled over. The catalyst was an
announcement by the U.S. Trade Representative (USTR) on May 18, 2023, that the
United States had reached a first agreement with Taiwan under the U.S.-Taiwan
Initiative on 21st Century Trade. While that agreement does not deliver any new

https://www.cfr.org/blog/future-dollar-hegemony 7/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

market-access commitments, it covers other important trade issues such as cooperation

on trade facilitation, good regulatory practices, anticorruption, and small- and medium-
sized enterprises.

The executive branch has incorrectly argued that such trade agreements do not require
congressional approval. Last month, Congress took action to set the record straight,
passing a bill that approved the first phase of the U.S.-Taiwan deal but also called for
enhanced transparency in ongoing negotiations with Taiwan. This is an important first
step to getting U.S. trade policy back on track, and it begins a broader conversation
about the trade policy the United States should pursue.

But that still may not be enough. Commenting on the reporting and transparency
requirements imposed on the executive branch in the legislation, President Biden stated
that his administration would “treat them as non-binding” in cases where they “would
impermissibly infringe upon my constitutional authority to negotiate with a foreign
partner.” In taking such a stand, Biden is setting up future battles over trade authority
and threatens to undermine the role of Congress in trade policymaking.

Anatomy of a Turf Battle

Renewing America
Ideas and initiatives for renewing America’s economic strength.

Email Address

Subscribe

View all newsletters >

https://www.cfr.org/blog/future-dollar-hegemony 8/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

The conflict over trade authority is not new, but the recent growth of trade executive
agreements (TEAs), which are negotiated by the executive branch with minimal
congressional input or oversight, has brought the issue back into focus. More than 1,200
of those agreements have been inked with 130 countries, including the recent Critical
Minerals Agreement with Japan. The Joe Biden administration’s signature trade
initiative, the Indo-Pacific Economic Framework (IPEF), currently under negotiation, is
also a TEA. While the U.S. Constitution gives Congress the power to regulate commerce
with foreign nations, TEAs subvert that authority in favor of presidential power.

In December 2022, a bipartisan coalition of lawmakers called on President Biden to

engage in consultations and enhance transparency on the IPEF negotiations, and to
“arrive at a common understanding of the appropriate submission, approval, and
implementation mechanisms for such a broad-based and important agreement
regulating international commerce.” Their letter makes clear that Biden and past
administrations have confused “the implementation of an agreement—which may not
require congressional action because no domestic laws need to be altered—and the
ability to enter into a binding agreement with other sovereign nations without
congressional approval.” The lawmakers assert that the Constitution grants Congress
alone the authority to approve trade agreements with foreign nations.

U.S. Trade Representative Katherine Tai and Secretary of Commerce Gina Raimondo
pushed back in May 2023, claiming that “Congress has granted the Trade Representative
authority in 19 U.S.C. § 2171,” a part of the Trade Act of 1974, “to defend and promote
U.S. interests through the negotiation of trade agreements.” However, as law professors
Kathleen Claussen and Timothy Meyer have pointed out, that law designates USTR as
the office responsible for trade negotiations, but “nothing about § 2171 gives the USTR
the authority to enter into or bring into force trade-related agreements.” They add that,
as a matter of law, “there is little doubt” Congress can take action to restrict the
executive branch’s trade authority.

https://www.cfr.org/blog/future-dollar-hegemony 9/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

Why the Taiwan Bill Matters

Traditionally, Congress established parameters for trade negotiations through the grant
of Trade Promotion Authority (TPA), through which it specified a range of trade
negotiating objectives for the executive branch to pursue, maintaining regular oversight
of negotiations in the process. TPA expired in 2021 and Biden has not sought to renew
it. Meanwhile, his administration has been actively pursuing TEAs to advance its trade
agenda, but those TEAs have been characterized by an absence of market access, which
is normally the core feature of any trade agreement.

The recently passed United States-Taiwan Initiative on 21st-Century Trade First

Agreement Implementation Act offers a corrective to executive overreach on trade.
Importantly, it embeds TPA principles of transparency and consultations with Congress
into future negotiations with Taiwan, but also takes them a step further by requiring
additional reporting requirements, such as detailed timeframes for access to draft
negotiating texts prior to them being shared with Taiwan or outside of the executive
branch. Such transparency is essential to ensure that trade agreements negotiated by
the executive branch represent the interests of all Americans.

Furthermore, the bill ensures that any agreement reached with Taiwan will be durable
and not subject to the changing whims of different administrations. By approving the
agreement, Congress has announced its interest in strengthening economic ties with
Taiwan for mutual benefit—emphasizing the past U.S. commitment to reciprocity in
trade, whereby the United States would grant access to its market in exchange for
similar concessions from its trading partners. This bill empowers Congress to ensure
market access is pursued in the next round of negotiations with Taiwan, which are
slated to discuss thornier, economically significant issues such as agriculture and digital

https://www.cfr.org/blog/future-dollar-hegemony 10/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

trade. This is further supported by a requirement for enforceability, which provides a

guarantee to U.S. trading partners that its commitments will be honored, and that U.S.
exporters have a means to recourse if the agreement is violated by Taiwan.

Implications for U.S Trade Policy

While the bill only addresses trade negotiations with Taiwan, it has the potential to
shift U.S. trade policy back to a more transparent, predictable, and binding set of
arrangements. Congress could pursue similar legislation with respect to the IPEF and
other negotiations such as those being pursued with the United Kingdom and Kenya. In
doing so, Congress can indicate economic priorities for the executive branch and
demand high standards on environmental and labor issues.

As Claussen and Meyer point out, the bill also raises an important question about the
status of other TEAs and could certainly irk U.S. trading partners wary of deals they
have inked with the United States that lack similar congressional approval. The
approval of the Taiwan deal thus leaves the legality and enforceability of other TEAs in
serious doubt. The Constitution is straightforward on the role of Congress in trade
policymaking, but that has not stopped presidents from extending their broad power in
foreign relations to international commerce.

Congress has finally taken action to rein in those abuses, but it remains unclear whether
the Biden administration will fully comply. Biden’s statement suggests that the
executive branch will make use of its interpretive discretion in deciding whether or not
it needs to comply with certain elements of the bill. However, this could lead to
significant discord with Congress. To maintain the delicate balance of authority
between the executive and legislative branches of government, Biden should instead
welcome Congress’s renewed interest on trade and work with both parties to define the
future of U.S. trade policy.

https://www.cfr.org/blog/future-dollar-hegemony 11/12
10/10/23, 10:48 cfr.org/blog/future-dollar-hegemony

This post was written for the Council on Foreign Relations’ Renewing America initiative—
an effort established on the premise that for the United States to succeed, it must fortify the
political, economic, and societal foundations fundamental to its national security and
international influence. Renewing America evaluates nine critical domestic issues that
shape the ability of the United States to navigate a demanding, competitive, and dangerous
world. For more Renewing America resources, visit https://www.cfr.org/programs/renewing-
america and follow the initiative on Twitter @RenewingAmerica.

Creative Commons: Some rights reserved.

https://www.cfr.org/blog/future-dollar-hegemony 12/12