The recent highly touted summit meeting between Russia’s President Vladimir Putin and Chinese leader Xi Jinping not only cemented a strong relationship but also revealed an initiative by the two leaders to carry on their financial transactions in Chinese yuan. Moreover, their public statements indicated the yuan could supplant the dollar as the currency of choice on the world market. Because the new BFFs lead the most consequential adversaries of the United States, their alliance clearly portends national security challenges in America’s foreign policy and defense strategies. So what does migration away from the dollar to the yuan mean?
The conversation between Liberty Nation’s National Security Correspondent Dave Patterson and Economics Editor Andrew Moran explores this development.
Dave Patterson: Andrew, you’ve written quite a lot about the emergence of the Chinese yuan as a currency of choice, particularly among US adversaries and non-aligned countries. Though representing only about 3% of global financial transactions now, what is the future for the yuan as it challenges the dollar for international business?
Andrew Moran: For now, there is unlikely to be much damage to the greenback. However, the acceleration of the broader de-dollarization campaign over the last 12 months has been remarkable, to say the least. If you look at the timeline of the latest events, from Saudi Arabia’s willingness to accept yuan to settle oil trades to China brokering a deal between Riyadh and Tehran, it is apparent that Beijing is striking while the iron is hot to generate momentum for the yuan. It also helped that Russia confirmed its plans to rely on the yuan for its trade in Asia and Africa. As you said, China’s yuan representation in global transactions is a fraction of the dollar’s, but this could increase if more countries, especially non-friendly US allies, embrace a strategic de-dollarization partnership with China and Russia. Of course, all of this coincides with America’s personal troubles: banking crisis, massive deficits and debt, and Tokyo and Beijing reducing their holdings of US debt.
DP: In the Department of Defense, there is a mantra: It’s about the money; it’s always about the money. From a national security perspective, two areas seem sensitive to de-dollarization. First, the sheer gravitas, power, and prestige of the United States to influence geopolitical points of view rest on the power of the dollar, a reliable symbol of the United States as a superpower. Second, a significant amount of the US defense economy is invested in the Defense Security Assistance Agency Foreign Military Sales of weapons and services. In 2021, the amount was $34.8 billion. The value of Direct Commercial Sales of military hardware, services, and technical data was $103.4 billion. As former Secretary of Defense Don Rumsfeld would say, “That’s not nothing.” Could foreign customers start to pay for military wares in some other currency besides the dollar and threaten to take their business elsewhere?
(Photo Illustration by Sheldon Cooper/SOPA Images/LightRocket via Getty Images)
AM: This is perhaps the $64,000 question. The reality is that if foreign customers are buying directly from the United States, they would still most likely settle these transactions in dollars. However, if other nations are buying from non-US suppliers, you could probably see more countries, particularly US adversaries, in the future follow China, Russia, and Saudi Arabia’s lead and complete their deals in yuans, rubles, or rupees. You are even beginning to see this in the making. Last summer, New Delhi and Moscow were working on a rupee-ruble agreement. India would use rubles to purchase oil, and Russia would turn to rupees to acquire weapons. In addition, Saudi Arabia has been purchasing weapons from China. So, it is only a matter of time before the two sides will trade in yuan rather than dollars.
Dealing in Yuan Could Upset Sales of US Weaponry
DP: So often, Andrew, I think the United States is a victim of its own hubris. We believe, with some supporting evidence, we have the best military systems for sale. Despite being higher priced, in many cases, America’s industrial base turns out the best-value world-class weapons, and, consequently, the rest of the world will buy these systems regardless of what the US government dictates. That notion is proving false, and should an ally or non-aligned country wish to purchase our military products but is put off by the Defense and State Department’s demand the transaction be in dollars, there are other countries selling good-enough products. It seems the United States is not anticipating this circumstance or thinking about it at all. Can we protect ourselves against such a situation? The opportunity for foreign countries to hold industries hostage to the yuan or some other currency is not limited to just military products. Large trading partners could also do that to achieve a transactional advantage in the market.
AM: This is an incredible point. But you also have to wonder if some of the countries that receive US foreign aid or military assistance would take such a gamble. Jordan, Egypt, and Ethiopia, for example, receive collectively about $6 billion from the United States in aid. Would they risk losing that funding if they chose to align more with China by adopting the yuan? Perhaps this could escalate if more leaders are convinced that the United States is a sinking ship, battered by banking crises, currency debasement, and out-of-control debt. Take a look at foreign holdings of US Treasurys: More nations – from China and Japan to Saudi Arabia and Belgium – have reduced their holdings of US debt at sizable levels over the past year. Despite being the largest economy in the world, the United States is drifting into a situation where it needs the rest of the world more than the globe needs America. Right now, the United States is shipping its inflation overseas, and, to quote Howard Beale from the movie Network, the international community is mad as hell and not going to take it anymore!
