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Another day, another false alarm about the death of the dollar

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Looks like I was wrong. (It happens sometimes, for meanings of “sometimes” that include “all too often”.) A tentative deal has emerged from the “quad” inner core of World Trade Organization members — the EU, US, South Africa and India — about an intellectual property waiver for Covid-19 vaccines, a mere 17 months after it was first proposed. I’ll look at the detail once a final version has been agreed. It needs consensus among the full WTO membership but I suspect they’ll come on board. It seems unlikely that WTO director-general Ngozi Okonjo-Iweala would take the risk of publicly welcoming the deal if she thought it was likely to fall apart.

The UK, Switzerland and Japan have big pharma industries, but as of Friday it sounded like they were coming around and I’d be surprised if they vetoed a deal signed off by the EU and the US. The UK complained recently about the quad format excluding other countries, but that’s Brexit for you, guys. And guess what? Germany didn’t block it inside the EU after all, despite repeated strident claims of some health campaigners that Berlin was standing in the way.

I was sceptical the waiver would happen, not because it’s a terrible idea — while mainly irrelevant, a limited provision might concentrate pharma companies’ minds — but because India likes being ostentatiously obstreperous and crashing all manner of trade discussions to make a point. (My call to the Indian mission in Geneva asking about this remarkable conversion went unanswered last week, as others have since 2020.)

According to the leaked draft of the agreement, it’s been drawn to allow India’s pharmaceutical industry to make use of the waiver, but the reaction of Indian NGOs was still pretty negative. However limited the waiver and however disappointed campaigners in general may be, we do at least now have something to work with. And the fact that the agreement appears to contain a review mechanism hopefully means we can have the conversation on a more constructive, fact-based and transparent basis.

Today’s main piece is on the perennial suggestion, on this occasion provoked by the US’s extraordinarily aggressive use of financial sanctions against Russia, that the dollar will be dethroned as the dominant international currency. (It will not.) Charted waters is on the impact of the Ukraine conflict on wheat prices in Arab nations. As ever, I’m keen to hear your thoughts, ideas and reactions, and I promise I will read them all even if I don’t immediately reply.

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Bypassing the buck

It’s a topic that rumbles on continually with sudden eruptions during periods of financial stress or the US imposing sanctions that don’t have universal support — that is, all of them. Will the renminbi, or the euro, or a digital currency or even (God help us) cryptocurrencies supplant the dollar? And even if they don’t, does the fear of over-reach constrain the US from weaponising the dollar for strategic ends?

As I’ve said before, the EU’s sanction package is impressive but it’s the US’s control of the dollar payments system that’s enabled it to freeze Russia’s central bank assets and cripple its banks. Naturally, this has caused much whingeing and mewling in countries less committed to punishing Russia, notably in the Middle East, India and China. Any payment to Russia through the dollar system is ultimately at risk. India, a big net energy importer and very much not part of the US-EU coalition, is rapidly increasing its oil purchases from Russia, at knockdown prices, and is thinking of setting up a rouble-rupee exchange. There are also stories that Saudi Arabia will price some oil sales to China in renminbi to avoid the dollar system.

I remain highly unconvinced that these moves, if they happen, will set a new international pricing standard that will harm the US currency. “[Random Middle Eastern country] is just about to price oil in [other currency] to destroy the dollar” has been a staple fantasy of the anti-American left for decades. It rather falls down on the point that it’s not the currency used for the actual sale that’s the point — that simply creates a fleeting transactional demand. A sustained fall in demand for dollars would require the country to want to shift its reserves en masse into euros or any other currency.

That would mean finding a massive pool of safe liquid euro (or other currency) assets, which hitherto hasn’t existed, and then either buying imports priced in euros rather than dollars or taking on some serious exchange rate risk. Amazingly, no one has wanted to do that yet. And shifting to the euro is difficult enough, but only reserve managers who feel their drab and predictable lives need pepping up by gambling with billions of dollars of public money will really put their funds in renminbi-denominated assets subject to the whims of Chinese capital controls.

In any case, the idea of a reserve asset being synonymous with an internationalised currency is a bit outdated. Currency pegs that had to be backed by reserves have substantially been replaced by floating exchange rates. It’s the dollar’s role as a funding and payment currency that really gives it power, and that has such a massive network effect it’s going to take a lot of replacing.

You can understand why the US et al would make a big fuss about Russia avoiding its sanctions by flogging knockdown oil to India or cheap gas to China — though I would note in passing that Russia’s imperialist westward surge making it a de facto colony economically dependent on countries to the east would be darkly comic. But even assuming India goes ahead with this swap, it’s not likely to do much to shift the dollar’s pre-eminence more widely. After all, as I said the other week, the EU tried bypassing former US president Donald Trump’s sanctions on Iran by setting up a quasi-barter system called Instex and it’s had almost no impact.

As for digital currencies and crypto: with the former, a digital dollar, which will be part of any payments network set up by the leading economies, will have similar advantages over a digital renminbi. And while oligarchs may try using crypto to evade sanctions, the long reach of the US Treasury is coming after them, as it did after Venezuela’s digital currency. It would be very bold to assume that crypto could build a broad role in the global financial system under constant pressure from the US government.

Each time the dollar is weaponised like this there’s a flurry of commentary about its international role being jeopardised by politicised misuse. Sure, if the US tries to isolate a really huge economy like China’s then the reward to promoting an alternative will increase. But there’s no sign of it yet.

Charted waters

In a globalised world, international conflicts have an impact across the planet. That is obvious to Lebanese bakers, long reliant on Ukrainian wheat, which is now two-thirds more expensive than a year ago.

Line chart of CBOT wheat ($ per bushel) showing wheat prices soar

Since the start of March, flour has disappeared from the shops in Lebanon and the price of bread has increased by 70 per cent. The country was caught in a financial crisis before Russia invaded Ukraine — its currency has lost more than 90 per cent of its value since 2019 — but the war has created an additional hardship for citizens struggling to put food on the table.

After doing the Lord’s work tracking China’s (entirely worthless) promises to buy more US exports, the saintly Chad Bown of the Peterson Institute and colleagues are now running a sanctions monitor for actions against Russia.

Two of the global gurus of weaponising economic interdependence, Henry Farrell and Abraham Newman, warn in the New York Times of the risks of US over-reach in sanctioning Russia.

The Financial Times looks at how the impact on EU and US relations with China of the war in Ukraine has underlined the risks for companies such as Volkswagen in depending on production and sales in authoritarian states.

The Biden administration just released 1,358 pages of plans on remaking supply chains, and Todd Tucker of the Roosevelt Institute provides a handy guide.

German finance minister Christian Lindner, who doesn’t actually have trade in his brief, has called for new talks over a transatlantic trade deal, apparently undaunted by the miserable failure of the previous attempt.

David Frost, who negotiated the Brexit deal for the UK, has done another of his speeches pretending he doesn’t understand what he signed, and someone briefing on behalf of foreign secretary Liz Truss is pretending she’s about to rip up the Northern Ireland Protocol. Steve Peers of the University of Essex has the rebuttal to Frost’s rebuttal of a rebuttal to his speech.

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