Mulland Fraser Tokyo Japan on China and BIS plans to dethrone the US Dollar
The United States Dollar (USD) is the most widely used reserve currency in the world today. However, a changing global financial landscape, driven by the rise of alternative currencies, novel frontiers in financial technology, and a shifting trend towards financial de-centralization and multiple currency access in cross-border trading pose a challenge to the current hegemony of the US Dollar and for all its stakeholders.
The United States’ rise as a global superpower happened after its rapid industrialization, as various nations were still struggling with the ravages of World War II. The proliferation of manufacturing factories and exportation of automotive vehicles built a robust economy, and the establishment of the United Nations and its corollary financial bodies such as the World Bank and International Monetary Fund paved the way for the US Dollar’s success as the dominant reserve currency.
After World War II, most countries relied on and traded with the United States, which further cemented its status as the world’s economic superpower. But according to data from the Lowy Institute, although 80% of the world traded with the US in 2001, it fell sharply to a mere 30% in 2018, and was dethroned by China, which is now the main trade partner of 128 out of 190 countries.
China’s Global Takeover of Top Industries
China’s rise as the new economic superpower can be attributed by its takeover of the top three industries that are key for building economic infrastructure: the manufacturing industry, the automotive industry, and the labor market.
The Manufacturing Industry
China has been replacing the United States and other superpower nations like Japan and Germany as the largest manufacturer and exporter of goods and services. While the US Dollar remains the major international trading currency, the United States is no longer a manufacturing powerhouse as it used to be, and eventually, markets are going to capitulate towards the currency of the biggest producer of goods and services.
Although the United States is no longer the world’s biggest manufacturer and exporter of goods and services, it is a key player in the international petroleum and gas industry. However, the current Biden administration is intent on curtailing and shutting down its petroleum and natural gas industry in favor of green, non-renewable energy, which will cause a significant setback for an already declining economy. Germany, another world superpower, is also heading in the same direction as they plan to make changes in their energy sector towards green and non-traditional, renewable energy, thus emblazoning China’s role as the world’s next economic powerhouse.
The Automtive Industry
The United States, Germany, and Japan had always been the industry giants in car manufacturing and automotive parts exports. The automotive industry has always been a backbone industry that catapulted these nations with exponential economic growth. However, a steady downtrend in car exports and manufacturing by these countries are a stark contrast to China’s growing automotive manufacturing boom, and will most likely upend Japan in its projected trajectory.
Business Outsourcing
Another contributing factor to China’s economic growth over the last decade is the influx of foreign factories into China and other Asian countries for cheaper labor. Multi-national companies from America and Europe no longer want to open factories in their own countries in favor of extremely cheap labor in China and other Asian countries like Vietnam, Bangladesh, India, and the Philippines to reduce production costs and maximize profits. While this might be a good policy for the mega-corporations involved, it has deleterious effects on their originating countries because this means lost job opportunities for their own people and less taxation in their respective governments.
One thing to note is that the financial-technological ecosystem supporting major USD currency trading is a wired, cabled system. However, with the world’s increasing and rapid shift toward wireless technology, financial technology could very well adopt and is heading towards a wireless, ‘cash-less’ paradigm shift, where using and trading alternative currencies becomes more accessible.
BIS and Project mBridge
The Bank for International Settlements (BIS) has been creating and launching Project mBridge, which aims to be a multi-currency, cross-border financial platform that is based on advanced blockchain technology. The BIS is an international financial institution that is owned by and consists of several member central banks worldwide.
Project mBridge is designed to be a cheaper, versatile, and more efficient alternative to the SWIFT international payments system, which is heavily reliant on the US Dollar and that would allow emerging economies to use their own currencies for cross-border trading. What are these emerging economies that Project mBridge is working with? This project currently enlists the Hong Kong Monetary Authority, Bank of Thailand, People’s Bank of China, and the Central Bank of the United Arab Emirates as its central bank digital digital currency (CBDC) pilot members.
Project mBridge’s central bank digital currency (CBDC) members can now freely trade goods and services without needing to convert their currencies to US Dollars, trade internationally with fewer and cheaper fees, and avoid the surveillance and sanctions that could be imposed by a US Dollar-centric payment system like SWIFT.
The Ripple Effect on America
The biggest impact of de-dollarization is that first, the US Dollar will no longer be the world’s dominant reserve currency, and secondly, that its purchasing power will significantly diminish. The US Dollar will likely experience a whiplash bust then steady decline until it matches its real post-dedollarization value. First comes the bust period of extreme inflation, where you can buy less goods and services with your US Dollar due to its decreased purchasing power. It will be tail-ended by a gradual deflation until it matches it real pre-inflation value. Arguably, this will hit hardest for those living within the United States and on economies, businesses, and individuals who are dependent on the US Dollar.
An investment in financial literacy through consultation with our trusted financial advisors at Mulland Fraser Tokyo Japan will help you identify your options and navigate the rapidly changing financial climate to meet your personal financial goals.
