Geo-Economic Warfare: How the US Uses the Dollar Against China

Book: Financial Cold War
Author: James A. Fok
ISBN: 9781119862765

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The second half of Chapter 6 moves from rhetoric and taxes into the financial battlefield. Words matter. But Fok’s real concern is what happens when the conflict stops being verbal and starts hitting markets, supply chains, and payment systems.

A war of words with real consequences

Donald Trump told a crowd in Indiana in 2016 that China was “raping” America and stealing jobs on a historic scale. That narrative stuck. Outsourcing to China did cost US manufacturing jobs. But automation accounts for roughly half the decline since the early 1990s. And much of the outsourcing was US policy, not a Chinese ambush.

American companies profited from cheap Chinese labor. Low-cost goods held down inflation. Lower rates made mortgages cheaper. China is now a major market for US firms. Yet when Trump launched his trade war, no major corporate leaders publicly defended China.

Chinese firms now compete with US tech giants globally, often with state-backed funding. Western aid to developing countries came with governance conditions. China’s aid offers an alternative with fewer strings attached. CCTV channels, Confucius Institutes, and a rising development model challenge US soft power. Democracy globally has seen setbacks.

Covid-19, Hong Kong’s national security law, and “wolf warrior” diplomacy sharpened the tone on both sides. Each side plays to domestic audiences. Americans care deeply about human rights, but leaders have overlooked abuses when convenient. China’s elite see liberal democracy as a threat to CCP rule.

Both countries believe in their own exceptionalism. American universalism meets Chinese cultural pride and patriotic education focused on the “century of humiliation.” Nationalist rhetoric on social media creates echo chambers. Populist anger can get out of control and limit leaders’ room to de-escalate.

January 6, 2021 gave Chinese leaders ammunition to argue the US system is broken. China is not immune either. After NATO bombed its Belgrade embassy in 1999, rock-throwing protesters trapped the US ambassador in Beijing for days.

America’s geo-economic arsenal

America can pressure countries through four main channels: capital deployment (think Marshall Plan), consumer market access, commodity and energy leverage, and dominance of the global financial system. The dollar and control over financial infrastructure are the most important in Fok’s analysis.

This is not new. Alexander Hamilton used federal assumption of state war debts to bind elites to the union. Post-WWII America had unmatched financial resources. Reagan used capital markets against the Soviet Union.

From the 1970s, the US pushed anti-money-laundering rules globally. After 9/11, the scope expanded massively. The cost-benefit ratio is terrible by Rumsfeld’s own admission. A 1993 truck bomb cost $400. The 9/11 operation cost an estimated $500,000. Compliance costs run billions annually. But fighting crime and terrorism still enjoys broad international support.

The controversy starts when geo-economic tools coerce countries on strategic matters that allies see as unfair.

China plays the game too

China’s levers are market access and outbound capital. By 2018 it was the primary trading partner of 124 countries. After Norway gave Liu Xiaobo the Nobel Prize in 2010, Beijing cut salmon imports by 60%. Cambodia blocked an ASEAN statement criticizing China’s South China Sea policy after receiving $2.7 billion in Chinese loans. Australian wine faced tariffs up to 218% after Canberra called for a Covid origin inquiry.

Lee Kuan Yew said China absorbs neighbors through its market “without having to use force.” But Fok argues this readiness to deploy economic pressure may reflect weakness in military and soft power, not strength. China’s influence efforts often backfire. Vietnam’s communist leaders have moved closer to the US.

The dollar as weapon

America’s financial coercion is broader and more sophisticated. SWIFT monitoring raised civil liberty concerns in 2006. Sanctions on South Africa in the 1980s hurt everyone, victims included. Targeted sanctions after Crimea in 2014 were more precise.

America’s central position lets it enforce sanctions unilaterally. Trump withdrew from the Iran nuclear deal in 2018 and penalized countries still trading with Iran under the agreement. That violated international law and made the US look unreliable.

The trade war’s stated goal was often unclear. Meng Wanzhou’s detention in Canada in 2018, the campaign against Huawei 5G, sanctions on Chinese tech firms over Xinjiang, and pressure on allies over the AIIB all pointed toward containment of Chinese technology. Biden extended Trump’s investment ban to 59 Chinese companies.

The biggest threat is denial of access to the dollar. Standard Chartered paid $340 million for a dollar trade with Iran that broke no UK or UN rules. BNP Paribas paid almost $9 billion for sanctions violations. Britain, France, and Germany set up INSTEX to trade with Iran outside the dollar system. Many companies still avoid Iran to stay on Washington’s good side.

Putin said in 2018: “We are not leaving the dollar, the dollar is leaving us.” Russia sold Treasuries and de-dollarized. China’s path matters for the dollar’s future.

China’s dollar trap

China holds over $1.1 trillion in Treasuries. Exports were still 18.5% of GDP in 2019. Most trade is invoiced in dollars even when the US is only 14% of China’s merchandise trade. Weak domestic financial markets force China to earn dollars and recycle them into low-yielding Treasuries.

Internationalizing the renminbi would reduce risk and bring seigniorage benefits. But foreign investors need a deep pool of renminbi securities and trust in Chinese courts. Capital controls and legal uncertainty block that.

Beijing moves cautiously for three reasons. Fast liberalization could trigger volatility and crises. The dollar’s global role imposes costs on the US that China does not want to replicate. PBOC Governor Yi Gang called for a bigger role for IMF Special Drawing Rights rather than pushing the renminbi. Outbound investment would expose Chinese savers to US sanctions through payment systems America influences.

China built CIPS as an alternative to SWIFT. But the dollar’s centrality gives the US a stranglehold. London Clearing House refuses Chinese government bonds as collateral for global interest rate swaps, limiting international demand for CGBs.

Financial decoupling would hurt both sides. Without renminbi internationalization, the US keeps shouldering the dollar burden alone. Curtailing China’s growth reduces US export markets. The real fight in both countries, Fok argues, is between elites and their populations, driven by fiscal, industrial, and monetary policies that widened inequality within nations and imbalances between them.

The Financial Cold War has spilled into populist nationalism and geo-economic conflict. History says complacency is not an option. Leaders can lose control of their own tactics. Fanning nationalism reduces flexibility to step back.

Before fixing anything, Fok says we need to remember what financial markets were built to do. They are man-made. Society should decide what objectives they serve.

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