AMERICAN EXCEPTIONALISM AT RISK: Part II
- Greenmark 101
- Jul 12
- 11 min read
offered by: Christopher Netelkos, president of Northridge G-101 SPM Company
As previously reported: AMERICAN EXCEPTIONALISM IS AT RISK.
The confidence crisis in the U.S. dollar continues to accelerate. No longer the anchor in the midst of current instability, the need to make preparations for tomorrow is to taking action today.
Making big money in the financial markets is hard even in the best of
circumstance unless you're a positional strategist.
America’s dollar is being actively undermined — and has been for the better part of a decade. We need to start paying more attention to the rapidly changing way countries are working around the dollar through new payment systems. The traditional macroeconomic indicators of dollar strength, like how many dollars other central banks hold and how often the currency is used in global trade, is not the whole story. We must consider the rapidly changing way countries are working around the dollar through new payment systems. Payment systems are the technical back-end processes of how financial institutions send money to one another. It’s a complex global network that places the United States — and our banks — at the nexus of nearly 90 percent of currency exchanges. Even when two countries aren’t trading in dollars, the way the system’s pipes are built makes the dollar a must-have go-between. This sprawling financial plumbing has given American policymakers enormous power to leverage — and yes, sometimes weaponize — the dollar to pursue foreign policy goals. From Venezuela to Iran to North Korea, limiting access to the dollar has been at the heart of U.S. security strategy for decades. But the systems we helped create to ensure the dollar’s supremacy are showing their age. A case in point is the Society for Worldwide Interbank Financial Telecommunications, commonly known as SWIFT, which turned 50 two years ago. U.S. policymakers have increasingly leaned on SWIFT to isolate the rogue actor of the moment, be it a terrorist group or Vladimir Putin.
SWIFT works as a messaging system where banks communicate with one another before they send the actual money on a different network, like texting a friend on WhatsApp and then sending that same friend the money you promised on Venmo. New technology is making this old way of doing business obsolete. Introduced in 2015, China’s Cross-Border Interbank Payment System combines messaging and money transfers on one platform. Transaction volumes on the Chinese payment system surged last year, with banks joining from all over the world.
Researchers at the Federal Reserve have said there’s little reason for concern, noting that some 80 percent of Cross-Border Interbank Payment System transactions reportedly still rely on SWIFT for access to the global financial system. And to look at raw numbers, China said it has fewer than 1,700 financial institutions registered in the system, compared to SWIFT’s giant stable of over 11,000.
But the number the Fed cites is from 2022; it’s very likely new data would show a shift that is already well underway. Just over a month ago, the United Arab Emirates’ central bank signed a deal with China to join with its system and develop a new cross-border payment program to serve banks in the Middle East and North Africa.
Sometimes it can be hard to see the ground moving under your feet.
There are telltale signs if you look closely.
In 2023, the government of Bangladesh decided to use renminbi — not dollars — to pay back a Russian company that built the country a nuclear power plant, since sanctions prevented it from using Russian banks the way it usually would. We know about this workaround only because Bangladesh’s Finance Ministry announced it. There is an untold number more of similar transactions that U.S. officials probably cannot track because they happen outside their line of sight.
Why do things seem to be changing so fast? After all, countries have been trying to work around the dollar since the invention of sanctions. The difference now is that new financial innovations, including blockchain technology, are making it less expensive and faster than ever before to build systems that used to be cost prohibitive. The longstanding desire to cut ties with the dollar is finally meeting the ability to scale.
Since Russia’s invasion of Ukraine and the imposition of Group of 7 sanctions, the number of cross-border central bank digital currency projects has doubled, offering a way for commercial banks in different countries to send money to one another using the same technology on which cryptocurrency is built. The money can travel in seconds and avoid touching a U.S. bank.
The most advanced project of this kind is mBridge, whose participants include China, Thailand, Hong Kong, the United Arab Emirates and, as of last year, Saudi Arabia. Because the volumes transacted are still low (reportedly only $22 million during a pilot in 2022), this project and similar endeavors in emerging markets, especially in the BRICS countries, are often dismissed.
That’s the problem with thinking only about macroeconomics and not about national security. Economists typically don’t view money as a key lever of U.S. foreign policy; they see small workarounds as meaningless to the overall health of a currency. A Federal Reserve study last year echoed what you often hear from U.S. officials in private: “The Chinese renminbi is nowhere close to overtaking the dollar in international importance,” it concluded.
This ignores the ways a country can now undercut how we use the dollar for national security — namely, through sanctions — while hardly making a dent in the role of the dollar in the global economy. Twenty-two million dollars is a pittance in the world of central banking. Yet that kind of money could translate into hundreds of drones for Russia or Iran on the battlefield.
The United States needs to find a new approach, and quickly. It should invest in reimagining SWIFT with allies in Europe, where SWIFT is headquartered. If countries backing the dollar, euro, pound and yen work together and use their huge incumbency advantage, no alternative, including one from China, will be able to catch up.
A major SWIFT upgrade will show other countries that the United States doesn’t just wag
its fingers at projects it doesn’t like, but offers the best technology in the
world to anyone who wants to be a part of the system.
This will not be easy — or cheap. As of 2022 China had over 300 people working on digital currency in its central bank; last year, in the entire Federal Reserve System, there were fewer than two dozen staff members working on digital currency full-time, according to people I’ve talked to. In a speech last month about the future of the renminbi, Pan Gongsheng, head of the People’s Bank of China, called out the antiquated way money moves around the world via the dollar and argued that Western systems are being leapfrogged by Chinese technology.
This is how the race for the future of money will be won or lost. As Britain found out a century ago, being the world’s reserve currency is not guaranteed to last forever. For the dollar to keep that status requires innovation as well as the recognition that our currency is not nearly as healthy as it used to be.
... Now for the rest of the problem.
I am disheartened by the world's prospects in a moment of American retreat with its ongoing
and pending collapse of the economic, political and cultural organizations.
^ Courtesy of the New York Times and Josh Lipsky, the chair of international economics
at the Atlantic Council and senior director of its GeoEconomics Center.
Just six months into his new administration, President Trump’s assault on global trade has lost any semblance of organization or structure. He has changed deadlines suddenly. He has blown up negotiations at the 11th hour, often raising unexpected issues. He has tied his tariffs to complaints that have nothing to do with trade, like Brazil’s treatment of its former president, Jair Bolsonaro, or the flow of fentanyl from Canada.
Talks with the United States were like “going through a labyrinth” and arriving “back to Square one,” said Airlangga Hartarto, the Indonesian minister for economic affairs, who met with U.S. officials in Washington on Wednesday.
The resulting uncertainty is preventing companies and countries from making plans as the rules of global commerce give way to a state of chaos.
“We’re still far away from making real deals,” said Carsten Brzeski, global head of macroeconomics at the bank ING in Germany. He called the uncertainty “poison” for the global economy.
Gone is the idea that the White House would strike 90 deals in 90 days after a period of rapid-fire negotiation, as Mr. Trump pledged in April. Instead, Washington has signed bare-bone agreements with big trading partners including China, while sending many other countries blunt and mostly standardized letters announcing hefty tariffs to start on Aug. 1.
Policymakers in Indonesia, Japan and elsewhere learned about letters setting tariff rates only when Mr. Trump posted them on social media. Mr. Airlangga said he was “amazed and surprised” to find that his country would face a 32 percent tariff, unchanged from what was announced in April. Negotiations had been going well, he thought.
Trading partners who have received such letters are now frantically pushing to reduce the country-specific rates, which range from 20 percent to 50 percent, though Mr. Trump has at some points suggested that room to negotiate may be limited.
For those who have not yet received a letter — Mr. Trump suggested on Thursday that the European Union’s was coming imminently — the developments have underscored that any negotiations are precarious. Trade deals appear to hinge on one person, Mr. Trump, and even carefully constructed agreements can be upended on his whim.
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“People are dealing with it as a rolling damage-limitation exercise,” said Andrew Small, a senior fellow at the German Marshall Fund who worked until recently as an adviser at the European Union’s executive arm.
Kush Desai, a White House spokesman, said countries were continuing to eagerly offer concessions to maintain access to the American economy. Mr. Trump had been clear that the United States, as the world’s biggest and best consumer market, “holds the cards and leverage in negotiations,” he said.
Yet even reaching a trade deal may not diminish uncertainty. Mr. Trump proclaimed on social media in July that he had made a trade agreement with Vietnam that would charge a 20 percent tariff on Vietnamese products, with a higher 40 percent tariff rate on some goods that have Chinese components in them.
“In return, Vietnam will do something that they have never done before, give the United States of America TOTAL ACCESS to their Markets for Trade,” he said.
But the countries never released a joint statement clarifying what they had agreed to. Three people familiar with the matter, who declined to be named to discuss sensitive conversations, said Vietnamese officials had not agreed to the tariffs that Mr. Trump announced, and that negotiations were ongoing.
Two of the people said the countries had reached an understanding on trade, but when Mr. Trump spoke on the phone with Vietnamese General Secretary To Lam on July 2, he took it upon himself to renegotiate some of those terms, surprising officials on both sides.
A White House official who declined to be named because he was not authorized to speak publicly about the matter said the Americans and Vietnamese had reached an agreement. But he declined to elaborate further. He said both sides were continuing to discuss details of the higher tariff rate for goods with Chinese components, and had agreed to negotiate them in more depth later.
Ana Swanson
“I have been reporting on economics, trade and international relations for over a decade, from both China and the U.S. I aim to underpin my work with data and numbers, as well as give voice to the personal stories of people I encounter in my reporting.”
Mr. Trump’s push to reorder the global trading system started in February, shortly after he took office. Since then, he has imposed tariffs on sectors including metals and cars, and on specific countries, including Canada and China.
In early April, Mr. Trump announced across-the-board tariffs that applied in different amounts to different countries, calculated using a simple equation that relied in part on a nation’s trade gap with the United States.
After Mr. Trump unveiled the numbers on a poster in the Rose Garden of the White House, a rapid volley of negotiations kicked off. Trading partners began to flock to Washington to try to talk down their rates while securing carve-outs for sectors.
Within a few days, Mr. Trump partially suspended the across-the-board tariffs until July 9 to allow for three frenzied months of deal-making.
The United States announced a framework agreement with Britain in May, and a handshake with Vietnam last week that now appears to be in flux, but most countries have not made a deal yet.
Mr. Trump sent out nearly two dozen letters this week telling trading partners they would be subjected to hefty tariff rates, though the date when they start to bite has been pushed back to Aug. 1.
And even those who thought that they might be close to an agreement might watch those careful negotiations implode.
Take the European Union, which is by some measures America’s single most important trading partner. The 27-nation bloc has been working toward an agreement that would likely include a 10 percent base-line tariff, with exemptions for key goods. In return, the bloc would pledge to buy more from and invest more in the United States.
But E.U. officials have long been unwilling to say they think a deal is likely. Even before Mr. Trump announced in an interview with NBC on Thursday that the bloc would soon receive a letter of its own, European policymakers remained painfully aware that the situation could detonate.
That’s partly because of the cautionary tale of Canada. Negotiations there were disrupted for a dramatic 48 hours in late June over the country’s digital-services tax, which would have applied to large U.S. tech companies. Mr. Trump said he wouldn’t continue negotiating if the tax remained in effect, and Canada’s government quickly dropped it.
Canada had then been negotiating toward an agreement by a July 21 deadline when on Thursday, it, too, received a letter announcing a 35 percent tariff and a new deadline of Aug. 1.
Nor has Canada been the only last-minute surprise.
The United States lurched into a sudden trade war with Brazil on Wednesday after Mr. Trump announced in a letter to President Luiz Inácio Lula da Silva of Brazil that 50 percent tariffs would take effect on Aug. 1. “The way that Brazil has treated former President Bolsonaro, a Highly Respected Leader throughout the World during his Term, including by the United States, is an international disgrace,” Mr. Trump wrote.
A few hours later, Mr. Lula said that Brazil would reciprocate against the tariffs. “Brazil is a sovereign country with independent institutions that will not accept being abused by anyone,” he said in a statement.
Thai officials also received a letter from Mr. Trump, but they emphasized reasons for hope.
Pichai Chunhavajira, the finance minister, said on Tuesday that Mr. Trump must not yet have taken into account a revised proposal to increase bilateral trade when he sent a letter setting the tariff at 36 percent, unchanged from April.
“It is a template, everyone gets the same letter and the same text applies for every country,” said Supavud Saicheua, who is an adviser to Mr. Pichai. Thai negotiators are still unclear about what Mr. Trump wants, Mr. Supavud added.
The 36 percent tariff “was calculated by some math that we have never heard of before,” he said.
Even countries that hope they are in a solid negotiating position face uncertainty.
While Indian officials have been emphasizing Mr. Trump’s warm relations with Prime Minister Narendra Modi, the United States has made tariff announcements over the past week that threaten to rock India’s economy.
Mr. Trump said at a meeting in the White House this week that, after a year, imports of all pharmaceutical products would be “tariffed at a very, very high rate, like 200 percent.”
That would be crushing for India, where pharmaceutical exports earned almost $30 billion last year, with the United States its biggest market by far.
America's trading partners have seen that there are no guarantees, except that further trade whiplash probably lies ahead.
"We understand that the decision is on the POTUS," Mr. Airlangga from Indonesia, using the acronym for the president of the United States.
End
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