The writer is a former member of the US Congress and was chair of the House permanent select committee on intelligence, 2011-15
In 1944 allied nations came together at Bretton Woods and established economic rules for the postwar era. These would provide much needed stability and structure. But as economies grew and financial interconnectedness increased, governments eventually needed greater freedom of action. The decision taken by the Nixon administration in 1971 to remove the dollar from the gold standard was a key driver of the demise of the so-called Bretton Woods system.
Today, we find ourselves in the midst of a global ideological conflict between liberal democracy and authoritarianism. Friendly democracies need, once again, to come together to establish a new economic agreement — one based on the liberal values of free trade, competition and freedom. Think of this as a digital Bretton Woods to ensure continued growth and progress. Failure to reach such an agreement risks ceding the future of global economic governance to China and its model of authoritarian capitalism.
China’s pursuit of a digital currency — a digital renminbi, or e-CNY — is just one example of Beijing’s aims. The e-CNY’s development is cloaked in the language of innovation, but hides potentially undesirable outcomes. Domestically, it will allow Beijing unparalleled oversight and control of financial transactions. Western companies in China will undoubtedly be subject to intrusive oversight and risk potential disruption should Beijing find their (or their country’s) behaviour unacceptable.
Internationally, the e-CNY will undermine the dollar’s role as a reserve currency. This is the Chinese Communist party’s aim. As a director of a state-owned bank told the Financial Times last year: “A bigger goal of ours is to challenge the dominance of the US dollar in international trade settlement.”
There are many worldwide who would say this is an attractive development — undermining reliance on the dollar would reduce America’s global influence and its ability to impose sanctions. Yet doing so would introduce instability into the global economy at a time when confidence is needed more than ever.
While China has sought to bide its time and hide its capabilities, it is now embarking on an effort to remake global institutions in a manner that favours its values and approach. The e-CNY is representative of Beijing’s overall push to redefine the global economy and its financial rules.
China’s efforts in a range of international forums follow a pattern in which Beijing participates in the process, advancing policies that are in its own long-term interest and not necessarily those of the global economy. While engaging with both the process and institutions, China undermines international norms by provoking diplomatically inspired trade disputes, such as the confrontation with Australia over duties on barley imports, and dumping goods on to the market. When the IMF allowed the renminbi to become a reserve currency in 2016, the drive to unseat the dollar began in earnest.
Beijing’s devaluation of the renminbi the previous year gave Chinese companies an unfair market advantage, reducing the cost of their exports to America and accelerating existing trade deficits with the US and EU.
The need for a new Bretton Woods led by the world’s liberal democracies is not wholly about China, however. The emergence of fintech, cryptocurrencies and other novel financial instruments is adding fresh complexity to an already highly fluid global economy — one for which existing policy structures were not designed.
The swiftness with which novel financial instruments emerge will continue to outpace our ability to regulate them in real time. This necessitates a fresh set of rules to guide international co-operation and help competition in these new economic spaces.
The goal of a digital Bretton Woods would not be to constrain financial innovation or limit individual governments’ ability to act. Nation states must retain the ability to manage their own economic and fiscal policy. Rather, it is about creating a set of norms informed by, and based on, liberal democratic values that will facilitate the next evolution of the global economy, while at the same time protecting the principles that gave birth to the modern world.
A future global economic order, and the rules governing it, must be based on liberal democratic values such as privacy and competition, not those of an authoritarian regime with hegemonic ambitions. It should not take a global conflict for us to understand what is at stake.