The writer is a former U.S. congressman and served as chairman of the House Permanent Select Committee on Intelligence, 2011-15
In 1944, allied nations met at Bretton Woods and established post-war economic rules. These would provide much needed stability and structure. But as economies grew and financial interconnectedness increased, governments eventually needed more freedom to act. The decision taken by the Nixon administration in 1971 to remove the dollar from the gold standard was one of the main drivers 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. The friendly democracies must once again come together to establish a new economic agreement — one based on the liberal values of free trade, competition and freedom. Think of it 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 goals. The development of e-CNY is masked by the language of innovation, but hides potentially undesirable results. Domestically, this will allow Beijing unparalleled oversight and control over financial transactions. Western companies in China will no doubt be subject to intrusive surveillance and risk disruption should Beijing find their (or their country’s) behavior unacceptable.
Internationally, the e-CNY will undermine the role of the dollar as a reserve currency. This is the goal of the Chinese Communist Party. As a public bank manager told the Financial Times last year: “One of our most important goals is to challenge the dominance of the US dollar in the settlement of international trade.”
Many around the world would say this is an attractive development – undermining dependence on the dollar would reduce America’s global influence and its ability to impose sanctions. Yet it 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 recast global institutions in a way that promotes its values and approach. The e-CNY is representative of Beijing’s global drive to redefine the global economy and its financial rules.
China’s efforts in a series of international forums follow a pattern in which Beijing participates in the process, advancing policies that are in its own long-term interests and not necessarily those of the global economy. While engaging in both process and institutions, China is undermining international norms by provoking diplomacy-inspired trade disputes, such as the confrontation with Australia over barley import duties and the dumping of goods in the market. When the IMF allowed the renminbi to become a reserve currency in 2016, the push to topple the dollar began in earnest.
Beijing’s devaluation of the renminbi the previous year gave Chinese companies an unfair advantage in the market, reducing the cost of their exports to America and accelerating existing trade deficits with the United States and the EU.
However, the need for a new Bretton Woods led by the world’s liberal democracies is not unique to China. The emergence of fintech, cryptocurrencies, and other new financial instruments is adding new complexity to an already very fluid global economy – one for which existing political structures were not designed.
The speed with which new financial instruments emerge will continue to outpace our ability to regulate them in real time. This requires a new set of rules to guide international cooperation and foster competition in these new economic spaces.
The goal of a digital Bretton Woods would not be to constrain financial innovation or limit the ability of individual governments to act. Nation states must retain the ability to manage their own economic and fiscal policy. Rather, it is about creating a set of informed standards based on liberal democratic values that will facilitate the next evolution of the global economy, while protecting the principles that gave birth to the modern world.
A future global economic order, and the rules that govern it, must be based on liberal democratic values such as privacy and competition, not those of an authoritarian regime with hegemonic ambitions. There wouldn’t have to be a global conflict to understand what’s at stake.