[EAI Special Report] The Future of US-China Competition and Korea's Strategy I_ ③ US-China Competition in International Reserve Currencies and Korea's Response

Editor's Note

In this Special Report, Professor Lee Yong-wook of Korea University's Department of Political Science and International Relations explores the international reserve currency competition strategies of the United States and China, driven by the internationalization of the Renminbi. The author predicts that US-China currency statecraft will be employed in ways that influence the determinants of international reserve currencies: economic power, currency credibility, domestic financial market liquidity and institutional foundations, currency networks, and military power. Amidst the US dollar system and a multi-reserve currency system including the Renminbi, the author argues that Korea must consider measures that benefit its comprehensive national interests and contribute to the stability and prosperity of the world order, adding that it must continuously strengthen its foundational capabilities, such as diversifying export markets and securing core technologies, to broaden its policy options.

※ The following is an excerpt. Please refer to the attached file above for the full text.

1. Introduction

Since the commencement of the US-China trade dispute in 2019, the conflict between the two nations has escalated daily, extending to sanctions on IT industries such as Huawei, WeChat, TikTok, and Tencent. Amidst this trend, the clash between the dollar and the Renminbi has emerged as a prominent topic, coinciding with the recent launch of the digital Renminbi. Not only did Henry Paulson, former Secretary of the Treasury under the Bush administration, contribute an article to Foreign Affairs on May 19, 2020, regarding the future of the dollar in the face of China's Renminbi challenge, but prominent international finance and currency experts such as Benjamin Cohen (2017, 2019), Harold James (2020), and Eswar Prasad (2017, 2020) have also begun discussing the potential end of dollar hegemony.

However, as will be discussed later, the internationalization of the Renminbi, which has been underway since 2009, has not met initial expectations, and the Renminbi's current standing in the global economy is significantly weaker than that of the dollar. Furthermore, the majority of experts do not anticipate the Renminbi to rival the dollar in the short term. Therefore, the warnings from the US about the future of the dollar open up at least one, or possibly both, of the following interpretations. First, it could indicate a judgment that the political, economic, and social conditions supporting US dollar hegemony are rapidly deteriorating. Second, it could suggest that China's Renminbi internationalization is entering a phase of achieving initial results after a period of investment. The US, which had previously taken a passive stance, viewing China's Renminbi internationalization with indifference, has recently shifted its position and declared its intention to respond to it. The Federal Reserve's indication that it may consider launching a digital dollar in response to the digital Renminbi suggests that the US-China currency competition is entering a new phase.

As is well known, currency wars are not merely economic issues. If the Renminbi achieves a level of internationalization sufficient to challenge the dollar, the US-China relationship will fundamentally change. First, US leadership in forums such as the G-7 and G-20 could be significantly undermined. The US's ability to steer global macroeconomic adjustments according to its will, despite substantial current account and fiscal deficits, stems from its financial power underpinned by currency hegemony. The internationalization of the Renminbi could weaken this American unilateralism. Second, a significant reduction in US macroeconomic autonomy is also anticipated. In other words, the US would not be able to arbitrarily issue dollars without concerns about inflation. The global demand for dollars, arising from its status as the reserve currency, partially offsets the inflationary pressures in the US caused by increased dollar liquidity. Lastly, if the dollar loses its status as the reserve currency, US borrowing costs will increase, thereby constraining military expenditures. This implies that the formidable military power of the US is dependent on the dollar system (Lee Yong-wook 2017, 165-166).

In this context, this paper explores the international reserve currency competition strategies of the United States and China. What is the US's grand strategy for defending the dollar? Will it bind its allies and friendly nations into a dollar alliance, similar to the Economic Prosperity Network (EPN)? What policy tools can the US employ to weaken the internationalization of the Renminbi? What could be the initial suppression measures, and what are the strategic options for the medium to long term? Separate from active Renminbi internationalization policies, what strategies can China employ to counter US pressure and weaken the dollar system? This paper aims to present, at least preliminarily, the grounds for calculating the scale of damage that could be inflicted on both sides as the US and China mobilize strategies to pressure each other during the process of Renminbi internationalization and dollar system defense. Considering that the combined share of the Euro, Pound, and Yen in the global economy is around 30-35% on average, the strategic competition between the US and China surrounding Renminbi internationalization is predicted to become acute when the Renminbi's share begins to exceed 10-15%. At that point, the dollar's share would fall below 50%, making it difficult to maintain its current hegemonic currency status.

This paper proceeds as follows. Chapter 2 briefly reviews the background and current status of China's pursuit of Renminbi internationalization. It examines the achievements of Renminbi internationalization by combining quantitative and qualitative analysis, focusing on the recent signs of crisis in the dollar system and the upward trend of the Renminbi. Chapter 3 analyzes the US-China currency competition strategy. The discussion unfolds by predicting that US-China currency statecraft will be employed in ways that influence the determinants of international reserve currencies: economic power, currency credibility, domestic financial market liquidity and institutional foundations, currency networks, and military power. Chapter 4 concludes the paper by presenting Korea's response strategy.

■ Author: Lee Yong-wook_ Professor of Political Science and International Relations at Korea University. He majored in East Asian Studies at the University of Kansas and received his Ph.D. in International Politics from the University of Southern California. His main research areas include international political economy, constructivism, East Asian regional cooperation and financial regionalism, and the multilateral trade order. His published works include "Complex Transformation of the East Asian Regional Order and Korea's Strategy" (2014, co-edited), "Plurality of International Politics Methodology" (2014, co-edited), and "China’s Rise and Regional Integration in East Asia: Hegemony or Community?" (2014, co-authored).

■ Management and Editing: Baek Jin-kyung EAI Researcher

Inquiries: 02 2277 1683 (ext. 209) j.baek@eai.or.kr

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