US dollar dominance enables a US-China alliance

The financial sanctions imposed on Russia by Washington and its allies have put Beijing on notice. In the event of a military conflict over Taiwan, China now knows what to expect from the United States. Beijing will therefore accelerate efforts to promote the renminbi as an international currency and reduce its dependence on the dollar. But the greenback will remain the dominant international currency and will continue to provide Washington with significant geo-economic power.

True, China’s far greater economic weight compared to Russia will make some American allies more hesitant to support US financial sanctions in the event of a military clash. But the implicit or explicit threat of US secondary sanctions should help persuade them to support American policies, even if the economic costs of doing so will be considerable. Should the US Navy impose a blockade on Chinese seaborne trade, financial and currency sanctions will become less meaningful, as they derive their effectiveness largely, if not exclusively, from restricting a country’s international trade.

China is the world’s second-largest economy. It is the world’s largest trading nation and the largest trading partner of a hundred-odd countries. It is the world’s third-largest creditor, and it is a major lender to developing economies. China also happens to be America’s second largest international creditor. And yet China remains highly dependent on the dollar and access to America’s financial system in terms of international trade and finance. Having watched Washington’s decisive response to Russia’s invasion of Ukraine, Beijing will double down on efforts to reduce its dependence on the dollar.