Dollar primacy makes overall hegemony sustainable---reject ‘LIO decline inevitable’ arguments that discount the dollar

There is a growing consensus in the discipline of IR that we are currently witnessing the end of an era (Flockhart 2016; Acharya 2017; Duncombe & Dunne 2018; Peterson 2018).1 The LIO built by the United States at the end of the Second World War, which was later (practically) universalized at the end of the Cold War, is on its last legs, and we are on the cusp of a new, more chaotic orderless era. Of course, the end of the American-led LIO has been hypothesized for some time. The putative decline of the United States coupled with the rise of China and other emerging powers (such as India, a resurgent Russia under Putin, or even the EU’s potential for deeper integration post-Brexit) has led to terms such as post-American world, G-Zero world, and multipolarity (or multi-order) gaining widespread usage in the mainstream coverage of international affairs in recent years (see Bremmer and Roubini 2011; Layne 2012; Zakaria 2008). Such prognostications have accelerated since the election of Donald Trump as President of the United States in late 2016, as his foreign policy – at least rhetorically – no longer seems to care about liberalism or the United States’ position as arbiter of the LIO, rather prioritizing an “America-first” aim (Peterson 2018; Posen 2018).

The problem with these prognostications about the imminent collapse of the liberal international order is that they assume that the defining characteristic of the LIO is liberalism. This article prescribes to the school of thought that the liberal aspect of the United States’ post-WWII international order was more of a superficial framing device rather than anything substantial and that, in reality, the real substance of engineering the order was the promotion, and then maintenance, of the United States’ international primacy (Barnett 2019; Lind & Wohlforth 2019; Patrick 2019).2 This is not to say that the order did not have any liberal characteristics – as Lind and Wohlforth (2019) contend, the order is not ideologically bound and can reflect the prominent ideologies of a given time – nor that the order has not been, on the whole, good for international politics. But, any consideration of the state of the LIO needs to focus on the substantive, not superficial areas. As Stokes (2018, 134) argues, proclaiming the order finished is naïve because it is “highly unlikely that the agency of Trump will overcome the deep structures and path dependencies that incline towards systemic maintenance” and that even if there is some deviation away from the order, “American elites will seek to ‘snap back’ to the status quo ante, given the goods the United States still derives from its hegemony.”

Arguably, the key substantive area of the LIO is not diplomatic (i.e. the embedding of multilateral institutions, fora, and frameworks) but financial. The globalization of finance since the end of the Second World War (and especially since the 1970s) has reached unprecedented levels and all of this has been managed by a system largely created by the United States – a structure which undeniably benefits it above the rest (Layne 2012; Stokes 2018; Kitchen & Cox 2019). The key aspect of this financial hegemony is the status of the US dollar as the undisputed global reserve currency. Former French President Valéry Giscard d’Estaing described the hegemony of the American dollar as representing an “exorbitant privilege” to the United States over the rest of the world (Eichengreen 2011). The crux of this argument was that when the US dollar was enshrined as the global reserve currency, the United States could no longer suffer a balance of payments crisis as its imports were purchased in their own currency. In other words, it gave the United States an exclusive ability to run up a massive current account deficit at an incredibly cheap rate by simply printing more money or issuing debt (Eichengreen 2011).

This strategic worth of the United States’ advantage of being the kingpin of international finance has not been lost on its foreign policy-makers either. The role of the United States’ financial hegemony in its various grand strategies since the end of the Second World War is clear (Stokes 2014). For instance, the Marshall Plan(1), the Washington Consensus (to name but a few), and, more recently (albeit unfulfilled) the pivot to Asia, all used the United States’ financial clout to help it pursue clear strategic aims (Walt 2011; Stokes 2014). Given the importance of economic sources of power in today’s heavily integrated international system, it is plausible to even make the case that the United States’ financial clout is its single most useful source of power – more so than its clear military might (Keohane & Nye 1973; Wigell, Scholvin & Aaltola 2018). Furthermore, this position of financial hegemony (and the ongoing exorbitant privilege) provides the United States with significant insulation from hegemonic decline (Stokes 2018; Smith 2019).

Since the advent of the US dollar as the global reserve currency in 1971, the United States has, unsurprisingly (given the inherent privilege it awards them), transitioned from the world’s largest creditor state to the world’s largest debtor state. For example, as of late 2018, the United States’ net international investment position (NIIP) has ballooned to nearly negative $10 billion while its net investment income (NII), thanks to its exorbitant privilege, was positive $167 billion – generally such an indebted country would have a significant negative NII too (Bureau of Economic Analysis n.d.). Essentially, the United States’ NIIP and NII statistics, according to Steil and Smith (2017), demonstrated that “basically, foreigners are willing to accept a trivial return to hold dollar-denominated assets.” Consequently, since Nixon’s decision to scrap the gold standard in 1971 turned the United States into a proverbial “gold mine” as it acquired much more financial power (Ward 2018).

In contrast to the United States’ privileged position of being able to maintain an extremely indebted position, the challengers to its financial power position, most notably China, have a clear competitive disadvantage. In contrast to the United States’ ever-increasing levels of debt, China has become the world’s largest creditor state, ballooning its NIIP to positive $1.7 trillion (Steil & Smith 2017). China’s incentive for being a creditor state is that it permits them to influence international trade and finance through offering cheap loans – either to advantage their own companies internationally or to grow ties with resource-rich countries in the global south (Fukuyama 2016). However, in doing so, China has had to accept a negative NII of negative $80 billion in 2017 – the world’s worst NII. The problem for China has been that occupying such an unfair position comparatively to the United States – what Steil and Smith (2017) call an “exorbitant detriment” – has become increasingly difficult given China’s economic wobbles over the past couple of years, especially as it begins a transition from an industrialised country to a post-industrial one (Steil & Smith 2017).