US Abdication and the Role of the Dollar

The doomsayers claim that the role of the dollar is being eclipsed by the rise of the Chinese yuan.  Others see the demise of the dollar as some countries, like Iran and Russia, sell oil in other currencies than the greenback. 

These are all high profile developments, but they are not what they may seem.  The yuan is still a relatively small currency, according to SWIFT.  The transactions on SWIFT remain highly concentrated in dollars and euros.  

China's numerous swap lines lie largely dormant.  Its own Special Administrative Region (Hong Kong) accounts for much of the yuan-invoiced trade flows.    Iranian and Russian oil sold for other currencies beside the dollar constitutes a relatively small part of world trade or what economists refer to as the transactional demand for dollars.  

There is still no significant rival for the dollar as a reserve currency, a transactional vehicle or a unit of account.   Yet a compelling alternative has always stuck us as an unlikely scenario to topple the dollar.  Instead, abdication may be the more profound and insidious threat. 

Investors may not have responded to last week's failure of the House of Representative to grant Obama the same power (Trade Promotion Authority) that every other president over the past couple of decades has been given.  They have not responded to the likelihood that the US Export-Import bank by be shuttered at the end of this month.  

Investors do not appear particularly perturbed by the reluctance of US Congress to authorize payment of its new IMF quota.  This reluctance has stymied attempts to reform the IMF to give some large developing countries a greater voice.  This in turn has encouraged efforts for countries, like China, to develop parallel institutions.  

           

Even if the markets have not registered these developments in any perceptible way, rest assured that policy makers around the world, allies and competitors alike, are closely monitoring these developments.  At stake is nothing less than  US credibility and reliability.    

No Rubicon has been crossed.  The Trans-Pacific Partnership is not dead.  The Ex-Im Bank may expire, but is likely to be revived before the end of summer.  If this is correct than the recent setbacks will likely be written off as the peculiarities of America's presidential system. 

There are two measures that are part of the bill that would give Obama Trade Promotion Authority.  One is the authority itself (TPA).  The other is Trade Adjustment Assistance (TAA), and that is where the problems emerged at the end of last week.  The Republican leadership had indicated that if TAA failed it would not proceed with a vote on TPA.  Consequently, Democrats, who long been advocates of TAA, understood that by blocking it, TPA itself would be defeated.  In the event, however, while the TAA was defeated 126-302), there was a vote on the TPA, which passed (219-211). 

The issue now is whether the TAA can be passed.  It is not clear.  A "do-over" vote was initially expected to be held today.  However, late yesterday the Republican leadership decided to extend the time that a new vote can be held until the end of July.   This in effect buys Obama and the Republican leadership time to devise the best strategy.  The goal is not so much about convincing more Republicans to the merits of TAA, which helps people displaced by trade, but by winning over some of the 144 Democrats that voted against TAA.  

Traditionally, the Democrats have been advocates of such assistance.  What made it different this time was that it was seen a way to block TPA.  Even though TPA passed, to win over Democrat support the TPA bill may have to be amended.  It is not clear whether this could work.  

The White House tells anyone who is willing to listen that there are a number of paths that can lead to TPA.  One is simply to send back to the Senate the TPA without the TAA and let a reconciliation committee figure how to bridge the differences. 

The Ex-Im Bank charter expires at the end of June.  The traditional battle lines have been turned on its head. The Republican Party has traditionally been the chief advocate.  However, the Tea Party wing is dead set against what appears to be a subsidy for business. Democrats traditionally have  been critical (even Obama was before he became President).  Democrats are now more sympathetic.  In a recent procedural vote in the Senate, there was sufficient support (more than 65) that would override any filibuster attempt.  

The most likely scenario is for the Ex-Im Bank to temporarily lose its charter.  Before the August recess, it will likely be resuscitated.  It will still be able to operate  though it does not appear that it could grant new loans.  It current funding would allow its 450 employees to continue working until the end of the fiscal year at the end of September.  

It is not clear at this juncture, precisely how the Ex-Im Bank will be revived.  It could be a separate bill, or it could be buried another must-pass bill such as the Highway Trust Fund.  Some reforms or limits could be introduced.   What is clear is that there is sufficient political will to retain the functions of the Ex-Im Bank. 

The US may still abdicate its leadership.  The failure to complete TPP would be a serious blow to US credibility.    It had to convince an initially reluctant Japanese Prime Minister Abe to join the talks.  Failure now would leave him high and dry.  It could very well jeopardize his own domestic reform agenda.  It would make the US pivot to Asia ring hollow.  The unreliability of the US would encourage others to recognize China as the only game in town.   The failure to have an Ex-Im Bank undermines the US ability to project an element of its soft power (commerce) at the same time that China appears to be giving its Ex-Im Bank around $25 bln of reserves to project its power and influence. 

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