Donald Trump has made it impossible for any sensible person to persevere in the delusion that global business can continue as usual. We should all welcome this, even if we are livid with Trump’s shocking behaviour, decisions and narratives.
The global economy will either be rebalanced or it will crash in ways that may make the 2008 crisis look like a walk in the park. The only question, therefore, that is worth posing is: Who can do what to help undo the imbalances damaging the Global Majority (the developing world) and raising the spectre of fascism across the Global Minority (the Western economies)?
We know who is powerless to step into the fray and contribute to the world’s rebalancing: the European Union. The reason why the EU has ruled itself out needs to be traced in the original architecture of its common currency (the euro) and, later, with the EU’s steadfast refusal to utilise the tumultuous euro crisis as an opportunity properly to federalise fiscal and investment decision-making. As a result, the EU has now entered a long-term, secular economic stagnation as well as political fragmentation.
We also know who is unwilling to help rebalance the world: the United States. While US Treasury Secretary Scott Bessent waxes lyrical about rebalancing trade and capital flows, the Trump administration he is labouring for is only interested in the contradictory aims of, on the one hand, undervaluing the dollar while, on the other, attracting even larger quantities of capital to the United States – a contradiction that can only be resolved through massive coercion that the US lacks both the power and the discipline to implement.
Who is left? The answer is: China. As far back as in April 2009, at the G20 meeting in London whose purpose was to coordinate monetary policies globally in a bid to stem the North Atlantic financial collapse from getting worse and from spreading, the Chinese delegation welcomed the idea of revisiting the Bretton Woods conference of 1944 and reviving John Maynard Keynes’ proposal (known as International Clearing Union, ICU). Alas, in exactly the same way that the United States had rejected Keynes’ proposal in 1944, the United States snubbed Beijing’s suggestion in 2009. The rest is the sad history of the past sixteen years: a world whose imbalances grew larger and are now spinning out of control.
Given that the EU cannot and the US will not help reign in the crippling imbalances, what could China do? My answer is: Establish a New Bretton Woods without the US or the EU, beginning with the BRICS+ and then admitting other countries once the benefits for this new system become apparent. Lest I am misunderstood, my proposal here is not that China should become an alternative global hegemon by reviving the actual Bretton Woods system (as it functioned in the 1950s and 1960s). No, my proposal is that China should build a truly multilateral system, in close collaboration with its BRICS+ partners – a New Bretton Woods mirroring Keynes’ 1944 proposal, the very proposal President Roosevelt’s team rejected in order to establish America’s hegemony.
Before explaining how this New Bretton Woods might work, let me address some of the objections that will most likely be raised – especially in the West. Many will rgue that China cannot be the backbone of any international trading system because it imposes capital controls. Do they forget that Bretton Woods (both the actual system and Keynes’ ICU proposal) was founded – quite sensibly – on capital controls? Others will protest that to be at the heart of a large international trading and monetary system, a country must run a trade deficit, so that others can have a trade surplus with it. Do they forget that the original purpose of Bretton Woods was to maintain the US trade surpluses? Clearly, these objections reflect more the prejudices of the objectors than any serious economic analysis.
Let me now turn to how this New Bretton Woods might work as a genuine multilateral system based on non-hegemony and mutual advantage. To counter the tendency of the market-driven trading system to generate increasing imbalances, Keynes had advocated the replacement of any system where “…the process of adjustment is compulsory for the debtor and voluntary for the creditor”[1] with one where the force of adjustment falls symmetrically upon debtors and creditors. Here is what such a system might look like.
Participating countries keep their own currencies and central banks. All trade and capital flows between countries are denominated in a common digital accounting unit; let’s call it the kosmos. Every country’s central bank keeps a reserve account, in kosmos, with some common institution (e.g., the existing New Development Bank) that issues the kosmos on the basis of a transparent digital distributed ledger and an algorithm that adjusts the kosmos total supply in a pre-agreed manner in relation to the volume of world trade, allowing also for an automatic countercyclical component that boosts the global kosmos supply at times of a general slowdown.
Foreign exchange markets would function as they do now and the exchange rate between the kosmos and various currencies would vary in the same way that the IMF’s Special Drawing Rights do viz. the dollar, the euro, the yen etc. The difference, of course, would be that, under the New Bretton Woods, all payments between participating countries pass through their central bank’s kosmos account.
So far, nothing that has been proposed mitigates the underlying tendency to build up imbalances within the system (large trade deficits and surpluses). However, this new institutional setting allows for two key interventions that will not only limit imbalances but will also unlock massive potential for mutual development. I call these two interventions The Levy and The Charge. Here is what they are and how they work.
-
The Levy: A trade imbalance levy to be charged annually to each central bank’s kosmos account in proportion to its current account deficit or surplus and paid into a Common Development Fund (CDF) held at the kosmos issuing multilateral institution
-
The Charge: Private financial institutions to pay a ‘surge’ fee into the same common fund, the CDF, in proportion to any surge of capital flows out of a country, reminiscent of the congestion price-hike that companies like Uber charge their customers at times of peak traffic.
The Levy’s rationale is to motivate governments of surplus countries to boost domestic spending and investment while systematically reducing the international spending power of deficit countries. Foreign exchange markets will factor this in, adjusting exchange rates faster in response to current account imbalances and cancelling out much of the capital flows which today support chronically unbalanced trade. As for the Charge, it will automatically penalise speculative herd-like capital inflows or outflows without, however, handing discretionary power to bureaucrats or the need for inflexible capital controls.
Suddenly, through this New Bretton Woods’ common fund, the CDF, the participating countries will have acquired, without the need for any subscribed capital, an extra Global Sovereign Wealth Fund (in addition to the existing funds of the New Development Bank) that achieves two aims at once: it balances global trade and it generates new funding for the Just Green Transition at a planetary scale.
****
Is this feasible? It sure is. China has the technology, in particular expertise in highly sophisticated digital payment systems. The rest of the world has the urgent need for a trading system that generates stability and mutual advantage, rather than imbalances and exploitation. We also have institutional experience with international clearing systems.[2] What the world lacks is the political process that can bring all these elements together.
Would it not be a delicious irony if Donald Trump’s shock therapy, which he claims is all about rebalancing the world economy, helped motivate China to accept the challenge to do so by coordinating with countries around the world, not just the BRICS, to build the multilateral system that Keynes had envisaged in 1944 but which was rejected so that the United States could dominate the world for another eight decades?
For the quancha.cn site where this article was originally published (in Chinese), click here.
