Bretton Woods should heed the cries for fair play or go, how China can help reshape the global financial system

 Is Bretton Woods fit for the 21st century?

America is financed by the rest of the world because of the hegemomic of the US dollar.

The world's largest economy has moved from a giver of global public goods to a taker of global resources.

Probably the best way to increase global funding is to raise the capital of the global multilateral development banks like the World Bank, Asia Development Bank, etc.

In July 1944, delegates from 44 countries gathered in a UN-sponsored conference in Bretton Woods, New Hampshire to decide on a post-World War II monetary and financial order. 

In the closing speech of the gathering, then US Treasury secretary Henry Morgenthau concluded that the conference had succeeded in addressing the twin “economic evils – the competitive currency devaluation and destructive impediments to trade” that led to the war.

To prevent competitive devaluation, the Bretton Woods conference established the fixed but adjustable exchange rate system, which was based on the US dollar linked to gold and capital controls, securing funding from a newly created World Bank and the International Monetary Fund (IMF). 

The global free trade mechanism was negotiated first through the General Agreement on Tariffs and Trade, which decades later became the World Trade Organization.

The Bretton Woods negotiations were led by the US chief delegate Harry Dexter White and the eminent British economist John Maynard Keynes. Keynes argued unsuccessfully for the creation of an new international currency called the bancor, whereas the United States preferred to use its own currency.

In 1944, the US had the largest share of world GDP and was a major creditor to economies suffering from the destruction of war. It is no surprise that the Bretton Woods order was largely US-led and designed.

This Bretton Woods structure lasted until 1971, when rising US fiscal and trade deficits led US President Richard Nixon to delink the US dollar from gold at the fixed price of US$35 to one ounce of gold. 

After flexible exchange rates became the global norm, the US continued to be financed by the rest of the world because of the hegemonic position of the US dollar. It was protected by the might of the US military and its status as the strongest economy, including being the consumer of last resort.

Eighty years later, the US share of world GDP has been pared down to 26 per cent by current exchange rates but the US dollar remains as mighty as ever.

People walk past an image of US dollar bills outside a currency exchange bureau in downtown Nairobi, Kenya, on February 16. Photo: Reuters

Unfortunately, having the US dollar act as the global reserve currency is both a blessing and curse. The US is able to fund its fiscal and trade deficits easily because the rest of the world prefers to hold the US dollar.

But running protracted deficits means that the US net liability to the rest of the world is now US$21 trillion, or about 20 per cent of world GDP, with a gross sovereign debt of US$35 trillion, or roughly one third of world GDP. Fiscal debt cost is rising as interest expenses will rise from 3.4 per cent of GDP in financial year 2025 to 4.1 per cent by 2034.

The irony is that the world’s largest debtor absorbs more of the world’s natural and financial capital that encourages global consumption to drive growth. Since increased levels of consumption ultimately generates more carbon emissions, the current model is neither ecologically nor financially sustainable.

To address these global imbalances, the United Nations has suggested that a “just transition” requires US$2.4 trillion annually to fund clean energy and climate resilience. Where is this money going to come from?

What is climate finance, and why is it crucial to the global energy transition?

This is both a flow and a stock problem. The annual shortfall, or flow, can either be funded from an increase in taxation or a cut in spending. The stock issue is whether there is enough wealth to be taxed or used to fund the needed climate action.

There is growing momentum behind an initiative proposed by French economist Gabriel Zucman, in which a minimum wealth tax of 2 per cent would raise US$200-US$250 billion per year globally from 3,000 billionaires who currently pay little to no tax. Current evidence suggests ultra-high-net worth individuals have an observed pre-tax rate of return to wealth of 7.5 per cent on average per year during the last four decades, while the current effective tax rate is equivalent to roughly 0.3 per cent of their wealth.

Alternatively, the Austrian Institute for Economic Research thinks that a global financial transactions tax of 0.1 per cent could yield between US$238 billion and US$419 billion per year. Needless to say, the rich who control the electoral process in countries across the world will not allow such tax increases.

There are two big-ticket items in global fiscal spending which could be cut. The largest is subsidies on fossil fuels, which were US$7 trillion or 7.1 per cent of global GDP in 2022. On top of that, global military expenditure was US$2.4 trillion in 2023.

Perhaps the best way to increase global funding is to raise the capital of the global multilateral development banks such as the World Bank and Asian Development Bank. If the countries which control the special drawing rights of the IMF can apply their US$650 billion in 2021 to increase the bank’s capital by eight times the leverage, these multilateral development banks can increase their lending by about US$5 trillion.

However, doing so would require these countries to agree that this is a priority, which could be unlikely given the current global atmosphere leaning towards protectionism and isolationism.

In short, the 21st century requires multilateral cooperation in dealing with mutual existential challenges involving climate warming, social imbalances and serious polarisation. If the Bretton Woods framework does not serve the Global South because the established powers are unwilling to reform it, do not be surprised if a new set of institutions rise to replace it.

Andrew Sheng

Andrew Sheng is a former central banker and financial regulator, currently distinguished fellow at the Asia Global Institute, University of Hong Kong. He writes widely on Asian perspectives on

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French economist Marc Uzan on how China can help ...

Open questions | French economist Marc Uzan on how China can help reshape the global financial system

With the US-led financial consensus at a crossroads, economist Marc Uzan says China has role to play in systemic reform

French economist Marc Uzan is executive director and founder of the Reinventing Bretton Woods Committee, a non-profit organisation established in 1994 to address issues related to the world’s financial architecture. He has been working closely with central banks and finance ministries around the world, as well as international organisations such as the International Monetary Fund and the Group of 20, to bring stakeholders together to attempt to fix the system.

In this latest interview in the Open Questions series, Uzan reflects on the decades of change since the paradigmatic Bretton Woods conference in 1944, and the role China and other emerging economies will play in the global financial system during an era of heightened unilateralism and confrontation. This interview first appeared in SCMP Plus. For other interviews in the Open Questions series, click here.

As suggested by the name of your organisation, the Reinventing Bretton Woods Committee, why did you think that the Bretton Woods system should be restructured back in 1994? Can it be?

This question brought a multitude of thoughts about the objectives of the 44 nations whose representatives gathered at Bretton Woods, New Hampshire, in the summer of 1944 to establish a new economic order.

The world has changed considerably since then. Instead of a system of fixed exchange rates among major currencies, we now have a mixed system with major floating currency areas but fixed rates among smaller countries. At that time, we had capital controls, and now we are a global financial market. And from a small group of 44 countries that became the founding members of the International Monetary Fund (IMF) and Worl 

U.S. debt just hit $35 trillion. Is it putting the global economy at 

risk ...

This nation’s gross cumulative debt has hit $35 trillion — a number so large, the International Monetary Fund warns that it’s putting the entire global economy at risk. 

https://www.marketplace.org/2024/08/13/u-s-debt-just-hit-35-trillion-is-it-putting-the-global-economy-at-risk/

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Xi's China EV dream is coming true

 

In pole position: Sales staff stand near the Seagull electric vehicle from BYD at a showroom in Beijing. The car, launched last year, sells for around US$12,000 in China and rivals US-made EVs that cost three times as much. — AP

HONG KONG: Ten years ago almost to the day, while checking out a handful of luxury sedans from one of China’s largest automakers SAIC Motor Corp, President Xi Jinping gave a pivotal speech that would set China on the course to dominate the electric vehicle (EV) industry.

The path to becoming a strong automaking nation lies in developing new-energy vehicles, Xi said, according to a 2014 Xinhua report.

Claiming a head start, or “high ground,” in this sector is key to the competition globally, Xi said.

In 2014, China sold around 75,000 EVs and hybrids, and exported about 533,000 cars.

The domestic market was dominated by international manufacturers such as Volkswagen AG and General Motors Co, which were allowed to enter by forming joint ventures with local players in the 1980s and 1990s.

This helped China transform from a bike-riding nation to a car-driving one.

Homegrown carmakers and brands that didn’t work with foreign partners were seen as inferior and lagging behind in engine and other automotive technology.

To get ahead and tackle environmental challenges, Beijing bet on fuel efficient and alternative energy vehicles.

The state had published a guideline in 2012 that established ways to develop the industry by setting sales goals, providing subsidies and allocating resources for building charging infrastructure, among other things.

Xi’s speech two years later signalled China’s determination to use this as a way leapfrog traditional Western and Asian auto powerhouses, in particular Japan, home to Toyota Motor Corp.

With the stage set, China needed a catalyst to spur consumer interest in EVs, which in the early 2010s were mostly cheap cars with short ranges.

That ended up being Tesla Inc, which became the first foreign automaker to set up a wholly owned operation in China.

With that special permission, Tesla completed its Shanghai factory in 2019. Its entry into the market motivated local players to come up with better EVs with longer ranges.

Fast forward to 2024, and China has become the world’s largest auto market and sells more electrified vehicles than any other country, with 9.5 million cars delivered last year.

It also controls the majority of the battery supply chain. Homegrown champion BYD Co dethroned Volkswagen to become the best-selling brand in China and in the last quarter of 2023, surpassed Tesla as the world’s largest producer of EVs.

China also overtook Japan as the largest auto exporter, sending 4.14 million units abroad with 1.55 million of them being EVs or plug-in hybrids.

The achievements proved that Beijing’s industrial policy and investments paid off. But they’re also adding to tensions with the West.

China’s success in EVs, which could disrupt traditional auto supply chains that employ millions of people, has become a key source of discomfort in Washington and Brussels.

As a price war at home and slowing growth drives Chinese automakers to search for buyers for its affordable and tech-laden EVs elsewhere, they’re running into trade barriers, especially in the European Union (EU) and the United States, which are meanwhile trying to develop their own EV supply chains.

Both have accused China of exporting its excess capacity.

The United States has quadrupled import tariffs on Chinese cars to more than 100%, while the EU is investigating Chinese EVs to see if there has been an unfair advantage from government subsidies.

Brazil recently removed a tax break on imported EVs and even Russia, arguably Beijing’s strongest ally and the largest destination for Chinese auto exports since the war with Ukraine, has asked Chinese carmakers to consider localising production.

Beijing has threatened to hit back, with the China Chamber of Commerce to the EU on May 22 saying that the import tariffs on cars with large engines may be raised to 25% from 15%.

There’s a June 5 deadline for the EU to inform Chinese EV exporters of preliminary findings and whether tariffs will be imposed.

SAIC, the state-owned manufacturer whose facility Xi visited 10 years ago, happens to be one of the three Chinese automakers, along with BYD and Zhejiang Geely Holding Group Co, selected for further scrutiny by the EU in its anti-subsidy investigation.

SAIC owns the British-origin MG brand, which is one of the top selling EVs in Europe.

At an event marking the 10th anniversary of Xi’s speech last Friday, SAIC officials including chief engineer Zu Sijie said they’ve remembered the president’s instructions well, and the company has consistently innovated around technologies like smart driving and connected cars.

Li Zheng, the co-founder of SAIC Qingtao New Energy Technology Co, a battery startup backed by SAIC, took the opportunity to promise executives won’t be complacent as EV competition rises, noting that progress in solid-state batteries, which have a higher energy density and reduced fire risk, will be one way for China to maintain its edge.

“New-energy vehicles have become a strategic industry, fiercely contested by countries around world,” Li said. “They’re a key supporting force to our country’s revitalisation of green sectors.”

A lot can happen in 10 years, but with SAIC having invested about 150 billion yuan (US$21bil) into research and development over the past decade alone, even despite trade wars, 2034 looks bright. — Bloomberg

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