Imagining A Renewed Bretton Woods Agreement In A Post-COVID-19 Scenario – Analysis
Introduction
International orders have been built, challenged, upended, and demolished throughout history. The existing international order may be traced back to the end of WWII1. The preceding period — between the two world wars and including the Great Depression that followed the 1929 stock market crash — had already demonstrated that a multilateral scheme based on a gold exchange standard was not optimal (or even possible, given that gold reserves were primarily held in the central banks of a few states), and that it was ultimately unfit to respond to a global financial crisis.
In the wake of International War II, a meeting held at the Mount Washington Hotel in Bretton Woods, New Hampshire, in 1944, prepared the way for a new world economic system2. The conference outlined the architecture of the new monetary system, which would be tied to the US dollar and a basket of convertible currencies, as well as the international trade system, which would be overseen by a new organization, the International Monetary Fund (IMF).
The Bretton Woods accords were a watershed moment in the construction of the new architecture of the international monetary system, but we should not forget how much the world had changed since the previous plans, which had become obsolete3.
Policymakers must acknowledge that new orders have frequently followed gloomy epochs. Furthermore, many existing structures are still useful, while others require refurbishment. The challenge is, how can ancient and new institutions coexist and constitute the foundation for future development?
The aim is not to establish an international order from scratch; many of the existing institutional structures are sound. But do they all match the demands of the twenty-first century? Examples from the past, such as the interwar era, show how instability may have a long-term influence on the international monetary system.
The Role of the Dollar and the Quest for a New Bretton Woods
After two decades, the Bretton Woods system demonstrated its failure to correct economic and commercial imbalances among its member countries4. Non Keynesian economists began to theoretically criticise the system beginning in the early 1960s. With the statement by the United States in the early 1970s to halt the convertibility of the dollar into gold, the Bretton Woods exchange system came to an end.
This occurrence, however, did not jeopardise the dollar’s status as a worldwide currency, owing to its triple function as a store of value, unit of account, and medium of exchange3. Despite an international monetary system that has largely become anarchic — without clear laws guiding it — the dollar retains and strengthens a dominating role inside the international monetary system, providing the United States the so-called “exorbitant privilege.” Other growing powers, particularly the more economically linked Asian emerging countries, have never questioned this position, nor has the formation of the euro.
Following the 2008 financial crisis and now the COVID-19 pandemic, there has been renewed discussion about the adequacy of the international monetary system5, as trade imbalances (particularly between China and the United States) are causing permanent tensions in the monetary system, potentially jeopardising the credibility of money as we know it. As the 2008 financial crisis proved, the US dollar remains the primary “safe asset” in international relations, with central banks holding around three-quarters of international currency reserves in US dollars.6
However, at least three causes have reintroduced the debate over the function of the dollar and the need for a new international accord to build the groundwork for a new monetary system and common norms on international trade:
- the rising fragility of economic hyperglobalization and the hunt for new international trade norms;
- technology and the digital divide, which are influencing global commerce and payment systems, including the concept of digital currencies that are not controlled by any central bank; and
- the altered geopolitical and geoeconomic environment, which has reintroduced the strategic and political use of the dollar, dubbed “dollar weaponization,” in this new context.
In a post-COVID-19 world, 75 years after Keynes and White debated the inevitable necessity for a worldwide reserve currency not controlled by a state, creating a new economic world order capable of ensuring international cooperation will be critical.7
Recent Developments and the First Debate for a Renewed Bretton Woods
Since China’s admission to the World Trade Organization in 2001, there has been talk of a “renewed” or “second” Bretton Woods8, with some of the major Asian currencies, particularly the Chinese renminbi, as well as the currencies of Latin America, pegged to the dollar and controls on international capital flows between these countries and the United States.
The narrative of the second Bretton Woods Conference and the worldwide imbalances that resulted from it is instructive. China’s rapid economic expansion has corresponded with its increased integration into the global economy. Its double-digit rise in commerce with foreign nations, as compared to world trade growth, resulted in increased and sustained trade balances and current account surpluses. The Chinese current account surplus averaged nine percent of GDP in the three years preceding the 2008 financial crisis.
Until 2005, China had avoided adjusting its trade imbalances for many years by maintaining a fixed exchange rate with the dollar and controls on financial capital outflows, as well as by accumulating official foreign reserves, which accounted for 25% of registered central banks’ global foreign reserves in 2011.9
China’s acquisition of public debt and other financial assets produced by trade deficit nations, particularly the United States, let these countries to retain high internal liquidity, allowing them to sustain domestic consumption and investment demand. Furthermore, these purchases enabled China to control its excess liquidity and, as a result, its inflationary pressures.
To summarise, the two Pacific sides negated the traditional monetary adjustment method of fixed exchange rate imbalances, namely the adjustment of real exchange rates by shifting domestic prices. The United States’ expansionary monetary policy, which supported the new economy and real estate market speculative bubbles around the turn of the century (and financed excess domestic demand), differed with the People’s Bank of China’s (PBOC) policy of currency control and trade surplus management. However, even this second Bretton Woods, which was a tacit manner of doing business with an awareness of the benefits for both sides (the United States and China) rather than a written agreement, couldn’t withstand the 2008 financial crisis. Under US pressure, China abandoned pegging its currency rate to the dollar in 2005; the yuan rose by nearly 18 percent in just three years (2005-2008).
Over the last decade, there has been a disconnect between the dollar’s importance in the international monetary system and the issuing country’s economic worldwide influence. Today, the United States accounts for around 15% of global GDP and 10% of global commerce.10 However, one-third of the countries in the international system have a currency that is explicitly pegged to the dollar, the dollar serves as a benchmark currency for 70% of global GDP, 50% of global invoices, and two-thirds of foreign official reserves and global external debts are denominated in dollars.
Because the bulk of international trade is invoiced in dollars, it makes sense to protect oneself with dollar-denominated financial assets and keep huge government reserves in dollars to avoid the impact of currency volatility caused by American economic cycles and monetary policies. As a result, emerging countries are compelled to utilise monetary measures to stabilise capital flows. The research concludes that the US dollar, which remains as powerful as it was when the Bretton Woods system collapsed in 1971 (despite developing nations now accounting for 60% of global GDP), would continue to dominate even if the US relative economic dominance decreased further.
A New Economic Order after Pandemic Disruption?
Following COVID-19, the global economy will confront unprecedented problems, including a major recession that will affect all countries (advanced, emerging, and developing economies), as well as an unparalleled expansion of sovereign and individual debts all over the world.5
Given the three global trends that existed prior to the COVID-19 crisis — the retreat from hyperglobalization; the relationship between market and government, with the latter playing a growing role, as seen in Europe; and a declining growth rate — the pandemic is unlikely to be a game changer, but rather a game accelerator.
China, France, Germany, Italy, Japan, the United Kingdom, and the United States, which have among the highest infection rates, account for about 60% of global GDP, 65% of global manufactured product, and more than 50% of global manufacturing exports11. Each of these nations is a significant provider of industrial inputs to the others as well as to third countries, and they are at the core of a plethora of worldwide supply chains.
As a result, recovering from the crisis will necessitate a concentrated effort to preserve international reciprocal interactions, even if the pandemic has also highlighted the vulnerability of the current hyperglobalization phase and provided justification for pre-existing anti-globalization sentiments. Under the psychological strain of pandemics, it would be a dangerous reaction for nations that follow demand to restrict global ties between economies in response to political justifications for establishing national self-sufficiency in the provision of critical products.
The threat is the decoupling of — or, more broadly, the war between — the West and China. The fact that we can openly discuss it suggests that, according to some analysts, the so-called trade war between the United States and China is only the beginning of a technological competition that includes not only the configuration of global value chains, but also geostrategic issues such as security, the unity and interconnection of information and communications technology networks, and financial and international payment infrastructures.
The contemporary concept of decoupling is based on a concern of China’s technical progress in all aspects, which might translate into geopolitical hegemony. This viewpoint might lead to a world separated into two technical blocks, where ideas would not spread freely internationally, but only inside two competitive sectors, one controlled by the US and the other by China.
Nonetheless, such a disconnected world remains exceedingly implausible, both because China is not yet entirely technologically autonomous and because it is impossible to untangle the infinite number of linkages that tie the globe in a non destructive manner. Furthermore, if a deglobalization tendency prevails, the global economy would confront a prolonged period of sluggish growth, which will conflict with the expansion of sovereign and individual debts left by COVID 19. The result would be a significant danger of a worldwide financial disaster. Attention must be paid in order to prevent forceful action to battle the COVID 19 pandemic, which contributes to a perspective that sees a globalized world as the core source of threats that can only be addressed by shutting borders. During the 2008 financial crisis, China and the US responded together, with significant fiscal stimulus in China and unorthodox monetary measures in the US. The global macroeconomic imbalance comprised of the massive Chinese trade surplus and the American trade deficit linked China and the United States.
As a result, China built dollar reserves while also tying itself to the dollar system and the preservation of its value, allowing the US to postpone internal rebalancing. As previously stated, some experts have referred to the tacit agreement to preserve this global imbalance as a kind of second Bretton Woods system.
But a lot has changed since then. China has not only increased in importance as a global economy, but it has also significantly rebalanced its economy. This general adjustment has two ramifications. The first is that China no longer has a large trade surplus (1.5 percent of GDP). The second is that China has climbed the value-added ladder along international supply chains and is no longer considered an emerging country. As a result, the fragile equilibrium that existed between the end of the past century and the first decades of the new millennium no longer exists, resulting in significant geoeconomic and geopolitical change.
To avoid turning competition into conflict, a new multilateral cooperative agreement is required to design the governance of the global economy of the future, taking into account the new geoeconomic and geopolitical global weight, but also keeping in mind that the combined population of the United States, Europe, China, and Russia is less than half of the world’s population.
A “new Bretton Woods” accord is an alternative to protectionism, nationalism, and the disruption of international trade and investment channels that have helped to the increase of global well-being in the post-COVID-19 world.
A New Financial and Economic Perspective to Restore Confidence after COVID-19
The economic repercussions of COVID-19 will be determined by the extent and longevity of the pandemic, as well as the ensuing disruption of production and consumption chains induced by the measures put in place to stop it. The rapidity with which all major nations’ economic policies may anticipate unfavorable expectations by declaring and promptly adopting expansive fiscal measures, such as monetary policies, will also play a role.
This unfamiliar territory also called the economy’s capacity to rebound into doubt. A lack of clear expectations may contribute to economic participants’ incapacity to respond in the best way feasible based on the information provided. In recent years, an abundance of information has resulted in less rational interpretation by economic and social actors, and hyperconnectivity and the quick exchange of any type of information may have converted local uncertainty into global systemic catastrophes.
The global financial and trade infrastructure, which has preserved the stability of the financial system established after WWII since the Bretton Woods conference and has somehow (with important alterations and adaptations) persisted till now, is now being tested12.
It should not be forgotten that one of the positive consequences of a connected world is the production of global common goods, such as the fight against climate change and pollution, the spread of knowledge and education, scientific progress, human rights, medical advancements, and the global fight against endemic illnesses.
A global concerted effort to rebuild the monetary system may be the only way to prevent a costly “financial war.” It is time to rethink a new plan for the coming years, which includes a new Bretton Woods initiative supported by all major economies, including the new emerging ones.1
Junaid Suhais is a freelance writer with a passion for storytelling and currently enrolled in a Master’s program in International Relations at Jamia Millia Islamia, following the completion of a Master’s degree in Political Science.
References:
1. Hosoya MRH Michael S Chase, Matake Kamiya, Shin Kawashima, Yuichi. Responding to China’s Complicated Views on International Order. Carnegie Endowment for International Peace. Accessed November 24, 2022. https://carnegieendowment.org/2019/10/10/responding-to-china-s complicated-views-on-international-order-pub-80021
2. Bretton Woods and the Birth of the World Bank. Accessed November 24, 2022. https://www.worldbank.org/en/archive/history/exhibits/Bretton Woods-and-the-Birth-of-the-World-Bank
3. About the IMF: History: The end of the Bretton Woods System (1972–81). Accessed November 24, 2022. https://www.imf.org/external/about/histend.htm
4. Bretton Woods System – an overview | ScienceDirect Topics. Accessed November 24, 2022. https://www.sciencedirect.com/topics/economics econometrics-and-finance/bretton-woods-system
5. Tria AFA Giovanni. Imagining a Post-COVID-19 Scenario for a Renewed Bretton Woods Agreement. Centre for International Governance Innovation. Accessed November 24, 2022. https://www.cigionline.org/articles/imagining-post-covid-19-scenario renewed-bretton-woods-agreement/
6. International Macroeconomics: From the Great Financial Crisis to COVID 19, and Beyond | SpringerLink. Accessed November 24, 2022. https://link.springer.com/article/10.1057/s41308-022-00171-x
7. What COVID-19 means for international cooperation. Accessed November 24, 2022. https://www.brookings.edu/opinions/what-covid-19-means-for international-cooperation/
8. Chapter 4: China in the World Trade Organization: implications for the international rule of law in: Chinese Perspectives on the International Rule of Law. Accessed November 24, 2022. https://www.elgaronline.com/view/9781788112383/12_chapter4.xhtml
9. China’s Currency Policy: An Analysis of the Economic Issues. Accessed November 24, 2022. https://www.everycrsreport.com/reports/RS21625.html
10.GDP (current US$) – United States | Data. Accessed November 24, 2022. https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=US
11.The territorial impact of COVID-19: Managing the crisis and recovery across levels of government. Accessed November 24, 2022. https://www.oecd.org/coronavirus/policy-responses/the-territorial-impact-of covid-19-managing-the-crisis-and-recovery-across-levels-of-government a2c6abaf/
12.The World Bank Group and the International Monetary Fund (IMF). Accessed November 24, 2022. https://www.worldbank.org/en/about/history/the-world-bank-group-and-the imf