Analysis & Opinions - Belfer Center for Science and International Affairs, Harvard Kennedy School

Competition with China Calls for a Central Bank Spotlight

| May 13, 2020

Becoming ever more apparent during the progression of the COVID-19 crisis, are the significant powers of the U.S. Federal Reserve in influencing politics and economies around the world. Though the United States is generally seen as wielding international influence primarily through its deployment of foreign military forces, this global economic emergency has shed more light on the authority and leadership capabilities of its financial system. In recent days, the U.S. dollar has once again emerged as the preferred currency for markets around the world, markedly appreciating in value by more than 3.0% since the beginning of the COVID-19 crisis, demonstrating global confidence in its performance. In conjunction with the reinforcement of confidence in the power of the dollar, central banks around the world have taken cues from The Fed when developing their own plans to shore up domestic economies for lasting consequences of COVID-19.

In recent weeks, Federal Reserve Chair Jerome Powell has reaffirmed the current and future role of the Fed in supporting the U.S. economy through the crafting of fiscal and monetary policy during the time of the COVID-19 crisis. The creation of these new facilities to shore up the domestic economy have been unprecedented and set a formidable model for dealing with domestic financial stability in countries around the world. This is an especially important time for strong leadership economically as the U.S. continues in its geopolitical spars with China. The East Asian giant has demonstrated a distinct interest in opening credit lines to emerging markets and expanding its influence abroad. The US must stay abreast of these issues and take advantage of the impending economic recovery by also demonstrating its viable alternative to developing countries. 

Along with this exhibition of power and influence, the U.S. has assumed a role of increasing pressure and responsibility for the global economy’s performance. This widespread confidence has inevitably left open the possibility for further wide-ranging repercussions in the global economy if any disruptions or weaknesses in the smooth functioning of the dollar are revealed. As a result of this tremendous pressure on the Federal Reserve to take sufficient action in supporting both the domestic and global economies, Powell has been proactive in ensuring a commitment to current and future financial stability.

Considering the demonstrated strength of this influence, the U.S. should be especially cognizant of this capability in future foreign policy endeavors. Wielding a strong military force and having a physical presence abroad has proved to be a formidable asset to foreign policy in the past. However, in an interconnected global trade environment, the possession of such a vital economic “instrument” could prove to be even more formidable. In these times of uncertainty, the Fed has taken extensive, unprecedented actions that have not only shored up the domestic economy of the US, but also provided useful guidance for economies around the world. By displaying a distinct understanding of how the future actions of the US Federal Reserve may exert substantial influence on the functioning of central banks abroad, policymakers will be tapping into another foreign policy tool of the United States. 

Domestically, this has been achieved through the rollout of a number of financial facilities and policies, in conjunction with fiscal support. Internationally, the Fed has provided leadership and liquidity to central banks in the form of swap lines. Many of the actions that the Fed has taken to navigate this crisis environment have been a model for other countries that seek best plans of action and a lower impact in the wake of COVID-19. This resulted in central interest rates being slashed across the world, the rollout of emergency fiscal stimulus policies, and the employment of various monetary policies to prop up domestic economies. After the Fed’s announcement of these actions, European Central Bank President Christine Lagarde advised central banks in Europe to take strong preemptive measures to shore up their financial resilience.

The Fed has proceeded and taken on even more responsibility internationally as they assume the leadership role in stabilizing the global economy through further monetary policy measures. By introducing new dollar swap lines created through facilities like FIMA (Foreign and International Monetary Authorities), the Fed has increased foreign availability of the greenback and cut the rates that it charges on the swaps. By taking such rapid and extreme measures, The Fed has made clear their understanding of the importance of the dollar as the foundation of trade and smooth function of markets around the world. According to a May 1st report by the Congressional Research Service, since the beginning of the COVID-19 outbreak, it has touched over 190 countries and has the capability of causing a deeper economic rift every day that it remains relevant. Estimates show a “trimming of global economic growth by as much as 2.0% per month if current conditions persist.”

Beyond the actions taken by The Federal Reserve, the United States should also take care to be centrally involved in the development of multilateral responses by organizations like the International Monetary Fund (IMF), G7, G20, and the World Bank. Though the economic power and influence of the US is underscored substantially by its unilateral actions, in order to function as a leader in the global economy, it must continue to provide guidance in cooperative institutions that develop policy multilaterally. In doing this, it will display a distinct desire to collaborate with partner nations, aiding in the reduction of international concern that the world relies too heavily on the performance of the US dollar for stability and growth.

Outside observers of Chinese foreign policy through the past few years have seen a concerted push for “support” of emerging markets and lines of credit extended to constructing infrastructure in developing countries. While China has appeared as an “angel investor” to less developed countries, they have simultaneously revealed a desire to exert their influence over these regions. Even as they promise funding and credit for the development of infrastructure, they impose high interest rates that are unmanageable for countries with smaller economies. This results in a seizure of infrastructure or the renegotiation of further unfair fiscal deals, as developing countries quickly approach default on their debts.

Many of these developments in Africa and Southeast Asia have played out right in front of the rest of the world without any significant response. By 2050, the population of Africa is expected to nearly double and ultimately account for about a quarter of the world’s total population. This statistic alone, without even referencing the untapped potential of Africa’s workforce and natural resources, gives substantial reason for international attention. Considering China’s exhibited desire to participate in foreign direct investment opportunities, illegal transfer of technologies, and funding for emerging markets, the U.S. must reconsider their own role in the future of Africa in the coming months. The implications of allowing China to be the sole investor in Africa will be wide ranging and certainly lead to a displacement of the United States as an economic superpower in the long term.

As discussed, wielding a uniquely US economic authority is a significant capability in its foreign policy toolbox. However, retaining it will require a concerted effort. As a result of recently slashed interest rates, The Fed stands in a position to provide emerging markets in Africa with a viable alternative to Chinese investment or lines of credit. Though the U.S. must place its emphasis first on being a leader in the recovery of the global economy, policymakers would be making a mistake in ignoring China’s near-term actions in Africa. Emerging markets require even more support during a global economic emergency and the US cannot afford to turn their back on them.

The United States Federal Reserve has a vital role to play in the recovery of the global economy, as well as its future growth following the COVID-19 pandemic. Even though there have been questions over whether or not the U.S. dollar could remain such a stronghold for foreign markets, it has proven its stability through multiple global emergencies and continues to prove its might through COVID-19. The extensive and rapid actions taken by Jerome Powell and The Fed since the outset of the crisis have reinforced the role of U.S. leadership in developing economic policy internationally and played a critical function in mitigating devastating damage to economies from the pandemic. When determining future foreign policy initiatives, United States policymakers must consider this economic influence as a considerable instrument in securing national interests. Internationally, entities want to be associated and interact with the U.S. financial sector. This authority is something that is unique to the United States and as a result, countries around the world are eager to follow its lead when it comes to instituting economic policy.

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is Director at Tiedemann Advisors. He is a fellow at Harvard Kennedy School's Belfer Center for Science and International Affairs. He is also a senior adviser to Atlantic Council President and Chief Executive Officer Frederick Kempe. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait.

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For Academic Citation: Greenwald, Michael.“Competition with China Calls for a Central Bank Spotlight.” Belfer Center for Science and International Affairs, Harvard Kennedy School, May 13, 2020.