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​Although the dollar continues to be the dominant global currency, Russia and China could dent this dominance. In the aftermath of global financial exclusion, Russia has had to make some strategic adaptations. The West’s sanctions had crippling consequences, and the Kremlin scrambled to find alternatives. In light of these developments, China became an important ally, and the Yuan—its currency—has taken on a more prominent role. It is telling that in Russia, the yuan has surpassed the United States Dollar (USD) in trading volume, a feat achieved a year after the Ukraine conflict, which triggered a series of sanctions against Moscow. As Russia and China band together, one wonders what other shifts will take place and how they will shape the future. Change is afoot, and the Russian market bears witness. The month of February saw a watershed moment as the yuan surged past the dollar in monthly trading volume for the first time. The momentum continued into March as the gap between the two currencies widened, showcasing the growing sway of the yuan. It’s an impressive feat, considering that the yuan’s trading volume on the Russian market was once quite insignificant. The winds of change blew through Russia’s financial system as the year progressed. Additional sanctions had taken their toll on the few remaining banks that still held power to make cross-border transactions in the currencies of countries that had been deemed “unfriendly” by the Kremlin. One such bank was Raiffeisen Bank International AG, whose Russian branch played a significant role in facilitating international payments within the country. However, the lender found itself under the watchful eye of both European and US authorities, which only added to the pressure. These events spurred the Kremlin and Russian companies to shift their foreign-trade transactions to currencies of countries that had not imposed sanctions.Converging coalitionsThe bond between Russia and China is growing stronger, with both nations seeking to bolster their positions on the global stage. Their alliance has spread across various spheres: military, economic, and political. With relations between Russia and the West crumbling, China has emerged as a key partner for Russia, providing it with the necessary support to counter economic and political pressure. On the other hand, China is keen on expanding its global reach, especially in the Eurasian region, and sees Russia as an important ally in this regard. President Xi Jinping’s recent visit to Moscow and his pledge to expand cooperation are likely to take this partnership to greater heights. Trade and investment ties are set to grow stronger, with both nations seeking to reduce their dependence on Western economies. Russia’s focus on infrastructure development and mega projects is also likely to benefit from China’s expertise in these areas. Energy is another significant area of collaboration, with Russia being a leading exporter of oil and gas and China being the world’s largest importer of these resources. Technology is also an essential domain, with both countries investing heavily in research and development to remain competitive in the global economy. While the alliance between Russia and China will likely have far-reaching geopolitical consequences, it is a complicated relationship with both nations pursuing their interests, even as they work towards common goals. As a result of Western sanctions, Russia has shifted its foreign trade transactions away from the dollar and euro to currencies of non-restricted countries. By doing so, the Kremlin and Russian companies hope to decrease their dependence on the Western financial system and explore new avenues for conducting their trade and economic activities. This shift in strategy reflects Russia’s determination to maintain its economic stability despite restrictions on its access to the global financial system. It also underlines the growing importance of alternative currencies in global trade as countries strive to minimise the impact of sanctions and safeguard their economic interests.Structural overhaulsThe Russian Finance Ministry was not immune to the winds of change either. Earlier this year, it made the switch from the dollar to the yuan for its market operations. It even went a step further by devising a new structure for the national wealth fund, earmarking 60 percent of its assets for the yuan. The Bank of Russia joined the chorus, urging its people and businesses to consider moving their assets to the rouble or other currencies considered “friendly.” This would help mitigate the risk of having their funds blocked or frozen. As the world undergoes a seismic geopolitical shift, it seems Russia is moving in tandem, searching for ways to secure its economic future. However, the dollar still reigns supreme in the Russian market. Even with all the changes taking place, it remains the most widely used currency, ceding its throne only occasionally to the yuan. This underscores the enduring dominance of the dollar, which has played a significant role in Russia’s financial landscape for years. However, as the world continues to evolve, one wonders how long it can hold on to its crown.

With relations at an all-time low, punitive actions targeting China have become politically popular, even if they have no analytical basis. Five years ago, then president Donald Trump launched a tariff-fueled trade war with China designed to reduce the bilateral trade deficit. His successor, President Joe Biden, then added a decoupling focus by restricting high-tech exports and curtailing professional and financial links. Both wanted to reduce imports of manufactured goods and bring home more jobs. How should one judge the effectiveness of their policies? Back then, and even more so today, the logic of Trump’s fixation on trade deficits made little sense. But security concerns have now become the rationale for reducing America’s trade relations with China and undercutting China’s growth potential. Against these yardsticks, the results are mixed but on balance unconvincing, given the costs in the form of inflationary pressures, repressed export growth, and a projected decline in global output. But U.S. politicians from both parties strongly support these restrictive measures because the costs are not obvious to their constituents, while the benefits from appearing to be tough on China resonate well with voters. Rising trade deficits The recent U.S. Census Bureau data indicate that the politically sensitive U.S. merchandise trade deficit with China was larger in 2022 than when Trump became president, while America’s overall trade deficit hit an all-time high of $1.18 trillion. This reinforces the views of nearly all the economists surveyed at the launching of Trump’s trade war: that the tariffs would not reduce U.S. trade deficits and the costs would be paid largely by Americans. For the Trump administration, the wild card was the “phase one” purchase agreement, which called for an increase of $200 billion in China’s imports from the United States. But state-to-state purchase agreements have no logical basis when global trade is largely shaped by the market-driven decisions of firms and consumers and subject to unpredictable events such as the coronavirus pandemic. Economic principles tell us that how much a country saves and spends determines its trade balance. The combination of Trump’s large tax cuts and Biden’s huge expenditure initiatives has led to soaring budget deficits, which are mirrored in record trade deficits. All this has little to do with China. Yet the Biden administration still insists that China honor the purchase agreement and links the removal of tariffs to its fulfillment. Asking China to honor an agreement that made no sense to begin with as a condition for dropping another equally ineffective policy defies logic. Trade diversification but increasing import dependence on other countries But this focus on bilateral trade numbers overlooks the sharp decline in China’s share of trade with the United States. Whereas China accounted for 47 percent of the U.S. trade deficit in 2017, it accounted for only 32 percent last year, with most of this decline offset by the increasing shares of other East Asian economies. Europe’s share of America’s overall trade deficit also declined from 21 percent to 18 percent. Only Canada and Mexico, via the United States-Mexico-Canada Agreement (USMCA), were able to increase their share from 11 to 18 percent. More insights can be gleaned from looking at the components of trade. Although the value of U.S. imports from China was essentially the same in 2022 as it was in 2017, total U.S. imports increased by about $900 billion during this period. As a result, China’s share of the total, made up largely of manufactured goods, fell from 22 to 17 percent. This decline, however, did not reduce America’s dependency on imports of manufactured goods. The share of imports relative to overall expenditures on manufactured goods rose steadily to 34 percent in 2022 from 23 percent two decades ago. The decline in China’s share of U.S. imports of manufactured goods was more than offset by imports from other countries, notably Mexico and Vietnam. These two developing countries, more than others, were able to import heavily from the United States based on their locational advantages and free trade agreements. Vietnam and China share a border and are linked by the ASEAN-China trade agreement, while Mexico and the United States also share a border and are linked by the USMCA trade agreement. Less noticed, however, is the behind-the-scenes role that China plays in supplying the components and materials for these other countries’ exports to the United States. Most of Vietnam’s increased exports were in product lines where U.S. imports from China fell, such as computer accessories and telecommunication equipment. China’s exports to Vietnam have more than doubled since 2017, and its trade surplus nearly tripled by 2022. China’s exports to Mexico increased by nearly 30 percent last year, on top of a 50 percent increase in 2021. China may be exporting less to the United States directly, but it is now indirectly exporting more. This explains why China’s share of global manufacturing production has continued to increase from 26 percent in 2017 to 31 percent in 2021. As for U.S. exports, the total averaged about $1.5 trillion from 2017 to 2020 but then jumped to $1.9 trillion in 2022. But this increase was not in manufactured goods but in exports of energy products and chemicals to Europe, spurred by the Ukraine crisis. The trade war did little to expand U.S. exports to China, the share of which fell from 8.4 percent in 2017 to 7.5 percent in 2022. Costs and benefits of decoupling According to one study, U.S. firms were handicapped by tariff-related higher costs of their imported inputs, and coupled with China’s retaliatory tariffs, this resulted in U.S. exports to China being 23 percent lower than they would have been in the absence of the trade war. The consequence is that America’s trade war policies generated very little growth in exports of manufactured products, despite the priority given to those policies by both the Trump and Biden administrations. If the purpose of the U.S. punitive actions toward China was to weaken China economically, there is no clear evidence of that happening. By developing alternative export markets and tapping pandemic-driven demand in the West for manufactured goods, China pushed its share of global exports to record levels in recent years. Meanwhile, China’s imports as a share of its GDP have been declining steadily, from a high of 28 percent in the early 2000s to 17 percent in 2022. One could argue that the world has become more dependent on China in trade while China has become less dependent on the world. The benefits of decoupling—if any—should be weighed against the costs imposed on U.S. consumers and producers and damage done to the export competitiveness of U.S. firms. To counter such tendencies, the Biden administration is promoting domestic manufacturing with subsidies in the Inflation Reduction Act. Such actions can be justified for strategic reasons, but the rationale is weakened by protectionist Buy America conditions. U.S. policymakers often counter by pointing to China’s use of subsidies to promote strategic industries, but Chinese firms were keen to import key technologies and components to ensure that their products were globally competitive on cost and performance grounds. The recent semiconductor and other U.S. restrictions on China’s access to high-tech products are also problematic because these products are “dual use,” with a much larger commercial market relative to military applications. Such restrictions hurt the many U.S. firms that derive significant revenues from selling to China and may contravene World Trade Organization guidelines. The costs of trade-related distortionary policies can be substantial. One oft-cited study estimates that taxpayers end up paying about $250,000 for each job saved in typical Buy America programs. At a broader level, a recent International Monetary Fund study estimates that a combination of U.S. trade and technological decoupling measures could reduce global GDP by some 7 to 12 percent. Ultimately, the problem lies in the lack of clarity on U.S. policy objectives. What does it mean to undercut China, and how will the United States know if it has succeeded? With U.S.-China relations at an all-time low, punitive actions targeting China have become politically popular, even if they have no analytical basis. The reality is that the United States and China have no choice but to continue trading with each other. But with security overriding commercial considerations, the economic interdependence built up over decades is now being reversed, leaving everyone worse off.

This fall, Senate Majority Leader Chuck Schumer is slated to lead a bipartisan group of U.S. senators to China. The planned trip, like other recent visits to China by high-ranking U.S. officials, is aimed at improving the relationship between the U.S. and China. Such efforts to ameliorate U.S.-China diplomatic relations come amid growing tensions between the two economic giants. They also run parallel to U.S. efforts to strengthen ties with Indo-Pacific countries to limit Beijing’s influence. Take, for example, President Joe Biden’s September 2023 trips to India for the G20 summit and to Vietnam, where U.S. competition with China was a focus of Biden’s discussions. While he was in Asia, Biden made several agreements in science, technology and supply chain security designed to bolster U.S. relations with India and Vietnam. “I don’t want to contain China,” the president told reporters in Hanoi on Sept. 10, 2023, shortly after meeting with Vietnam’s communist party leader. U.S. Reps. Mike Gallagher and Raja Krishnamoorthi echoed similar sentiments during an event held by the Council on Foreign Relations think tank in New York City the following day. But even if the U.S.’s stated goal isn’t to limit China’s global influence, its recent agreements with India, Vietnam and other countries may do exactly that. What US-led G20 deals mean for China The U.S. is actively looking for ways to blunt one of China’s best tools of influence: international loans. During the G20 summit Sept. 9-10 in New Delhi, the U.S. pledged to help reform the World Bank and International Monetary Fund to make them more flexible in lending to developing countries to finance renewable energy, climate mitigation and critical infrastructure projects. Biden committed the first US$25 billion to make those reforms possible and secured additional financial pledges from other countries totaling $200 billion in new funding for developing countries over the next decade. The U.S. also signed onto a deal with the European Union, Saudi Arabia and India that will help connect the Middle East, Europe and Asia through rails and ports. Characterizing it as a “real big deal,” Biden said the rail and ports agreement would help stabilize and integrate the Middle East. These plans are aimed at providing an alternative to China’s Belt and Road Initiative. Commonly referred to as BRI, the initiative is China’s international infrastructure loan program. Over the past decade, Chinese government agencies, banks and businesses have loaned more than $1 trillion abroad, and 60% of the recipient countries are now in debt to these Chinese entities. The U.S. and other countries have long criticized BRI as “debt trap diplomacy.” One study suggests that the trillions of dollars in infrastructure loans to countries by the government and quasi-government bodies in China typically lead to debt problems that the borrowing countries can’t manage. As China grapples with a slowing domestic economy, it may become more difficult for Chinese entities to keep shelling out funding for big-ticket overseas projects. The new U.S.-led agreements that come out of the G20 could fill the coming gap. These G20 plans complement existing Western economic initiatives to compete with the BRI, including U.S. trade pacts for the Indo-Pacific region and the Americas, the EU’s Global Gateway and the G7’s Partnership for Global Infrastructure and Investment. What the US’s agreement with India means for China In their meeting on the sidelines of the G20, Biden and Indian Prime Minister Narendra Modi agreed to deepen collaboration on developing critical and emerging technology, such as quantum computing and space exploration, as well as 5G and 6G telecommunications. This will help India compete with China in the technological arena in the Indo-Pacific. The telecommunications portion of a joint statement by Biden and Modi specifically mentions the U.S.’s Rip and Replace program. It is about helping smaller telecommunications companies rip out technology from Chinese companies like Huawei or ZTE and replace them with network equipment from the West that will protect users’ data. The U.S. has banned Huawei and ZTE equipment from its telecommunication networks, deeming those companies national security risks. The U.S. and India’s pledge to support Rip and Replace is a direct counter to China’s telecommunication technology expansion. What the US’s agreement with Vietnam means for China In Vietnam, Biden elevated the bilateral relationship to a comprehensive strategic partnership, expanding the relationship in everything from economics to education to technology in a country that has long counted China as its top trading partner. The enhanced partnership includes the U.S. providing $2 million to fund teaching labs and training courses for semiconductor assembly, testing and packaging. One company in Arizona and two in California have already pledged to set up semiconductor factories and design centers in Vietnam, and the U.S. artificial intelligence company Nvidia will help Vietnam integrate AI into automotive and health care systems. All these investments will make Vietnam even more attractive to U.S. and Western companies that don’t want China to be the sole source of their supply chain. As Vietnam becomes a key player in the semiconductor market, it will shrink China’s share of the market as well as its regional technological advantage. The U.S. also agreed to provide nearly $9 million to help Vietnam patrol the waters around its borders and beef up port facility security, as well as boost efforts to fight illegal, unregulated and unreported fishing, or IUUF. While not explicitly mentioned, China is the target of this initiative; China and Vietnam continue to be at loggerheads over disputed claims over the Spratly Islands in the South China Sea, and Chinese industrial fishing vessels are the largest culprits of IUUF around the globe. By inking these agreements at the G20 in India and in Vietnam, the U.S. broadened its circle of allies and partners in the Indo-Pacific that can help counterbalance China. Along with similar diplomatic accomplishments by Vice President Kamala Harris at the recent ASEAN summit in Indonesia; security partnerships like AUKUS, between the U.S., Australia and the UK, and the Quad, between the U.S., India, Australia and Japan; increased military sales and training to Taiwan; and the recent Camp David meeting Biden held with Japan and South Korea, the U.S. is building partnerships all across Asia. These actions are aimed at restraining China’s political, economic and military might, even if U.S. leaders don’t explicitly say that is their intention. Regardless of rhetoric, actions speak louder than words.