General Introduction for China’s Re-globalization: A Petrodollar Trilogy[1]
In early 1979, Chinese leader Deng Xiaoping during a flight to the United States argued that countries establishing good relations with the US generally achieved economic development. In 1978, Vice Premier Gu Mu led a delegation to five Western European countries, including West Germany; the same year, Deng Xiaoping visited Japan and Singapore, previously labeled “U.S. imperialist lap dogs.” [2]At that time, West Germany had already completed the first miraculous post-war economic recovery, and Japan’s GDP surpassed that of West Germany in 1968, ranking second in the Western camp.
Deng’s visit to Japan coincided with discussions among Western nations about the “Japanese economic miracle,” later scholars called it “Japan No. 1.” Just the strong visual impact of advanced industrialization (the sprawling cities, the traffic, the widespread wealth) forced Chinese decision-makers to consider the reasons for such advances. The United States, as the leader of the West, had significantly contributed to the economic achievements of West Germany, Japan, and Singapore—a backdrop to Deng’s subsequent visit to the US.
However, around 1979, the economic situation in the West, particularly in the US, was at a low point. The stagflation following the first oil crisis continued, with a second oil crisis looming ahead, and President Jimmy Carter publicly stated “the American public has lost confidence.” The US faced rising twin deficits, and the dollar was experiencing the most severe crisis of trust of the 20th century. Legendary Treasury Secretary Blumenthal, who represented the US at the opening of the US embassy in China and discussed the first bilateral trade agreement with the Chinese, hurried to Saudi Arabia to advise them to continue recycling “petrodollars” back to the US to purchase US Treasury bonds and maintain dollar exchange rate stability. In 1978, at the G7 summit held in Bonn, the US hoped that West Germany and Japan would jointly play the role of the “economic locomotive of the West,” but it was to little effect. Japan continued relying on exports to the US to spur economic growth.
As Volcker took over as Federal Reserve Chairman in the same year, his tight monetary policies reversed the dollar’s decline. Oil prices peaked in 1982 and then fell sharply. With the relaxation of capital flow controls among Western economies, global capital flows entered a new stage. During this period, “petrodollars” gradually made way for Japan’s “trade surplus dollars,” and the US entered a period of “great moderation,” leading Western economies out of stagnation and achieving steady growth.
It is hard to say whether Chinese decision-makers accurately recognized and grasped the turning point of the US economy; it is more likely that they were under pressure from the domestic economic situation. Japan and Saudi Arabia had been admitted into the US camp since the beginning of the Cold War, and China, at that time, had no experience or connection with the International Monetary Fund (IMF) or the General Agreement on Tariffs and Trade (GATT). China’s foreign exchange reserves were limited, and it opted for the declining British pound as its reserve currency. Decision-makers and researchers of the reform and opening-up were still learning about the post-war monetary and trade order.
For example, they didn’t really know what was a Joint Venture, [3]Besides, was China ready to utilize foreign investment on a large scale in the face of the Latin American debt crisis? [4]And Chinese officials were perplexed and unenthusiastic when the United States initially suggested joining GATT. At least in the 1980s, China was inadequately prepared to “keep up with the pace of the US.” in infrastructure, including human resources and accumulated knowledge. For the Chinese economy, opening up was primarily a learning process, and the direct impact of the US economic rebound around 1980 was not significant.
After Deng’s “Southern Tour” in 1992 and the introduction of the “market economy system” concept, China accelerated its integration into the US-dominated international economic system. [5]Thirteen years had passed since Deng’s visit to the US. In the following nine years, Sino-US economic and trade relations faced progress and setbacks, but they fell far short of China’s expectations.
It was only after China became a member of the World Trade Organization (WTO) in December 2001 that it genuinely engaged comprehensively with globalization, significantly boosting its economic scale and social wellbeing— to an unprecedented level in history. Its GDP surpassed that of Germany and Japan; previously semi-employed laborers could now make a living through products sold on New York’s Fifth Avenue; and workers could enjoy regular weekends.
II. The Dollar’s Hegemony and Globalization
The prosperity of Japan and Singapore resulted from the post-war Western “partial globalization,” while China’s successes after joining the WTO stemmed from a more extensive globalization. Since World War II, regardless of its scope, “economic globalization” has been driven by the US dollar, leading to expanded international trade and increased capital flows.
The Bretton Woods Conference in July 1944 confirmed the pre-existing global dominance of the US dollar through its agreements (the Bretton Woods Agreement encompassed the International Monetary Fund Agreement and the International Bank for Reconstruction and Development Agreement).
The “pre-existing status” is traceable to the 1920s after World War I. The 1935 Chinese currency reform and the dollar’s role during the Sino-Japanese War further confirm this. Perhaps due to the participants’ memories of the fixed exchange rate system or humanity’s inherent preference for low volatility, the IMF’s founding agreement adhered to a fixed exchange rate system. A critical, though unstated, condition was the US agreement to exchange accumulated (current account) surpluses held by other member authorities at the rate of $35 per ounce of gold. It was a unilateral commitment President Franklin D. Roosevelt announced after signing the Gold Reserve Act in 1934. President Nixon’s August 15, 1971, announcement severing the dollar’s link to gold was a renunciation of this commitment.
However, from the perspective of the IMF Agreement, the US action did not constitute a breach of contract. Post-1971 developments showed that the Bretton Woods Conference essentially established a dollar standard, although participants couldn’t relinquish their belief in gold.
The agreement primarily aimed to prevent a recurrence of competitive currency devaluations among members seeking trade advantages (“beggar-thy-neighbor policies”), aiming to rebuild a stable international monetary system and trade order. The establishment of dollar dominance enabled the contemporaneous establishment of the International Bank for Reconstruction and Development (commonly known as the “World Bank”), the subsequent GATT (1947), and the later World Trade Organization (1995).
If, supposedly, participating economies weren’t focused on earning dollars, the restrictive clauses and regulations in many US-led trade agreements would be unnecessary, and the relevant international organizations wouldn’t exist. The post-war international economic order is based on a dollar standard underpinning the international monetary system and trade rules. This dollar standard means the dollar serves as the pricing and settlement currency for the most critical international goods and financial transactions; other currencies have exchange rates relative to the dollar and ultimately accumulate primarily dollar-based reserves.
While international trade might use currencies besides the dollar and euro, their pricing is invariably calculated in dollars and then converted to other currencies. This often aims to circumvent restrictions, directly increasing transaction costs.
Through the US commitment, the gold exchange standard continued. Subsequent developments demonstrated that under open conditions, a currency’s international standing and external value are determined by market participants, making it difficult for the issuing government to control it unilaterally. The IMF agreement only addressed current account capital flows; before 1980, cross-border capital flows in the West were limited, but the post-war recovery of Western economies depended on the US; technology and equipment were imported from the US, and the Marshall Plan couldn’t fully meet their funding needs. Around 1950, the West experienced a “dollar shortage,” with the gold price falling below the $ 35 ounce.
This situation reversed dramatically in the 1960s; a “dollar glut” led many countries to openly or secretly exchange dollars for gold from the US, most notably France, where De Gaulle’s use of warships to transport gold back to France is often touted as a “challenge to the dollar’s arrogant privileges.” However, as mentioned before, governments can’t control their currency’s exchange rate; shortly afterward, De Gaulle resigned, partly due to the devaluation of the franc. It didn’t stop France from seeking US help to stabilize its currency.
Once the accumulation of dollars outside the US exceeded the US’s gold reserves, the collapse of the Bretton Woods system was merely a matter of time. It was equally beyond US control, and even concerted efforts by Western nations (whether sincere or not) couldn’t reverse it. Even with the dollar as the dominant currency and the US as the leader of the Western world, the US could never sacrifice its national interests to remain bound by the gold standard. If US socio-economic stability was at risk, how could the Bretton Woods system be maintained, and what would be the point of doing so?
It aligned with subsequent US fiscal and monetary policy objectives: prioritizing US national interests, which remains the case today. It was the most crucial reason for Nixon’s August 15, 1971, decision to end the gold-dollar exchange commitment; one could even argue it was the only reason. Nixon’s reaction to potential spillover effects from the decoupling, “I don’t give a damn about the Italian lira,” was a genuine visceral response; Connelly’s public reiteration of someone else’s statement, “The dollar is our currency, but it’s your problem,” was even more blunt. When informed of Nixon’s decision, the then-West German Defense Minister, later West German Economics Minister, and Chancellor Helmut Schmidt exclaimed, “This shows that the US is at least unwilling to continue acting as the leader of the West in monetary matters.”
Outsiders understood this as well. In this context, seeking a replacement for gold to continue restraining the dollar and the US economy would question the intelligence of Western decision-makers, especially considering that the alternative would be even more difficult to control than gold. To dispel the myth of “petrodollars,” nothing is more convincing than the agreement between the US and Saudi Arabia. In the appendix to Petrodollars[6], I have included the full text of the June 8, 1974, joint statement (the alleged “agreement”) between the US and Saudi Arabia.
Since the West wasn’t considering abandoning the Bretton Woods system then, and other Western economies preferred removing the gold constraint while retaining the fixed exchange rate system, Volcker flew around on a military aircraft to coordinate exchange rate arrangements. Due to managerial considerations and the influence of past beliefs, even after 1974, when floating exchange rates became a reality, the 1987 G7 meeting in the Louvre still attempted to maintain fixed exchange rates, even though the attempt failed.
After 1971, with the pound declining, no other currency could or wanted to stand alongside the dollar. The dollar, lacking a substitute, did not collapse, although predictions of its demise from both East and West have never ceased. It surprised Robert Triffin, the author of the “Triffin Dilemma.” While occasional calls for a “return to the gold standard” surface, the trend is irreversible. In the Central Bank of Oil[7], the experience of Saudi Arabia, the largest holder of petrodollars, scrambling for scarce communication resources within the country to manage investment market fluctuations illustrates that gold is no longer suitable for a monetary role.
The 1976 Jamaica Agreement eliminated the official price of gold, ending its monetary role. The rise of “petrodollars” in the 1970s, by helping to address domestic US economic problems, stabilized the US dollar-dominated international economic order and ushered in a new era of globalization.
This latest order involved “petrodollar recycling” back to the US, alleviating its deficit and inflation pressures, allowing the US to sustain trade deficits further and boost exports of other economies. By acting on advice from his financial officials, Nixon decoupled the dollar from gold and set up a “petrodollar recycling” loop. He dispatched his new Treasury Secretary, William Simon, to Saudi Arabia during his second term to persuade them to use “petrodollars” to buy US Treasury bonds (recycling), instructing him to “not come back empty-handed.” Simon, as the actual operator, successfully ushered in a new era.
Petrodollar recycling also included its role as a significant component of “Eurodollars,” flowing through unregulated European and American financial institutions to other countries with oil trade deficits and capital needs (including Latin America). The essence of petrodollars was similar to Japan’s post-1980s dollar trade surpluses and China’s post-WTO accession dollar trade surpluses—primarily trade surpluses with the US.
The difference lay in petrodollars stemming from a single export product (oil), whereas Japan and China had far more diverse trade surpluses. Petrodollar recycling provided a model for subsequent international flows of dollar surpluses from Japan and China. It formed a chronological sequence that continued until 2008, making them the most important sources of foreign funds for US Treasury bonds. This pattern represents a consistent globalization model since the 1970s, reflecting the US dollar-dominated international economic order.
Since the 1960s, the Saudi riyal had been on a gold/silver standard, pegged to the Special Drawing Right (SDR), and a basket of currencies before finally being pegged to the US dollar in 1986, a situation that continues today. This arrangement is highly representative of the fixed exchange rate systems maintained by exporting economies after the collapse of the Bretton Woods system. Given that oil price fluctuations cause significant volatility in Saudi Arabia’s export earnings, the fixed exchange rate system of the Saudi riyal is less typical of a Bretton Woods 2.0 system compared to the Chinese Renminbi system, which features a relatively stable and controllable (quasi-pegged) exchange rate arrangement ensuring sustained export surpluses.
The vast dollar reserves accumulated by these surplus countries represent crucial votes of confidence in the dollar, signifying market participants’ support and making surplus countries stakeholders in the dollar’s international status and upholders of the dollar system and the existing global economic order, whether intentionally or not. Of course, these economies also benefit from this situation. Excluding US-specific factors, the actions of dollar asset holders have made it difficult for the Deutsche Mark, Yen, and later the Euro to challenge the dollar’s dominance, i.e., “dollar hegemony.” Undeniably, the US is the decisive factor in the dollar’s position in the long term, not any third party.
III. The Future of Globalization and the Dollar’s Role
Nixon’s response to Saudi Arabia’s oil embargo threat—Without (western) demand, you can’t sell your oil—underestimated the growing energy needs of the West due to its socio-economic development (industrialization). China also transitioned from an oil exporter to an importer in 1993. “Petrodollars” are a product of globalization, but they also furthered it, highlighting the mutual reinforcement of trade development and capital flows in the globalization process.
Energy differs from other industrial goods. Although Saudi officials may not officially believe in oil industry cycles, Saudi oil revenue fluctuates dramatically with price changes due to the limited capacity of natural resources. Japan and China’s tradable industrial goods differ; production capacity can be increased almost indefinitely relative to demand. It reflects Japan and China’s experience with globalization, a typical East Asian growth model, the difference being the timing of their participation and economic scale.
Dollar capital will continue to drive globalization due to factors like taxation affecting returns, and economies with a production capacity exceeding domestic demand will even more urgently seek continued globalization. However, from the perspective of the US, the primary destination for final products, globalization has had uneven effects on different social strata, exemplified by the Rust Belt’s expansion since the 1970s. It makes globalization a domestic political issue in the US and other developed economies, generating anti-globalization sentiments. As mentioned earlier, the US must prioritize its domestic socio-economic needs.
Predictably, trade measures, including tariffs, will become commonplace, and restrictions on capital flows are possible. Post-war economic globalization has been built on a “dollar standard.” At the same time, there are voices within the US opposing the dollar’s global dominance; given the US’s role and position in the Western world, this won’t become the mainstream view. Globalization will continue. Due to the persistent demand for the dollar, international trade organizations’ influence will wane, with the US adopting a more assertive stance and redesigning the dollar-dominated globalization framework. It is difficult to classify as “deglobalization (or anti-globalization)”; instead, it aims to make current globalization more beneficial to the US. After all, if US domestic socio-economic instability triggers a dollar crisis, countless globalization participants would be collateral damage. Under this trend, economies hoping to rely on globalization to absorb excess domestic production capacity will face significant challenges.
Numerous proposals have been made for international monetary system reform over the past half-century to counter “dollar hegemony” and mitigate risks. These include the earlier Special Drawing Rights (SDR), a later tripartite system involving the dollar, Deutsche Mark (or euro), and yen, and the more recent Bretton Woods 3.0 (pricing currencies based on commodities). Since the Asian financial crisis of the 1990s, most currency crises have ultimately required US (dollar) intervention, casting doubt on the feasibility of the second proposal.
In recent years, currency diversification in international reserves has only involved reserve countries increasing allocations to minor currencies within the dollar system for return considerations, not altering the dollar’s position or role. Pegging major currencies to commodities is not a new idea，whose drastic price fluctuations are an insurmountable flaw as a currency anchor. It’s also important to note that since the post-war era, Saudi Arabia has never linked its currency to oil. The difficulties caused by fluctuating “petrodollars” in Saudi Arabia, as discussed by the Central Bank of Oil, serve as prime evidence.
Overthrowing, replacing, or improving the existing international economic order requires a currency that rivals the dollar, reflecting the direction Keynes attempted to achieve unsuccessfully at the Bretton Woods Conference. Success would at least lessen the US’s current influence in international finance and trade. A new challenger would need to meet the trade demands of surrounding countries while maintaining a currently inward-looking economy, much like the US.
The current international economic order won’t fundamentally change if this isn’t achievable. Economies departing from the existing framework without finding alternative growth models will face significant growth deceleration risks, mainly if they are highly externally dependent.
Economically, some developing economies have greatly benefited from globalization. As their economic scale grows and their influence in the global economy increases, the international status of their currencies will become a priority.
Continuously accumulating dollar surpluses and exporting dollar assets reinforces the dollar’s position and the dollar-dominated international economic order, not the internationalization of their currency. Occasional increases in the proportion of their currencies in international settlements are ultimately due to dollar backing.
Regardless of trade deficits or surpluses, exporting one’s currency is crucial, meaning it doesn’t need backing to be accepted by other economies. However, achieving widespread acceptance of a national currency is far more complex than striving to become a surplus country. Many countries have trade deficits and use dollars to repay foreign debts; China’s surpluses from non-US deficit countries are also mainly in dollars, making it unlikely that this is due to “agreements between the US and China to settle exports solely in dollars.”
For export-oriented economies, projecting their currency as dominant requires significant adjustments to existing growth and distribution methods; otherwise, it remains a mere theoretical aspiration. The widespread acceptance of the dollar is rooted in US domestic factors, upon which international trade, reserves, and financial transactions are built. This extends far beyond the realm of economic discussion.
Inaccurate interpretations of historical events such as the Plaza Accord and “petrodollars” prevalent in the market negatively impact market participants, academia, and policymakers, and the costs far outweigh the benefits for society as a whole. China has suffered dramatically in this regard. Over the past years, the “internationalization of the Renminbi” has been shaped and driven by this dominant mindset, and the outcome is thus predictable. The experience of the British pound in Petropound[8] should serve as a testament.
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Jie Yu, 1972, has been working in the fields of banking, investment, and corporate management. Since 1998, he has focused on the exchange rate between the Chinese yuan and the US dollar, publishing numerous articles in Chinese media on China’s foreign trade and the renminbi exchange rate. Over the past decade, he has planned and introduced the translation of more than a dozen books in related fields, including Changing Fortunes (Paul Volcker, Toyoo Gyohten).
[1] In Chinese：石油英镑，石油央行，石油美元。see below。
[2] https://china.huanqiu.com/article/9CaKrnJl212
[3] Li Lanqing (former deputy premier of China), Breakthrough—the Early years of Opening Up to the World (突围——国门初开的岁月），Central Literary Publishing House， Beijing，2008，p211.
[4] Helmut Schmidt，Man and Powers, 1989, 330-339.
[5] http://shiguangsheng.mofcom.gov.cn/activities/201204/20120408094228.shtml.
[6] 石油美元, CITIC Press,2024。English version: Oil Money，Middle East Petrodollars and the Transformation of US Empire, 1967-1988, David M. Wight, Cornell University Press,2021.
[7] 石油央行，CITIC Press，2024. English Version：The Saudi Arabian Monetary Agency,1952-2016, Central Bank of Oil, Ahmed Banane, 2017,Rory Macleod, Springer.
[8] 石油英镑。CITIC Press， 2024. English Version：Money，Oil，and Empire in the Middle East, Sterling and Postwar Imperialism, 1944-1971, Steven G. Galpern. Cambridge, 2009.
