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Pakistan Dumps the Dollar in Trade with China

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The United States uses the dollar as a weapon to keep other countries in line, but it’s becoming a less and less effective strategy as other nations find ways to minimize their dependence on the greenback.

Pakistan serves as the latest example. Just one day after Pres. Trump blasted the country on Twitter, Pakistan’s central bank announced it was abandoning the dollar and replacing it with the yuan for bilateral trade with China. This is yet another sign of global de-dollarization.

Peter Schiff talked about this global shift away from the dollar during a recent interview on The Street after the Chinese took another step toward launching yuan-based oil contracts.

I think China has been positioning itself for ultimately when the dollar is no longer the reserve currency, and that process is ongoing and it will continue. And it’s not just China. I think a lot of the world is trying to move away from the dollar. One reason being we’ve weaponized the dollar. I mean, the United States takes advantage of the dollar’s role to sanction countries that do things that it doesn’t like, and I think a lot of countries would like to take that power away from the United States.”

Trump put pressure on Pakistan with his tweet criticizing the country’s anti-terrorism record. But the US simply doesn’t have the leverage it once did. Pakistan can turn to the Chinese, who have been making a concerted effort to cozy up to the South Asian nation. As CNBC pointed out, China has invested heavily in Pakistan. Islamabad is home to one of Beijing’s central infrastructure schemes, a collection of land and sea projects known as the China-Pakistan Economic Corridor with a price tag of nearly $60 billion.

Economist Intelligence Unit Asia regional director Simpon Baptist told CNBC China’s involvement has made Pakistan less dependent on the US.

China has really gone hard in cementing its existing relationship with Pakistan, it’s really the only place that’s seen significant investment under the Belt and Road initiative and China has been pushing for geopolitical advantage there.”

All of this takes place in a broader context. China has pushed hard, along with Russia, to dethrone the dollar. Gold is a big part of the plan, with gold-backed, yuan-based oil contracts making up just one piece of the puzzle. More broadly, Russia and China are reportedly moving closer to developing a gold-based trading system.  On a visit to China last year, the deputy head of the Russian Central Bank Sergey Shvetsov told TASS that the two countries want to facilitate more transactions in gold.

“We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets.”

This drastically decreases the power and influence of the US. This was demonstrated last fall when the US threatened to lock China out of the dollar system if it doesn’t follow UN sanctions on North Korea. Treasury Secretary Mnuchin was talking about blocking Chinese access to SWIFT – Society for Worldwide Interbank Financial Telecommunication. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar is the world reserve currency, SWIFT facilitates the international dollar system.

The US has used SWIFT as a stick before. In 2014 and 2015, it blocked several Russian banks from the system as relations between the two countries deteriorated. But with China, Russia and other countries working toward freeing themselves from reliance on the international-dollar system, and developing viable alternatives, these threats become increasingly empty.

Pakistan’s move to dump the dollar and simply trade directly with China in yuan is another small step toward de-dollarization.

As Peter pointed out in his interview, the decline of the dollar will ultimately mean big changes for the US and global economies. He said he thinks a lot of the economic instability in the world can be traced to the dollar’s role as the reserve currency. It creates malinvestments and misallocation of resources because the US consumes too much, borrows too much, produces too little, and saves too little.

I think ultimately, when the dollar loses that privilege and Americans have to produce to consume and have to save to borrow, that will do a lot to address a lot of these global economic imbalances and deflate a lot of the bubbles that central banks have been inflating.”

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