Chapter 7 International financial and monetary relations (Week 9)

7.1 Discussion questions

  • Drezner (2009): What is the main argument of the paper? What are the implications on the future of international financial relations?

  • Brawley (2021): What is the main argument of the paper? What are the implications on the future of international monetary relations?

  • Given the economic interdependence in the current international order, would sanctions be an effective tool in changing other states’ behavior? (*)

How the Russia-Ukraine war may impact the U.S. dollar

Why The U.S. Dollar May Be In Danger

7.2 Financial statecraft

Drezner (2009) focuses on the security implications of China’s creditor status vs. the US. More specifically, he test the ability of foreign creditors to exercise political leverage by examining cases where creditor countries sought to change target governments’ economic policies. Since economic policies are of lower salience compared to security or military ones, these tests represent an easy test, where null results suggest financial coercion against major powers is largely ineffective.

Drezner lays out a list of factors that determine financial leverage, which include:

  • alternative sources of credit
  • low costs of retaliation
  • low expectation of future conflict
  • monetary regime (fixed or floating exchange rate)

Along this metrics, he argues China does not have the leverage. Drezner then examines two policy disputes in 2008. On the issue of regulating SWFs, the credit importers were able to force the SWFs to concession. On the issue of the US financial policies in 2008, China was not able to pressue the US into adopting their preferred policies. On the issues of trade, monetary policy, and proposal to reform the reserve currency, China was not able to convince the US to budge.

7.3 Liberal monetary order (LMO)

Brawley (2021) studies the sub-order of the LIO. Broadly, there are two lines of theories: one focusing on hegemon while the other emphasizing the self-sustaining logic deriving from consitutuents’ rising material interests. In tracing the evolution of the LMO, Brawley examines:

  • the gold standard: 1840s to WWI
  • the interwar period
  • the embedded liberalism of Bretton Woods
  • post-Bretton Woods: 1970s and 1980s
  • post-Cold War era