Dedollarization appears to be an unstoppable trend as countries around the world look to reduce their dependence on U.S. currency.
Countries, particularly those in the Global South, are reducing their U.S. dollar reserves, settling cross border transactions in non-dollar currencies, and exploring the formation of new multilateral settlement mechanisms.
A major driver of this trend is Washington’s weaponization of the dollar via expansive sanctions that currently cover 29 percent of the global economy and 40 percent of global oil reserves.
Two recent Responsible Statecraft articles, one authored by International Crisis Group co-chair Frank Giustra and another by Quincy Institute Non-Resident Fellow Amir Handjani, began the process of explaining the drivers of this economic trend, as well as the geopolitical pitfalls facing the U.S. as much of the world reduces its dependence on the dollar, especially if the U.S. fails to engage other countries in the process of forming a multilateral monetary system.
In this video, Giustra and Handjani make the case for the U.S. acknowledging the trend of dedollarization and for Washington to address the national security dangers, as well as global economic and political instability, associated with this unmanaged decline of U.S. economic hegemony.
Eli Clifton is a senior advisor at the Quincy Institute and Investigative Journalist at Large at Responsible Statecraft. He reports on money in politics and U.S. foreign policy.
Top image credit: CAMP LEMONNIER, Djibouti (Feb. 9, 2023) Senior military leaders met with Djiboutian Sous-Préfet de Damerjog, Abdi-Chaib Nour Youssouf, and his distinguished guests for a ceremony at Camp Lemonnier’s Islamic cemetery (U.S. Navy photo by Mass Communication Specialist 1st Class Maria A. Olvera Tristán).
Project 2025, the alleged blueprint for President Trump, focuses only one African country: Djibouti. Smaller than West Virginia, Djibouti has a population of one million people and few natural resources. Nevertheless, Project 2025’s authors fret about “the U.S.’s deteriorating position in Djibouti.” Likewise, Secretary of State Marco Rubio has stressed the need to work on “countering Chinese influence in Djibouti.”
Djibouti is critical because of its location. Situated near the Gulf of Aden, around one third of ship traffic passes by on its way to the Suez Canal. To protect these ships, Djibouti hosts military bases from China, France, Italy, Japan, Saudi Arabia and the United States. Until recently, Djibouti-American relations were good. But when Djibouti refused to let the United States attack the Houthis from their territory, the foreign policy establishment lost its temper and blamed Chinese influence.
Djibouti’s refusal is not a pivot to China, but part of its balanced foreign policy: neutrality with states and aggression with non-state actors. By maintaining neutrality, Djibouti can host military bases from multiple countries, some of which are each other’s foes. As long as these bases are used against non-state pariahs like pirates and terrorists like al-Qaida, there is no issue. But any force against states or quasi-state actors like the Houthis is strictly prohibited.
Rather than create unnecessary tensions with China, the United States should focus on its shared interest of protecting maritime traffic. Doing so will enhance security and diffuse tensions between these great powers.
Why Djibouti matters
As the Somali civil war dragged on, chaos reigned and poverty increased. To secure their livelihood, many Somalis resorted to piracy starting in 2000. The capture of American ships and the September 11 attacks led the United States to step up military operations in the Horn of Africa.
In 2002 the United States purchased Camp Lemonnier from Djibouti’s former colonizer France, establishing America’s first and only permanent military base in Africa. They were soon joined by others: Germany established a military presence at the French base in 2008, Japan established its only foreign military base in 2009 and Italy opened its first foreign military base in 2013. There were no issues with any of these military bases, until China opened its first foreign military base in 2017.
China in Djibouti
Just like every other country in Djibouti, China’s main interest is to protect shipping. In fact, before opening its base, the United States lobbied China to provide more assistance in the region. Djibouti is also important for China’s Belt and Road Initiative as a key maritime stop and a new railway line to Ethiopia’s capital Addis Ababa that connects the countries. China is the largest investor in Djibouti, with a total of $14.4 billion in infrastructure being built, a huge sum for an economy that is only worth $4.67 billion.
But for the American foreign policy establishment, China is not just a rival, but an existential threat. “If the Chinese took over that port [in Djibouti], then the consequences could be significant,” said Marine General Thomas Waldhauser in 2018. China’s military base will become a “platform to project power across the continent and its waters,” General Stephen Townsend told the House Armed Services Committee in 2021. Both generals said China wouldbuild more military bases in Africa, a prediction that has not yet come to fruition.
With the outbreak of Israel’s onslaught of Gaza, Yemen’s Houthis began a blockade against ships heading to or affiliated with Israel. After Djibouti denied the U.S. request the use force against the Houthis (Djibouti permitted U.S. strikes on al-Qaida in Yemen), the U.S. foreign policy establishment believed China was responsible. “China [is] interfering with U.S. operations at its base in Djibouti,” said Michael Rubin, Senior Fellow at the American Enterprise Institute. Guleb Ahmed of the Middle East Institute insisted that it is because of China that “the Djibouti government has refused to condemn the Houthi attacks on maritime traffic.”
Djibouti’s neutrality
While much has changed in the Horn of Africa, Djibouti has consistently remained neutral. This lets it attract foreign military bases from countries that have adversarial relationships with one another. Ironically, this neutrality permits states to use military force against non-state pariahs like pirates and al-Qaida.
For the United States, the Houthis are terrorists and should be treated the same as al-Qaida. But the Houthis in many ways operate as a state. They control most of Yemen’s populated areas, including its capital, host diplomatic missions and have economic relations with dozens of states. Rather than oppose the Houthis, Djibouti drew a line, prohibiting the United States from carrying out operations from its territory.
But according to the U.S. foreign policy establishment, inaction means Djibouti is pro-Houthi. They point out that Djibouti helped resupply Iranian vessels that assist the Houthis. Yet, the same thing was also done for American vessels that attack the Houthis, as long as these attacks are done outside Djibouti’s territory. No pro-Houthi government would allow such a policy.
A dangerous game
Rather than accept Djibouti’s position, foreign policy experts have sought to escalate tensions, blaming Djibouti for being pro-Houthi and pro-China. Hoping to find a more reliable partner, many propose that the United States recognize and work with Somaliland instead. Somaliland is an unrecognized state that asserted its independence from Somalia in 1991. Close to Yemen and next Somalia, it seems Somaliland offers everything Djibouti has with no strings attached. Project 2025 recommends “the recognition of Somaliland statehood as a hedge against the U.S.’s deteriorating position in Djibouti.”
But recognizing Somaliland would not provide the security America hopes for. The Horn of Africa has a delicate balance of power, with tensions between Ethiopia and Somalia only recently resolved. American recognition of Somaliland would threaten this delicate peace. In addition, while Somaliland is far more stable than Somalia, clan warfare has been ongoing in its Eastern region for the last two years. Finally, relations in the region are often fluid. While China supports Somali unity, this might change if Somaliland was recognized by more countries. With China as the largest investor in Africa, Somaliland might want to work with China. In the end, all America could be left with is a more unstable Horn of Africa.
Cooperate and de-escalate
Djibouti represents a rare opportunity for the United States. It is the only country that hosts both American and Chinese military bases mere kilometers apart. While the two countries are largely adversaries, their primary purpose in Djibouti is the same: securing maritime traffic.
Recall, it was the United States that first asked for Chinese assistance to combat piracy in the Horn of Africa. When China opened a base, it was considered a move too far, with worries it would lead to more bases in Africa, which has not happened to date. Meanwhile the United States has around 40 bases on the continent.
Rather than create tensions, the United States should focus on cooperating with China. Doing so will require respecting Djibouti’s neutrality, which prohibits America from attacking the Houthis from its territory. While there is much the United States and China disagree on, ensuring that trade continues to flow uninterrupted is a shared priority of both countries.
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Top photo credit: Pete Hegseth in Senate hearings, January 14, 2025. (Shutterstock/ Zhongxinyashi_Photo)
After weeks of acrimony and consternation over his personal indiscretions, Pete Hegseth was confirmed tonight as secretary of defense. Republicans Mitch McConnell, Lisa Murkowsi, and Susan Collins voted against him, leaving a 50-50 tie which was broken by Vice President J.D. Vance in Hegseth's favor.
Now the fun begins. Hegseth, an Army veteran of the Iraq and Afghanistan wars, has testified that President Donald Trump has put his faith in him to "bring the warrior culture back to the Department of Defense. He, like me, wants a Pentagon laser-focused on lethality, meritocracy, war fighting, accountability and readiness.”
Most of the opposition from Senate Democrats revolved around Hegseth's personal indiscretions and public opposition to women serving in combat; to a lesser extent, his "frontal assault" on the "woke" culture he claims infected the institution, degrading every facet of force readiness and cohesion. Even fewer questions were devoted to how he used his pull as a Fox News host to get war criminals pardoned in the last Trump administration, which some might consider more problematic than a lot of the other stuff.
Hegseth, much like his new boss, is a bit of puzzle when it comes to how he plans to reform the military "from the top down" and put the "warfighter first." It is worth noting that many a defense secretary has promised reform. None in my professional lifetime have quite delivered, at least in any lasting sense that made the military leaner, meaner, ready for combat with strategy dictating investment, and not the other way around. My friend Winslow Wheeler, who banked four decades working on Capitol Hill and literally co-wrote the book, "The Pentagon Labyrinth: 10 Short Essays to Help You Through It," sees the era of Hegseth going in few different directions.
"The moment he is confirmed today, Hegseth will lose his protection from Trump and his base. Trump will now expect Hegseth to be the protector, but much more importantly, Hegseth will be on his own (along with his immediate staff) to deal with the public and private elements of being SecDef," Wheeler said in an email today. Specifically, he said, he must be prepared:
"Political bromides ("anonymous smear," warrior rhetoric) will not suffice to respond to unwanted questions from the press and in hearings.
For the canned, superficial questions he will get in hearings, he will need a minimal command of the facts on an ocean of subjects to avoid self-embarrassment.
He will gain a reputation inside the Pentagon for either being an empty suit as people like me expect, or he will win a reputation for actually knowing what is going on and in command of what it takes to run the building.
He will either piss of Members of Congress for being unhelpful with their earmark (pork) demands or as a 'problem solver' for satisfying those and other myriad demands; the same thing goes for dealing with the defense corporations and especially Silicon Valley and the Brahmins there who think they know how to run the Pentagon and acquisition.
In short, he will emerge as someone who is in command (for better or worse) like (GW Bush/Obama Sec Def Robert ) Gates or a pushover and weak reed like (Chuck) Hagel or (William) Cohen."
Worse yet, said Wheeler, "he could end up like (Donald) Rumsfeld and help to foist historic disasters driven by the agenda of others. He may think, like Rumsfeld, that the way to escape ignominy as an ineffectual manager is to be a driver of such a foisted disaster."
It could be that Hegseth will focus mostly on the lethal military side and work to make good on his pledge to "reestablish deterrence" and "re-build the military" through boosting domestic industrialization, modernizing the nuclear triad, and "rapidly fielding emerging technologies," all of which should make Silicon Valley, Wall Street, the 5 major primes, and assorted Beltway Bandits happy.
But he has also promised the DoD would pass an audit, an ambitious goal since it has never passed one. He has also criticized "feckless civilian leaders and foolish brass." His boss wants to end the Ukraine war quickly after nearly three years of the Pentagon pledging to help build up Europe and Kyiv with more and more weapons and assistance to fight it. And Trump doesn't seem keen on keeping U.S. troops out in the deserts of Syria and Iraq (his Pentagon opposed withdrawal the last time, including his Sec Def Jim Mattis).
As a brand new Congress and administration settles in, the groundwork is being laid for a historic increase in military spending that could lead to catastrophic implications for the federal budget.
Senator Roger Wicker (R-MS), the new head of the Senate Armed Services Committee, is calling for a $120 billion hike over the next two years, and other key Republicans are calling for an increase of up to $200 billion. This follows a rise of some $160 billion over the four years of the Biden Administration.
But the accounting of annual dollar figures amid the technicalities of the budget reconciliation process today is perhaps less important than the conceptual and practical sea change in the long term approach to military budgeting being planned. Sen. Wicker is advocating setting a new floor for military spending at 5% of the national economy – a scheme apparently endorsed by President Donald Trump at Davos yesterday when he called for “all NATO nations” (presumably including the United States) to spend at least 5% of GDP on defense.
The implications of spending at least 5% of the entire national economy on the military each year are striking. The first is the sheer dollar figures involved. In 2024, a 5% floor would have led to approximately $1.45 trillion in military spending as opposed to the actual level of $886 billion — a difference of over $550 billion or some 60%.
That level of spending won’t happen overnight. The scale of the increase implied by a 5% floor is such that it can’t be accommodated in one or even two to three years. The additional funds are so great that the entire U.S. military-industrial complex would need to be scaled up to absorb them. But the long-run budgetary implications of such an increase are extremely concerning.
In recent work for the Quincy Institute, Steve Kosiak, a former senior White House defense budget official, projects that by 2034 a 5% of GDP floor on military spending would lead to an almost 90% increase in real (inflation adjusted) spending as compared to the current path for Pentagon spending.
A sustained expansion in military spending of this size would have a tremendous impact on the ability of the government to pursue other national priorities. This is especially true since the Trump Administration also appears committed to a major tax cut (far larger than any new revenues brought in by potential tariffs).
As Kosiak’s work documents, the combination of a massive boost in Pentagon spending and tax breaks would require either major cuts in central entitlement programs like social security or health care, or a long-term explosion in the Federal debt to levels two to three times the highest levels ever previously recorded. While it’s become fashionable to claim that “deficits don’t matter,” expanding the Federal debt to such unprecedented levels carries significant risks to economic growth.
Besides the implications for spending and deficits, a commitment to spend at least 5% of national economic production on the military would change the essential nature of military budgeting. Instead of setting the budget by assessing actual concrete needs for national defense — a process that already leads to a significant degree of waste and abuse— a spending floor would require spending to mechanically increase as the size of the economy grows, regardless of documented military needs.
The effect would be like a “military tax” on the U.S. economy, requiring a nickel of each additional dollar of production to go to the Pentagon.
The policy would also have significant effects globally, as it would tend to hard-wire an arms race dynamic into the world economy. With the U.S. and close allies increasing military spending each year as their economies grew, U.S. rivals would also feel pressure to spend more in order to keep up. Global military expenditures, already at the highest levels ever recorded, would likely spiral upward. This in turn would feed the U.S. justification for continuing to increase military spending.
While rivals that are significantly poorer than we are, such as Russia, Iran, or North Korea, would certainly feel stress to their economy in trying to keep up with our spending, a wealthier manufacturing power like China has a great deal of ability to boost military spending in response to a U.S. buildup. Estimates of Chinese military spendingvary, but are generally at around 2% of GDP, leaving substantial room for growth.
At various times, when the economy was much smaller, the U.S. has certainly spent more than 5% of GDP on the military. But today, this would represent a much higher absolute level of military expenditure. More importantly, it is not necessary to actually defend the American public or secure vital national interests.
Sen. Wicker’s defense spending plan claims that the U.S. confronts “the most dangerous threat environment since WW2” due to facing an “axis of aggressors” that includes China, Russia, Iran, and North Korea. It claims that America needs to budget for fighting at least two active and protracted wars simultaneously, one to defeat China and another to defeat a second aggressor in another part of the world, while maintaining additional military forces in reserve to intimidate other potential aggressors.
Further, it insists that during such a conflict we must assume that America could not rely on effective military assistance from its alliance network.
Rather than assuming that it is necessary to prepare for this terrifying and extreme scenario of an isolated America fighting a two-front global war against multiple nuclear powers, we should ask whether it can be averted by less risky and expensive means than almost doubling our military budget over the next decade.
The decision to prepare for a “nuclear WW3” scenario would require major economic sacrifices for the entire American population. Unfortunately, it appears that many in Washington wish to take us in this direction.
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