University of Southern California Dissertations and Theses

Supply and demand of economic hierarchy: the Northeast Asia case

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Supply and demand of economic hierarchy: the Northeast Asia case

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Content 1

Doctoral Dissertation

Supply and Demand of Economic Hierarchy: the Northeast Asia Case

Gloria Minkyung Koo

Ph.D. in Political Science and International Relations
Awarded by the University of Southern California Graduate School Faculty

December 14, 2016

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Table of Contents

Abstract 3

Chapter 1. Introduction 4
I. The Argument 8
II. Organization of the Dissertation 14

Chapter 2. Theoretical Discussion of Economic Hierarchy 17
I. Hegemonic Stability Theory Revisited 18
II. Economic Hierarchy 25
III. Application of the Supply and Demand Framework 38

Chapter 3. Rise and Maintenance of the U.S. Hierarchy in Asia, 1950s-70s 46
I. Geopolitical Contexts and Military Ties 46
II. Strategies for Pax Americana in Asia 52

Chapter 4. Defense of the U.S. Hierarchy, 1990s to Present 62
I. Geopolitical Contexts and Military Ties 62
II. Indicators of U.S. Hierarchy 68
III. Strategies to Maintain Pax Americana and Manage Competitors 85
IV. State of Asia: Diverse Interests and Positions 99

Chapter 5. Conclusion and a View to the Future 124

References 136

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Abstract
The dissertation explains hierarchy as an evolving process that is fashioned by dynamics
of supply and demand. On the supply side, major powers vie to build, maintain and defend their
leadership status. The potential leaders devise and follow strategies in pursuit. On the demand
side, follower countries weigh the costs and benefits of following the leader candidates. They
push and pull the potential leaders, and employ leverage tactics to settle on a regional leadership
structure of choice. The dissertation focuses on the trade, monetary and institutional categories of
leadership. In that light, the dissertation examines the empirical case of the U.S. leadership in
Northeast Asia from 1950 to present. During the periods of the rise, maintenance and defense of
the U.S. leadership, Japan, China, South Korea and Taiwan along with Southeast Asian nations
demonstrate multifaceted compliance and resistance. More recently, Japan and China have
contested America’s dominance in the region. Evidence shows that interactions between the
suppliers and consumers of the leadership have shaped the hierarchical structure in Northeast
Asia.

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Chapter 1: Introduction
Hierarchy is about leadership, and both leaders and followers shape the kind of leadership
ultimately wielded. Potential leaders contest with each other to be the one to lead, and at the
same time, follower countries push and pull to cast a vote on who gets to lead. On the receiving
end, followers comply with and resist different facets of leadership. Together, producers and
consumers of leadership fashion and settle for a structure that is acceptable. This process of
negotiation does not happen overnight, and it does not begin or end with clear thresholds. The
process evolves and continues to evolve. Political interests, economic incentives and/or
geopolitical situations change, and the hierarchical structure also changes accordingly. This
dissertation studies the evolving process of establishing hierarchy, particularly in the case of the
U.S. leadership in the Northeast Asia region.
Hierarchy encompasses widely, in military, political, economic, institutional and even
cultural realms. The dissertation focuses on economic leadership in the areas of trade, currency
and institution. Although the primary focus is on economic leadership, the dissertation also
acknowledges the context of strong military ties between the U.S. and Northeast Asia. Military
conflicts in the 1950s brought to America’s attention the strategic importance of the Asia region
and set off the current landscape of political and economic relationships among the U.S. and
Japan, Korea and Taiwan. The U.S. pursued discrete bilateral security alliances with the East
Asian countries in order to maximize its influence over the individual countries. Also, security
alliances were often discussed as the utmost priority in the bilateral relationship, and the focus on
security downplayed potential conflicts of economic interests or disagreements among the U.S.
and Japan, Korea and Taiwan. For instance, in the 1990s when U.S. and Japan had a trade
conflict and faced a clash of economic interests, the Clinton administration diverted the attention
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away and maintained emphasis on maintaining strengthening the security alliance (Christensen
1999, 59). The economic conflict was contained in order to prioritize security concerns. Military
contexts and economic partnership are not separate or isolated issues, especially in discussing the
overall leadership that the U.S. had in the region.
In this dissertation, America’s economic leadership is examined over three periods: rise,
maintenance and defense. Throughout the three phases, security tensions and alliances provide a
backdrop. And during the periods, the U.S. acts as a main supplier of leadership. Japan and
China along with Korea and Taiwan are consumers at first. Korea and Taiwan continue to be
followers, but Japan and China also become challengers to the U.S. On the supply side of
leadership, the U.S. evaluates its geopolitical interests in Asia, devises strategic policies, and
manages competition from Japan and China. The trajectory of the U.S. leadership in Asia was
constructed and negotiated. On the demand side, Asian economies evaluate their needs and gains
as they comply with some aspects of the U.S. leadership and resist some. The dissertation aims
to show the dynamics of supply and demand in the areas of trade, currency and institution during
these phases of rise, maintenance and defense (See Table 1).
Table 1. Phases of U.S. Economic Leadership in Northeast Asia
Rise
(1950s-1970s)
Maintenance
(1970s-1990s)
Defense
(1990s-Present)
Military
(Constant Context)
U.S.-Japan Security Treaty (1951- ), Defense Cooperation (1978-Present)
Korean War (1950-53), U.S.-Korea Defense Treaty (1954-Present)
U.S.-Taiwan Defense Treaty (1954-90), Taiwan Relations Act (1979)
Trade Japan, Korea and
Taiwan’s export-led
growth strategies, with
dependence on the U.S.
market
Increasing exports to
the U.S.
U.S. FTA proliferation
Rise of China
Rise of Inter-Asia
Trade
Currency Given the trade flows
in the U.S. dollar, de
facto dollar bloc forms
Asian Financial crisis

Status quo of the U.S.
dollar
Japan Lost Decades
Global Financial Crisis
Internationalization of
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Chinese Yuan
Institution Asian Development
Bank (U.S. and Japan,
1966)
APEC (U.S., Asia
Pacific, 1989)
Asian Monetary Fund
(U.S. vs. Japan, 1997)
CMIM (ASEAN +3,
2000)
Asian Infrastructure
Investment Bank (U.S.
vs China, 2015)

The rise of the U.S. presence in Asia was interrelated with geopolitical shifts in the world
at large. In the wake of World War II, the U.S. asserted its military presence through a series of
deployed bases and bilateral mutual defense treaties with countries in Europe and Asia. After the
War, the U.S. was the least scathed, and was financially able to provide aid and resources to help
their allies recover from the War. As the world entered the Cold War period, the U.S. created a
series of global and regional international institutions designed to support America’s position as
the clear hegemon and leader. At the same time America actively pursued containment policies
in Europe and Asia. The U.S. expanded its global chain of military presence in Europe and
formed alliances with England, Germany, Iceland, Italy, Portugal and Spain. The U.S. also
negotiated alliances with Saudi Arabia in the Middle East, and Greece and Turkey in the
Mediterranean. In Asia, the U.S. secured strong ties with Japan, South Korea, the Philippines and
Thailand. American strategies in Asia were an extension of this grand strategy. Particularly to
Asian countries recovering from the Pacific War and the Korean War, the U.S. provided military
aid, poured in capital and investments and opened its doors to trade. For their part, Asian nations
relied on the U.S. security umbrella to defend against military threats from North Korea, the
Soviet Union and China.
Unlike in Europe where the U.S. established multilateral structures such as the NATO,
the U.S. pursued asymmetrical bilateral alliances with East Asian nations and attempted to
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maximize America’s influence on them. The Truman and Eisenhower administrations desired to
avoid getting embroiled in another regional war in Asia, and at the same time wanted to prevent
a potential domino effect of the Asian countries falling under communist control. In order to
fulfill these goals, the U.S. fashioned robust bilateral alliances with Japan, South Korea and
Taiwan that fostered their material and military dependency on the U.S. and in turn granted
America a high level of control over them (Cha 2010, 163). When Taiwan and Korea showed
interests in a provocative aggression or conflict against the mainland China or North Korea, the
U.S. did not shy away from exercising its leverage to prevent them. The U.S. threatened to stop
economic and military assistance or pull out the troops (Cha 2010, 177). Japan, Korea and
Taiwan obliged to maintain the level of military power approved by the U.S. American troops
stationed on national soil served as a vivid reminder of their dependence on the U.S. Much of the
weaponry used for the domestic troops was also provided by the U.S. Within the context of
robust alliances, the U.S. became a major political ally and trade partner to Northeast Asian
nations. The U.S. financed much of the capital needed for recovery and industrialization in Japan,
Korea and Taiwan during 1950s through 1970s. Trade with the U.S. was indispensable to East
Asia’s success of export-led growth strategies. Asia accepted America’s military and capital out
of need, but the help did not come for free. The U.S. exercised leverage and wielded influence in
domestic politics. For the most part in the early years, Asia followed. But later as the East Asian
economies developed and grew, they dissented the U.S. leadership in subtle and complex ways.
Overall, Asia’s acceptance of the American presence was not a binary outcome: all or nothing.
Their multifaceted response to the U.S. leadership is demonstrated in the instances of different
challenges to the U.S. presence as well as collaborative efforts to establish regional institutional
alternatives.
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I. Argument
This dissertation argues that both supply and demand dynamics sustain hierarchy.
Dominant states supply leadership, and subordinate states demand it. It is not unilateral in a
sense that a single dominant state asserts and everyone else unquestioningly accepts. It is more
relational and nuanced. On the supply side, a major power asserts dominance and faces
challenges. The supply of leadership is contested and established. On the demand side, it is not a
simple decision to accept all or nothing of some form of regional or global leadership.
Subordinate states weigh their choices, resist, comply, and respond with a multifaceted demand
for leadership. “The most durable order is one in which there exists a meaningful consensus on
the right of the hegemonic state to lead, as well as the social purposes it projects” (Mastanduno
2003, 145). This consensual view of hegemony sheds light on why secondary states would defer
to the leader (Clark 2001). The double-sided supply and demand explanation views hierarchy as
an evolutionary outcome achieved and maintained through a process of negotiation between
supply and demand. This explanation is an alternative to the idea that hierarchy is a static state
that is taken for granted. Also, it argues against the idea of institutional persistence, which views
that institutions after a certain period of time become persistent and too “sticky” to be challenged
or undone. While persistence is observable in hindsight, it is difficult to tease out when exactly
institutions pass the threshold and become persistent. The idea of persistence does not allow for
variations or degrees of strength of a hierarchical structure.
In previous studies, hierarchy has been defined as an ordinal measure from the highest to
the lowest, referring to “some kind of arrangement or rank, among people, groups or institutions”
(Lebow 2008, 4). In the process of forming this kind of arrangement, the different actors are
relationally connected. In particular there is “a bargain between the ruler and ruled premised on
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the former’s provision of a social order of value sufficient to offset the latter’s loss of freedom”
(Lake 2007, 54). A form of hierarchy is hegemony where some states accept the role of
leadership and responsibility for others (Donnelly 2006, 154). A hegemonic power shapes “the
rules of international politics according to its own interests” (Mastanduno 2005, 179). The
process of the hegemon establishing its leadership and of the other follower states accepting it is
unpacked through the explanation that incorporates the supply and demand framework.
The dissertation defines hierarchy as an equilibrium negotiated and reached through the
dynamics of supply and demand for power. And this equilibrium continues to adjust in response
to market interactions. In the supply and demand framework of leadership, the market
encompasses all interactions between leaders and followers. Market interactions include bilateral
or multilateral exchanges, political negotiations, and trade or currency exchanges. Leadership is
conceptualized as the product which the leaders produce and followers consume (See Figure 1).
The price is what the producers charge and the consumers pay. For producers, the price is what
they gain from supplying or wielding leadership. For consumers, price is what they give up in
order to benefit from following the leader. Quantity is the area of leadership. For producers, it is
the extent or sphere of influence. For consumers, it is the area of lost autonomy. Producers weigh
the benefit from leading over an area of influence and determine their supply curve. Greater
influence they can exert, greater benefit they gain. Consumers weigh the cost to follow the leader
for the area of lost autonomy. Greater the cost, less they want to give up autonomy.
The supply curve is collection of individual supply curves that are determined by
production costs, expectation of future prices, and a number of suppliers. That is, the slope of the
supply curve is determined by marginal cost, which is the change in the total cost that arises
when an “extra unit” of leadership is provided. Costs of providing leadership include resources
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that are needed and expensed to provide military support, open the domestic market to
international trade, internationalize currency and establish international institutions. Price at
which the hegemon “sells” leadership is the benefit it reaps. The benefit includes tangible gains
such as welfare gains for the residents or constituents of the hegemonic state and seigniorage, as
well as intangible benefits such as reputation or status. The supplier curve would shift left if
there are multiple suppliers in competition, because the leader will have to spend more to outdo
the competitors. The supplier would have to appeal to the consumer and show that it can provide
more or better public goods than competitors.
Figure 1. Supply and Demand

The demand is a collection of individual demand curves that are determined by buyers’
income, taste and preferences, expectation of future prices and a number of potential consumers.
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The slope of the individual demand curve is determined by marginal utility, which is the extent
of additional satisfaction that the follower gains from consuming one more unit of leadership.
The follower consumes a certain quantity of leadership at a given price, if the marginal utility of
additional consumption equals the opportunity cost, which is in other words marginal utility of
alternative choices. So the demand schedule reflects the willingness and ability of the follower to
give into the leadership at different points in time. The price that the follower pays to purchase or
consumer leadership is the cost that the follower incurs, for instance the loss of autonomy or
sovereignty over domestic political or economic affairs. The demand curve would shift right
when demand increases. Demand would increase when or if followers experience much domestic
instability or international volatility and feel the need to rely on a hegemon for source of stability
or protection. If the followers feel that they are relatively stable and safe, or that they are self-
sufficient, their demand for outside leadership decreases, and the demand curve shifts left.
However, even if the follower country feels the need to rely on the external power for security
either militarily or economically, if the price of the benefit from reliance on the hegemon seems
too hefty, the follower country may decide to opt out.
The supply curve of leadership is initiated by the producer or a potential leader. The
supply side explanation focuses on the ambitions, strategies and actions of the leader. The leader
perceives benefit of leading, harbors ambitions to lead and pursues to supply the leadership good
to the market. The leader employs aggressive strategies and active politics to achieve that end.
The leader garners domestic support and persuades the international audience that it is the best
supplier of the good. The international audience includes other major powers who could
potentially be competitors as well as smaller powers who are potentially customers of the
product of leadership. In the case of the U.S. leadership in Asia, the U.S. government pursued
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strategic policies to expand trade, internationalize the dollar, invest in overseas military presence
and establish international institutions. The U.S. signaled to the world its willingness and
capability to be the primary supplier of leadership in the Asia region. During and after World
War II, the U.S. imported heavily from its European and Asian allies, and provided much aid to
the countries. Also, the U.S. deployed military troops and provided security guarantees,
especially in East Asia. Following World War II and into the Cold War, the military dominance
of the U.S. thrusted the U.S. into the Pacific scene. The U.S. was suddenly hugely responsible
for security of Japan and Korea, two major states in East Asia. Relatedly, the U.S. took it upon
themselves to allow trade on favorable terms, give much aid and invest capital into East Asia.
While the U.S. lent a hand to the states that needed help in industrializing and developing, the
help was not philanthropic in nature. The U.S. harbored ambitions to dominate in the region and
followed strategic policies to do so. Because the U.S. was in the best shape after the War, and the
least scathed by devastations, it did not have other competitors. The timing might have been
fortuitous, but the almost accidental hegemon was very much intentional on keeping its hold in
the region.
The demand for leadership is a response by consumers or the followers. The followers
respond to a type of leadership provided and respond with a demand curve. The followers
consider their current economic or political status, preferences, future price of the leadership, and
availability of alternative goods. Alternative goods would be forms of an alternative leadership
or hierarchical system. The followers weigh various determinants and make a collective choice
or individual choices. The demand curve is therefore a culmination of carefully constructed
political choices. The demand curve reflects the sum of weighted choices that the economies had
to make in consideration of the trilemma of international economics. That is, economies cannot
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have all but must choose different weights among autonomy, stability and international
integration. If economies decide to be fully integrated to the international markets and maintain
monetary policy independence, they have to give up currency exchange rate stability.
Alternatively, economies choose different weights on the three policy goals: managed exchange
rate flexibility, controlled financial integration and limited financial autonomy (Aizenman, Chinn
and Ito 2010). The countries weigh the costs of opting the policy options and take that into
consideration in setting their demand for outside leadership. For instance, Asian economies
deliberate how much they value and therefore how much they are willing to give up in order to
pursue financial integration, monetary independence and/or exchange rate stability in relation to
the U.S. dollar.
At a larger sense, in response to the U.S. leadership in military and economic realms,
Asian economies demonstrate both complicity and resistance in their positioning against the U.S.
It is inevitable that no state accepts the U.S. leadership position unquestioningly. They side with
America on some matters, and not on some other matters. This is because as a region, Asia has
become more diverse in their alliances and trade relations, and less focused on just the U.S.
Individual states “continue to be driven far more by their quite distinctive national agendas than
by any preexisting region-wide comity” (Pempel 2010, 230). As individual countries maintain
their diverse interests and preferences, not all countries are uniformly pro-America, and they are
not all anti-America either. Key East Asian countries, namely Japan, South Korea and Taiwan
have maintained close military relations with the U.S. since 1950s, and this helped perpetuate the
U.S. hierarchy in the region. America’s strong military presence induced Asia’s dependence on
the U.S., and the security priorities overshadowed potential economic disagreements or tensions.
Extensive trade and capital investment relations with the U.S. led Asia to prioritize stable
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exchange rate against the dollar. Asia became a de facto dollar bloc with extensive trade relations
and close exchange rate linkages with the dollar. In the 1990s and 2000s, as Asian nations
became larger and more robust economies, inter-Asia trade increased and dependence on the U.S.
lessened. Key nations such as Japan and China spearheaded efforts to break the region away
from being a de facto dollar bloc. Asian nations did not wholeheartedly jump on the bandwagon
to support Japan and China, but they did not entirely reject the efforts. Middle-powers like South
Korea and Taiwan remained skeptical of the two major powers in the region and careful not to
sever ties with the U.S. The multifaceted stance of the rest of Asia keeps the U.S. as well as
Japan and China in the contest for leadership.

II. Organization of this Dissertation
The dissertation consists of five chapters, starting with this introduction chapter. Chapter
2 wrestles with theoretical definitions of power, hegemony, hierarchy and leadership, and
presents the supply and demand argument. The argument is placed in relation to the literature on
hegemony and hierarchy in international relations. The supply and demand framework is
elaborated upon to explain how the framework can better explain the dynamics of the evolving
process of establishing hierarchy.
The next two chapters explain the periods of the rise, maintenance and defense of
hierarchy in Asia. Each chapter begins with the constant context of military ties between the U.S.
and Asian countries. The context of military ties provides the backdrop to the power relationship
between the U.S. and Asian economies. America’s pursuit of tight bilateral alliances with Japan,
South Korea and Taiwan shed lights on how the U.S. strategized to maximize its control over the
Asian nations and thereby the region as a whole. The foremost priorities were on military
security and containment of communism, but in order to maintain and satisfy these priorities, the
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U.S. extended and deepened the economic ties as well. Asia’s dependence on the U.S. for
military and economic support has left a lasting impact on how the region perceives and
responds to America. Then the chapters elaborate on the dynamics of supply and demand for
leadership during each stage. On the supply side, the explanation focuses on America’s strategies,
and on the demand side the explanation covers Asia’s response and actions.
Chapter 3 focuses on the rise and maintenance of the U.S. hierarchy in Asia from 1950s
to 1990s. During this period, geopolitics, market conditions and strategies gave rise to the U.S.
hierarchy and activated its leadership supply curve. The U.S. aggressively pursued tight bilateral
alliances in East Asia and established the “hubs and spokes” system in the region. Bilateralism
took roots during this place, and did not leave any room for multilateral pacts or structures. The
U.S. government deployed military presence, promoted international trade and internationalized
the U.S. dollar. During this period, Asian countries do not pose direct opposition to the U.S. In
particular, South Korea, Taiwan and ASEAN economies perceive and respond to America’s
leadership contest in their own ways. This period is dominated by America’s initiative.
Chapter 4 elaborates on the defense phase of the U.S. hierarchy from the 1990s to the
present. After the description of the military and political context, the chapter shows indicators of
the U.S. hierarchy. Numerical data include domestic economic indicators, trade, international
reserves, currency exchanges, and voting shares in international institutions. Whereas the
narrative of the previous period was driven by the U.S. interests and actions, Asia takes more
ownership of the contour of the political and economic landscape during this period. The two
major regional powers Japan and China pose challenge to America’s stronghold. Japan and
China compete to be the next alternate supplier of leadership. The U.S. exercises its diplomatic
and political leverage to contain the competitors and defend its own place. Also, the middle-level
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follower economies show multi-faceted demand to the regional leadership by accepting some
aspects of the U.S. leadership and resisting others. For example, starting in the 1990s, the
follower countries pursue a number of regional trade and monetary initiatives that could
potentially be an alternative to the U.S.-centric institutions. They also respond to the power
contests among the U.S., China and Japan in complex ways. For example, they support Japan’s
contest against the U.S. for leadership but let political and historical tensions simmer. More
recently, in the wake of China’s rise, they support China’s efforts to internationalize the Chinese
yuan, but remain wary of China’s territorial ambitions.
Lastly, Chapter 5 completes the dissertation with the overview of the argument and
evidence, and prospects for the future hierarchy in the Asia region.

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Chapter 2: Theoretical Discussion of Economic Hierarchy
Overall, this dissertation discusses the process of establishing and maintaining leadership
in a region. To begin, this chapter visits theoretical definitions of concepts related to leadership:
power, hegemony and hierarchy. In the broadest and the most general sense, power is understood
as an ability to shape and change others. There are different facets to power: hard, soft, unilateral,
multilateral, structural and relational. And this power is exercised through various channels:
bilateral interactions, structured social relations, institutional organizations, and/or diffused
means (Barnett and Duvall 2005). Institution is one of the means to exert power, but it can also
be a means to constrain power by binding a state to certain standards or limitations. One example
of self-restrictive institution is the Franco-German coalition within the European Union
(Kupchan 1998, 48). This chapter focuses on the structural and relational aspects of power.
Structural power is reflected in a system where a superpower employs coercive capabilities or
material preponderance to influence others and maintain order. Relational power is captured in a
system where the leader and the follower enter a contractual agreement, either spoken or
unspoken, to maintain order. The leader agrees to provide stability and security, and the
followers agree to submit and grant legitimacy to the leader. The followers accept their place in
relation to the leader as well as other followers. The chapter delves deeper into unpacking the
definitions and workings of these power-driven systems, particularly as they relate to trade,
finance and currency. The chapter contributes to the existing theoretical discussion of hierarchy
by suggesting to apply the economic framework of supply and demand. In this approach,
leadership is conceptualized as the product, leader as the producer, and followers as consumers.
The framework describes competition among the leadership producers and decision making
processes of leadership consumers in terms of supply and demand curves.

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I. Hegemonic Stability Theory Revisited
Political science is a study of political behaviors and activities which evolve around the
distribution of power and resources. Power and resources are closely linked to each other in that
having power can control resources, and having resources can give power. In international
political economy, structural power shapes “the rules of international politics according to its
own interests,” and therefore determines rules and norms of transactions among economies
(Mastanduno 2005, 179). A country with much power and abundant resources can create “a
structurally advantageous context with long-term commercial, financial and political gains” for
its advantage (Strange, 1987, 1996). An advantageous structure is viable if it can be enforced,
and it is enforceable when it is acceptable or accepted by others. A leader can exercise structural
power when it can also exercise relational power over others. When a hegemon has relational
power, it has the ability to change the affected party’s perceived costs and benefits of the
available options through force, payment or persuasion (Baldwin 1978, 1231).
A system where a single dominant country has structural and relational power is
hegemony. The hegemon possesses superior military and/or material capabilities and exercises
preponderant influence over others. Followers submit to the hegemon’s rule. In response, the
hegemon provides the public good of security and stability. Hegemony can be observed in
different areas of power, such as military, trade, institutions and finance. Hegemony is different
from pure domination or imperialism. In an imperialistic order, the empire coerces and exploits
its colonies or subordinates strictly for its benefit. But in hegemony, size or capabilities alone do
not automatically guarantee that the hegemon would have authority over others. Material
capabilities do not automatically or necessarily translate to hegemonic behavior, provision of
public good or absence of conflict (Prys 2010, 481). Establishing hegemony requires that the
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leading state has coercive capabilities, but also, there needs to be consensual acceptance of the
leading state’s legitimate authority. The consensual right of one state to lead derives from the
values or norms that a state projects, in addition to military might or economic wealth. This kind
of relationship must contain some measure of legitimacy understood by both parties (Lake 2007).
In a way, hegemony is a condition that must be socially recognized in order to exist. In a
hegemonic system, essential are “the ability of the hegemon to sustain its economic, military,
and technological leadership; the degree to which potential challengers perceive themselves as
benefiting from the existing hegemonic order; and the propensity for hegemonic overextension”
(Nexon and 2007, 254). For this reason, hegemony should be defined in terms of control rather
than terms of power base (Grunberg 1990, 434). Measures of control and authority should
incorporate some kind of responsive behavior from the followers. A well-functioning hegemony
requires a social order that legitimizes the system as well as a credible commitment on the part of
the dominant state not to exploit the secondary states if they accept the dominant state’s authority.
Hegemony spans over different areas of power, and in particular, monetary hegemony is
“organized around a single country with acknowledge responsibilities (and privileges) as leader”
in the sphere of money (Cohen 1977, 9). More narrowly, currency hegemony is where a single
currency is the mostly widely circulated, and it commands a high level of “confidence, liquidity
and transnational networks” (Helleiner and Kirshner 2009). Alternative to a unipolar currency
hegemony is multi-polarity where multiple currencies are predominantly circulated in different
regions amidst changes in growth dynamics, corporate investment and international monetary
and financial arrangements (World Bank 2011). A phenomenon of a single or a few currencies
becoming widely circulated is an outcome of market dynamics as well as intentional strategies.
A country that wants to internationalize its own currency can employ various facets of its power
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to enforce and widen the use of its currency in other parts of the world. The issuing economy can
implement strategies to strengthen its capabilities in the areas of production, finance, security
and knowledge to communicate to the international market that the economy is stable and
therefore the currency is also. Strengths in production, finance, security and knowledge are four
pillars that will uphold currency hegemony (Strange 1987). The combined effect of trade and
financial markets as well as unrivalled military power sustain currency hegemony (Norloff 2008,
2010). Dominant commercial capabilities generate favorable investment relationships; financial
capabilities result in beneficial commercial dynamics; and military preponderance creates
advantageous commercial and financial transactions (Norloff 2014, 15).
Hegemony or hegemonies are in forms of bipolarity, unipolarity, or regional clusters, and
they fall somewhere in the range of benign to imperialistic. Benign unipolarity refers to a
structure where the hegemon establishes a hub-spoke pattern of influence, and allows a regional
order to emerge through consensual bargains (Kupchan, 42). In a benign hegemonic order, the
hegemon self-restrains its power, and other members self-coerce to be part of the system. The
hegemons exercise their power through various means, from unilateral actions or multilateral
institutional structures.
The theory of hegemonic stability posits that a hegemonic power is needed to insure the
smooth functioning of an international monetary system. In other words, international market is
stable when there are explicit rules and procedures governing international monetary affairs
(Eichengreen 1987). A hegemon enforces the rules of the system, provides public goods and
absorbs the market excess (Kindleberger 1973). The theory relies on several assumptions: (1)
stability of the market is a public good that is too costly for anyone else but the hegemon to
provide, (2) the hegemon is willing and able to provide this good in exchange for some benefit,
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and (3) the market is intrinsically unstable without the provision of the public good and therefore
the presence of the hegemon. While the theory explains the empirical cases of the Pax Britannica
and the Pax Americana periods to an extent, the assumptions need further examination.
To begin with, the assumption about the public good is beneficial for all but prohibitive
needs to be re visited. According to the theory, international economic stability is a public or
collective good from which all countries benefit regardless of whether or not they contribute to
producing it. Small and medium-sized countries are unlikely to contribute, because their
individual contributions have little impact. Instead they are tempted to free ride and pursue
private national interests and hope others will produce the public good (Webb and Krasner 1989).
But it is not clear if the smaller countries do not contribute at all. Costs of systematic stability
may be passed onto smaller states. Only a hegemon has sufficient power and motivation to
provide the public good of international economic stability. If there is no hegemon, the rest of the
world is unable to achieve this common interest because of the institutional and strategic
obstacles to the provision of collective goods (Webb and Krasner 1989). All participants are
rendered better off by the intervention of the dominant power. An example of the public good on
a national level is common currency. When a country is consisted of multiple regions with
different levels of production and income, then some regions contribute more to the overall gross
domestic product than others. But if these regions share a common currency, then it can be said
that some regions contribute more to sustain the value of the currency then others. If the currency
is stable and strong, the regions that do not contribute as much still benefit from having a strong
currency. The common system is beneficial to all for the ease of transactions between the
regional lines, but some benefit more and/or incur higher costs than others.
22

The second assumption is that the hegemon is willing and able to provide the public good
in exchange for some benefit. The hegemon takes the lead in pushing for trade liberalization and
keeping its own market open in times of recession. It manages the international monetary system
especially in times of crisis, and supplies investment capital to developing economies. A
hegemon is powerful relative to other states in the system when it performs these functions
(Webb and Krasner 1989). However, the built-in assumption of hegemonic benevolence is
inconsistent with the generally accepted notion that states pursue self-interests and take actions
for their own benefit. Hegemons do not behave in a uniform manner. Power-hood especially in a
regional setting manifests in different forms and different features (Prys 2010). On one hand, a
hegemon can be extremely coercive, but on the other hand, it can be gently cooperative. A
coercive hegemon dominates others through force or manipulate subordinate states to
compliance (Lake 2007, 52). It also threatens a state that deviates and/or rewards a state that
complies. A cooperative hegemon applies non-coercive means such as side payments and power-
sharing arrangements to advance their interests and institute a regional order (Pedersen 2002).
The idea of cooperative hegemony implies soft rule within and through cooperative
arrangements based on a long term strategy (Pedersen 2002, 684). Cooperative hegemony is
conductive to stable legitimate rule.
Also, hegemony may rise and fall, and emerge and disappear. Hegemony is not an
accomplishment that a country achieves and then maintains once and for all, but rather it is a
condition that the country strives toward and then must work to maintain it. Hegemony is
transitory because its hold on power unavoidably faces dilemmas. The Triffin dilemma of
hegemonic currency suggests that when a hegemon runs a balance of payments deficit and thus
provides the system with liquidity and a common currency for international transactions, it
23

actually undermines the confidence of markets and central banks in the hegemonic currency and
thereby weakens its position in the system (Grunerg 1990, 453). An investment dilemma
suggests that when a hegemon heavily invests overseas, it becomes less competitive and allows
potential challengers to rise. The open market dilemma suggests that when a hegemon polices
the regime of free trade and opens its own vast market but the free riders do not reciprocate, the
hegemon suffers payment deficits and loses competitiveness (Grunberg 1990, 453). Historical
experience shows this and suggests that a hegemon’s willingness to act as a stabilizer at a point
in time tends to undermine its continued capacity to do so over time (Eichengreen 1987). The
hegemon’s decline will wreak systemic havoc. If smaller states contribute less to public goods
but still benefit disproportionately from international cooperation, the hegemon gradually
weakens relative to other states. And this will eventually lead to a decline that is imminent and
inevitable (Norloff 2010, 49). Hegemonies decline when the existing participants defect. A
country will choose to incur the cost associated with interrupting public good provision when it
is less than the benefits of adjustment through devaluation, as in the optimal currency area
literature (Eichengreen 1987)
Through the rise, decline and emergence of hegemons, must there be one at a time? What
distinguishes a hegemon from almost-hegemons or non-hegemons? Where do states place in the
continuum of hegemony? We may recognize a hegemon when we see it, but is there a predictive
measure? There is no clear threshold (Lake 1993, 481). There is no clear measure. There are a
number of relevant indicators: GDP, military expenditures, trade volume, and monetary reserves,
among others. These indicators can measure power base, but weakly reflect control or influence.
The third assumption is that the market is intrinsically unstable and need to be stabilized
by an international lender of last resort. But this assumption is not substantiated. Market
24

malfunctions occur because government interventions engender moral hazard and related
problems. The absence of interventions does not disrupt the market (Eichengreen 1996). On the
other hand, if the system is overly dependent on one superpower for stability and that one
superpower cannot sustain its place for long, then the market is in fact unstable.
Hegemonic stability theory posits that the presence of a hegemon is a necessary condition
to achieve the outcome of international economic stability. But subsequent theories and
empirical assessments show that a single leader is neither necessary nor sufficient for the
provision of an international economic infrastructure. It is always possible to define any state
that effectively produces stability as a “leader” and any state that does not as a “non-leader”
(Lake 1993, 466). What is conducive to the stability is not necessarily the presence of a hegemon
but more of an international consensus on the objectives and formulation of monetary policy that
permit central bank policies to be harmonized (Eichengreen 1987). The condition of the
international economy, whether open with free trade or stable with capital flows, is an outcome
of strategic interaction and bargaining of self-interested states that pursue their individual trade
policy preferences (Lake 1993, 469). The contrast between the appearance of smooth adjustment
under the classical gold standard and the Bretton Woods and the adjustment difficulties of the
interwar years suggests that the policies of a dominant power serve as a sheet anchor for
international adjustment (Eichengreen 1987). The argument is that a dominant player is best
placed to signal to other players the nature of the most probable stance (Snidal 1985). However,
even with a hegemon in place, cooperation is required for systematic stability. If the world
economy performs well and maintains stability even with fading or absence of a hegemon, then
the theory finds no support from history (Webb and Krasner 1989).
25

A game theoretical model suggests that a hegemon is unlikely to defect from an
established international monetary system, which in and of itself may lend that system a
semblance of stability. This model suggests that a system comprised of identical or similarly
sized countries is the most likely to be stable. This only weakly supports the hegemonic stability
theory in that if the hegemon itself is unlikely to engage in destabilizing actions then the system
will be stable (Eichengreen 1987). There is no simple mapping from broad characteristics of the
international monetary system to the capacity of a dominant country to use different strategies to
insure the maintenance of that system (Eichengreen 1987).
Cooperation is essential to maintaining hegemony, and therefore how hegemonic
behavior is received by non-hegemons and followers is instrumental in defining and
understanding hegemony. How power is received sheds light on how power is established in the
first place. There is a relational aspect of power and authority. Relational power is understood
through the patterns of asymmetrical interdependence between countries or actors (Bergsten
1973). In other words, leadership implies that there are followers. A leader has a greater
responsibility or ability to set the course of action for the future than do followers. Theories of
hegemony rely on a hierarchical perception where the hegemon and subordinates understand,
agree and choose into a particular state of world order.

II. Economic Hierarchy
Hierarchy describes a system where the hegemon and followers cooperate to maintain the
status quo. The hegemon and the rest of the followers are rank-ordered based on a particular
attribute. Thus, hierarchy is an ordinal measure from the highest to the lowest, as “some kind of
arrangement or rank, among people, groups or institutions” (Lebrow 2008, 4). Hierarchy is
26

defined contractually. The ruler and the ruled strike an unwritten contract, or “a bargain …
premised on the former’s provision of a social order of value sufficient to offset the latter’s loss
of freedom” (Lake 2007, 54). “Regional order emerges from a consensual bargain between core
and periphery, not from coercion …[and] the core engages in self-restraint and agrees to subject
the exercise of its preponderant power to a set of rules and norms” (Kupchan 1998, 42). In
hierarchy, states are similar to a set of offices that are linked by chains of command. One state
cedes to another state the right or control over an action (Wendt, Friedheim 1995, 697).
Dominant states exercise political authority and commands subordinate states to alter their
behavior and comply with the order (Lake 2007, 50). In a dyadic context, hierarchy is a pattern
of asymmetric interdependence and leverage or a lack thereof between parties. “Power
asymmetries create hierarchy, but order emerges because power is withheld at the same time that
it is exercised” (Kupchan 1998, 47).
Key to this definition is the social nature of hierarchy. In the rank-ordering, some are
above, and some are below others. Notwithstanding the “small-country assumption,”
1
even small
economies are engaged in relational power relationship. Subordinate states are part of the
hierarchy just as much as the top state, so are their views and attitudes. How the subordinate
states view and accept the position of the top power establishes the kind of hierarchical system
established. Whether and why secondary states accept hierarchy is as important as why great
powers contend for the top position. Thus, questions of hierarchy also exist among smaller states,
not just the great powers. Hierarchy is by definition a way that states interact and co-exist. And
this theoretical lens leads to questions such as: what are the rules of the game? How do we

1
“Small-country assumption” presumes that small countries cannot affect their own terms of trade and interest rates,
so they have no economic power and therefore no responsibility for the economic system or any necessity to exert
leadership (Kindleberger 1981, 249)
27

measure the status hierarchy? How do states express their satisfaction with their place in the
hierarchy? How do states change their standings? When is conflict most likely to occur?
Hierarchy implies that subordinate states choose into the relationship not in response to
coercion but rather out of obligation. Obligation flows not from the commands of the ruler, but
from the consent of the ruled; a ruler does not possess authority unless her subordinates
acknowledge an obligation to comply at will. The “periphery” enters willingly into the “core‘s”
zone of influence (Kupchan 1998, 43). Therefore the authority to lead derives from the interests
of the ruled, rather than the ruler (Lake 2007, 55). The shift of the analytical focus from the ruler
to the ruled and the notion that a hierarchical relationship forms out of choice suggests that
cooperation to the existing order is voluntary. Subordinates self-enforce cooperation.
Economic hierarchy is a subset of general hierarchy. The approach of economic hierarchy
recognizes that actors are not identical and not interchangeable. Some actors have more
resources and market shares, and therefore can influence the market more than others. Economic
exchanges require institutions that can resolve collective action problems. As such, a key
question becomes how economic hierarchy forms and sustains itself. Economic hierarchy
captures a rank-order of the economies by the order of their shares in the market. Indicators of
market shares include production, trade values, bond yields, stock market valuations,
international currency reserves, and currency circulations. In particular, currency indicators are
reflective of the issuing economy’s domestic market conditions as well as international
competitiveness. Holding a dominant place in economic hierarchy varies inversely with a
country’s monetary policy autonomy and political autonomy (Lake 2008, 67-8). Hierarchical
relationships among economies and more specifically currencies are reflected in the asymmetry
28

of the international monetary system. In other words, a small number of the dominant currencies
or economies take up a large proportion of the market and the world economy.
International currency dominance is a subset of economic hierarchy which is a subset of
general hierarchy. Currency is dominant when it is widely circulated. It is extensively traded,
exchanged and accumulated. Wide circulation of the currency reflects international currency
status, defined as having a market share in the international currency market, for instance in
terms of trade invoicing, reserves and exchange rate regimes. International currency status
therefore is one component of measuring economic hierarchy. Currency dominance is neither
strictly economic nor political phenomenon, as currency itself is both an economic vehicle and a
political instrument, influenced by both market and strategic politics. The extent of the use of the
currency is an explanatory variable as well as an outcome variable of hierarchical dynamics
among the hegemon and the followers.
Currency is a multifaceted instrument that is functional and symbolic. Functionally,
currency serves as a medium of exchange, a unit of account, a standard of deferred payment, a
store of value, and a symbol of national unity and government authority. It is a durable good
itself, and “its price reflects a flow of future services, not simply its transactions value at a point
in time” (Rogoff 2001, 243). Currency functions as a channel between markets, in that while it
belongs to a single economy, it enables transactions that flow through multiple economies.
Currency is a natural monopoly, but international currency competition provides a check on
inflation (Rogoff 1985). On one hand, money is “what is used in the discharge of the functions of
money, rather than what is declared by government or governments to be legal tender,” and “the
market, not governments, determine what is money” (Kindleberger 1981, 10). At the same time,
currency is a political statement that reflects a government’s commitment to protect its value and
29

use. Money is a political and economic institution that is sticky and embedded into a global
structure.
Currencies can be used to manipulate international monetary relations such as relative
exchange rates, value and volatility and to coerce a certain behavior of other states via measures
such as sanctions or restrictions (Kirshner 1995). When a currency is circulated widely, it can
also give coercive power to the owner of the currency. One state can manipulate its relative
exchange rate or volatility of the currency in order to coerce or otherwise influence another
state’s political or economic behavior (Kirshner 1995). This is possible because the market is so
interconnected, and a change in the value of one currency affect the competitiveness of its own
as well as of others and affect trade patterns or investment flows among economies.
As for the currency price, the exchange rate is determined in relation to other currencies.
Market dynamics of supply and demand determine the value, but the supply and demand forces
can be steered by government interventions. Exchange rate regimes run on the continuum. In a
free float regime, exchange rates fluctuate freely. On the other extreme, a hard peg regime sets
exchange rates at a certain level determined by the government or the central bank. The market
dynamics and policies can be in conflict. That is, the central bank may announce their exchange
rate policies, their de jure exchange rate regimes, but the actual behaviors, in other words de
facto exchange rate regimes, may differ. This is detected when fluctuations in the exchange rates
do not reflect the fluctuations in the international reserves. In order to establish this point,
economists suggested various ways to classify currency regimes in the first place and then
showed that they differ from official currency regimes (Frankel 1999; Calvo and Reinhart, 2000;
Reinhart and Rogoff 2004; Levy-Yeyati and Sturznegger 2005; Frankel and Wei, 2008).
30

According to Levy-Yeyati and Sturzenegger, a flexible regime shows unlimited volatility
of nominal exchange rates with little intervention in the exchange rate markets. A fixed regime
shows unmatched movements between reserves and exchange rates. A regime of crawling peg
shows fluctuations in the nominal exchange rates with stable increments (Levy-Yeyati and
Sturzenegger 2005, 1606). For instance, in 1980s, a few Central American central banks
announced that they would maintain fixed regimes with the U.S. dollar but in reality allowed
their currencies to significantly depreciate.
2
An alternate case is also noted where countries
formally announced that they float their currencies but in reality allowed the central bank to buy
or sell foreign reserves in order to reduce exchange rate fluctuations (Broda 2011, 377).
3
If
countries are export-oriented, they can easily amass foreign reserves and use them as a buffer to
offset exchange rate fluctuations (Calvo and Reinhart 2002).
4

The mismatch between de jure and de facto regimes is explained by the clash of domestic
interest in maintaining a stable currency against the international pressure to free float. Scholars
refer to the fear of floating as a primary basis for wanting to control the currency regime even
while not admitting to be doing so. Fear of floating arises because countries are well aware of
adverse effects of exchange rate fluctuations. When exchange rate fluctuations are high, output
costs are high (Lahiri and Vegh 2002), supplies of external funds are inelastic (Caballero and
Krishnamurthy 2001), and risk premium shocks are high (Calvo and Reinhart 2002). Also, the
mismatch occurs when the relevant institutions are not apt to maintain the de jure regime.
Economies with poor institutional quality have difficulty maintaining a de jure regime, especially
of pegging, and economies with relatively good institutions tend to intervene in the market more
than announced due to the fear of floating (Alesina and Wagner 2006).

2
Cases in point: El Salvador (1983-1984), Guatemala (1986- 1988), and Nicaragua (1985-1987)
3
Cases in point: India (1993-1996), Bolivia (1985-1990), and Philippines (1988-1997)
4
For example, Korea and Thailand
31

The exchange rate has welfare effects on domestic constituents. For instance, a wide use
of the currency allows the residents of the issuing country a greater purchasing power of their
currency both at home and abroad (Krannan 2009). A greater use of the currency abroad leads to
a fall in the price of imports and thereby an improvement in the terms of trade. As more foreign
exporters are willing to accept the domestic currency, the domestic residents see an increase in
their real money balances. And the increase in purchasing power generates welfare gains
(Kannan 2009).
Similarly, volatility in the value of a reserve currency can hugely affect the value of the
reserves. Fluctuations in the currency value generate fluctuations in the loan amount and expose
the borrower and the lender to foreign exchange risks. The currency mismatch is a significant
source of risk especially for emerging countries that have to borrow in a foreign currency. The
choice to borrow or trade in a particular currency shows trust in the relative stability of that
currency. For instance, it would be much easier to trust the currency when the issuing country
exhibits political and economic stability (Helleiner 2009). Therefore currencies are entrusted
with different levels of trust. They are entangled in a web of “top,” “master” and “negotiated”
currencies (Strange 1971; Cohen 2009). The top currency accrues benefits of seigniorage,
macroeconomic flexibility, reputation and leverage (Cohen 1998, 2004).
Currency policies are restrained by the restrictions of the trilemma of capital mobility,
monetary autonomy and exchange rate stability. In today’s world with greater capital mobility,
the trilemma boils down to how to manage between the two prices: “(1) The price (and
variability of the price) of money in the home market (i.e. the inflation rate) [and] (2) The price
(and variability of the price) of money outside the home market (the exchange rate)” (Kirshner
2003, 647). If the exchange rate is pegged, the choice of the price money in the outside market is
32

already made, and the ability to choose a price of money in the home market is lost. In other
words, the choice of exchange rate regime therefore inversely denotes the degree of monetary
autonomy. More pegged the exchange rate is, less autonomous the monetary authority is. The
choice of exchange rate regime also reflects how much a country prioritizes the exchange rate
stability over monetary autonomy. In practice, countries choose a weighted package of the three
options and fall on a continuum of the trilemma (Aizenman, Chinn and Ito 2010).
Why a certain currency is preferred choice to trade, exchange and hold is studied
extensively (Bergsten 1975; Eichengreen and Frankel 1996; Eichengreen and Mathieson 2000;
Frankel 1992; Krugman 1984; Kindlebergr 1981; McKinnon 1979; Rey 2001; Tavlas 1993;
Chinn and Frankel 2007; Helleinr and Kirshner 2009). The empirical determinants that influence
currency circulation are (1) existence of transaction costs; (2) role of strategic externalities; and
(3) strong persistence in monetary leadership (Flandreau and Jobst 2009). Here, transaction cost
is defined as the difference between the price at which currency is acquired and the price at
which it is resold. Agents are expected to select money with the smallest difference. The extent
of transaction costs are determined by market size. When a currency is largely circulated and
easily resold, transaction cost for that currency is low. In other words, liquidity lowers
transaction costs. And the implication is that currencies become valuable when other parties use
them and generate externalities (Krugman 1980; Rey 2001). Strategic externalities are captured
by posting a decreasing unit cost function with the volume of transactions using the given
currency. And this in turn creates persistence. Strategic externalities emerge naturally because
equilibrium outcomes are influenced by other agents’ choices. In order to facilitate currency
exchange, trading posts are needed, and these require real resources (Devereux and Shi 2005).
Because these posts entail fixed costs, certain currencies emerge as vehicles.
33

Wide circulation of currency is a natural byproduct of a large market. That is, when the
issuing country has a large share in international output, trade and finance, naturally its currency
will be widely circulated. It also helps if the issuing country has open, free, deep and well-
developed capital and money markets. If the currency does not fluctuate erratically and the
inflation is held stable, then outsiders as well as insiders can be confident that the value of the
currency will be relatively stable. For a currency that is already widely circulated, transaction
cost is low and the inertial bias is in favor. These factors constitute the immediate context which
suits a currency for a dominant international currency status. These market conditions explain the
international financial phenomenon. These explanations show why a currency becomes a widely
circulated international currency, but only partly. These immediate contextual determinants
emerge only under certain conditions. And these conditions conducive to the rise of an
international currency emerge through some process. This process is colored by politics.
Active political strategies expand the role and scope of a domestic currency into an
international one. States formulate currency policies to internationalize their currencies, and in
this process they exercise power (Helleiner and Kirshner 2009; Norrlof 2014). Granted, not all
states opt to internationalize their currencies. Only a handful are interested. While all major
powers would benefit from having currencies be more widely circulated in the international
monetary market, not all of them succeed. Benefits of international currency are debatable, but
the consensus is that the advantages outweigh disadvantages. Advantages include convenience
and welfare benefits for the issuing country’s residents, more business for the issuing country’s
banks and other financial institutions, seignorage, political power and prestige. Disadvantages
include possibly large fluctuations in the demand for the currency and burden of responsibility to
34

be mindful of the international impact the currency has (Chinn and Frankel 2007). The success of
currency internationalization depends on strategic politics just as much as market forces.
Explanation of international currency dominance and thereby economic hierarchy and
hierarchy at large should synthesize both economic and political factors. One approach is to refer
to the economic principle of supply of and demand for safe and liquid assets. In the anarchic
market of myriad investment vehicles, an asset denominated in a particular currency gains
attraction if the issuing economy of that currency is relatively less volatile and more stable than
others. The more the currency is trusted, the more it is circulated. Positive externalities kick in,
and the externalities reinforce the benefit of using this currency. A hegemonic order centered on
this currency emerges, and it persists. This process occurs organically through market dynamics.
Economic factors such as liquidity, network externalities and confidence reinforce each
other in shaping a hierarchical pyramid of currencies (Strange 1971; Cohen 1998). A key
determinant for which currency is used as a medium of exchange in international transactions are
size of the issuing economy especially as it relates to trade and finance. When an economy
conducts a high volume of overseas trade, much of the trade is conducted in their currency.
Larger the trade market, wider the currency use. Over a long run, a share in international trade
and the size of the market is a powerful driver of international monetary leadership. A large
share of world product and trade positively influences the international role of the country’s
currency in reserve holdings (Chinn and Frankel 2005). Currency denomination in international
trade arrives through iterations of firm-level strategic interactions across international markets. In
simple words, “money follows trade” (Flandreau and Jacobs 2009, 647).
Transaction costs and exchange rate variability affect the choice, and the invoicing choice
for volumes of trade affects exchange rate volatility. It is shown that the market share of an
35

exporting country in the foreign market and the competitiveness of the export goods, in other
words the availability of substitute goods in the domestic market, determine the invoicing choice
(Bahetta and Wincoop 2005, 297). The higher the market share of the exporting country, the
more differentiated the products and the more likely are the firms to invoice in the exporter’s
currency. An exporting firm prefers to price in the exporter’s currency when profits are convex
when pricing in the exporter’s currency. Prices are sticky because of nominal rigidities, and
invoicing decision matters because in international trade, it matters in which currency the prices
are sticky. Whether prices are rigid in the importer’s or exporter’s currency has a large impact on
international transmission of shocks in open economy macro models (Obstfeld and Rogoff 1995;
Betts and Devereux 1996).
When firms have little price setting power, they resort to invoicing in a currency that is
widely used overseas (Goldberg and Tille 2006). Alternatively, when firms have price setting
power, they are likely to insist on their choice of invoicing currency. In general, primary
products are priced in the widely circulated international currency, whereas manufactured goods
between industrialized countries is denominated in the exporter’s currency. If bilateral trade with
a given country is important, invoicing in its currency is convenient. And the trade partners can
mitigate foreign exchange risks and lower transaction costs. Here, the cost refers to the
difference between the purchasing price and the selling price of a currency, which can also be
defined as the bid-ask spread. It is natural to expect that a large volume of trade leads to a large
volume of foreign exchange transactions. Also in general, high inflation currencies are used less,
and the developing country’s currency is used less between industrial and developing countries
(Friberg and Wilander 2008). Exceptions to these general observations occur when the export
production network involves intra-firm trades across multiple economies with different currency
36

risks as well as the final destination of the products is located at yet another market (Ito et al.
2010).
Externalities occur when the utility from consumption of the good increases with the
number of other agents consuming the same good (Kat and Shapiro 1985). The larger the foreign
exchange market volume, the more liquid the currency; subsequently, the more liquid the
currency, more transaction. This kind of positive feedback generates strategic network
externalities. Choosing to use a currency influences and is influenced by others’ choices. As
individual decisions jointly respond to each other, individual response functions correspond to a
Nash strategy. A large share of world product and trade positively influences the international
role of the country’s currency in reserve holdings (Chinn and Frankel 2008).
Positive externalities, as currencies become international on the account of their low
liquidity premia, which further strengthens their wide circulation. The evidence was found in the
late 19
th
century, where history benefited European countries and disadvantaged the U.S. Over a
long run, economic mass and share in international trade has been a powerful driver of
international monetary leadership (Flandrea and Jobst 2005). Network externalities generate a
gravitational pull of a currency because everyone else is using it (Kindleberger 1967). Network
externalities explain the international use of a currency beyond what one might expect by simply
looking at economic variables. These externalities can also mean that at some point an
international currency can assume a global role that is out of proportion and beyond the issuing
country’s size in the world economy. This explains why a decline of the incumbent currency may
come later than the decline of the issuing economy (Krugman 1984; Bergsten 2005). This points
to the disconnection between the currency and the issuing country.
37

When externalities ensue for a while, this gives rise to path dependency. By definition,
strategic externalities are “captured by posting a unit cost function that is decreasing with the
volume of transactions using a given vehicle currency” (Flandreau and Jobst 2009, 645).
Network externalities emerge naturally as equilibrium outcomes that are influenced by other
agents’ choices (Flandreau and Jobst 2009). In the currency market, preference to use a particular
currency increases when the number of other agents using the same currency increases. Also,
holders of the currency become less willing to switch to another currency. In this case, the
threshold of tolerance of bad behavior of the currency becomes high. For instance, when the
currency is widely used, the inflation of the currency would have to be very high for the holder
to abandon it (Kannan 1993, 1184). When a currency is used widely, it is more liquid in the
market. Users can easily exchange it, so the cost of holding it is low. In this way, the transaction
cost of a particular currency is determined by the size of the market that involves the currency
(Krugman 1980; Rey 2001). And because of this, widely used currencies are lent at low interest
rates, and they are more likely to be quoted abroad. As foreign quotations increase, interest rate
decreases. Transaction costs are lower, and this generates transactional efficiency.
Confidence, liquidity and positive externalities prolong a hegemonic order of a particular
currency. Traders, investors and central bankers around the world calculate costs and risks and
consciously choose into a monetary system dominated by one currency. At the same time, the
market is susceptible to more than the forces of supply and demand. The government can
implement strategic policies to actively create and expand its currency market and coercive
measures to maintain a monetary system dominated by its currency. Behind the market dynamics,
there could be political will harder at work. By extension, domestic and international politics
play a significant role in determining the future of an international currency. Politics matter in
38

two large ways. One is that political forces shape market conditions on which a currency is able
to rise and is able to maintain its status. Another is that other economies choose to prop currency
denominated assets and sustain the particular currency centric monetary system for political
reasons. The underlying assumption for this political approach is that governments’ backing for a
particular international currency may be linked to broader geopolitical motivations and power
considerations. An international monetary system operates according to domestic and
international political dynamics (Gilpin 1987). The geopolitical approach argues that support for
a dominant currency is linked to deeper political motivations and relationships.
In general, an incumbent wants to prolong its hold on power. Similarly, the incumbent
currency wants to remain so, whether through favorable market advantages or strategic political
operatives. The implicit assumption in examining political operatives is that someone
deliberately utilizes these operatives and exercises power through them. Especially in the
international currency market which is pervious to unexpected noise and unpredictable volatility,
public and private actors exercise, or attempt to exercise power in all forms and through all
channels. This could range from brokers hedging currency risks and consequently influencing
currency prices to central banks trading large volumes of currency denominated assets.

III. Application of the Supply of and Demand Framework
An economist definition of economic or market power is sufficient size in the relevant
market to influence prices and quantities. So hegemon is a like a dominant firm whose market
power exceeds that of all rivals, or a dominant firm in an oligopolistic market where it maintains
its grasp on the cartel by making side payments to marginal members. It deters defection from
the cartel by using its economic policies to threaten retaliation (Keohane 1980; Eichengreen
39

1987). And a hegemonic “system is stable as long as key countries are not weighed down by
heavy loss, and as long as credible alternatives to [the current system] do not exist” (Norloff 10,
53). The hegemon tends to maintain a “sticky” power as other countries become large stake-
holders in the hegemon’s economy, both commercially and financially.
The dynamics of international currency dominance and greater economic hierarchy can
be captured in the framework of supply and demand. The issuing country of the dominant
currency is thought of as a hegemon that supplies leadership. Other countries that use the
dominant currency are thought of followers that receive leadership. As described in the diagram
below, the dominant state contests with other potential dominant states to establish the top status
(See Figure 2). The subordinate states shape a collective arrow of demand through their
compliance and resistance. The dominant state initiates to supply leadership as it expands
political alliances, trade and strategic network. For instance, when a state pursues to establish
currency hegemony, it promotes wide circulation of its currency by expanding trade and
investment. The currency secures a sufficient market share, and becomes a major currency in
trade invoicing, international reserves and exchange rate regimes. The currency then becomes a
main vehicle currency in the international monetary system. Other major currencies may
challenge the system and provide an alternative. The challenge is successful if the ambition
drives on the capacity and means to achieve it. But if not adequate, the challenger fails to
establish currency hegemony and resorts to cooperate with the existing order. The cooperative
behavior is self-coerced. And the gradients of cooperative behavior vary depending on how
competitive the challenge was.

40

Figure 2. Relationship between the Dominant and Subordinate Economies

In this supply and demand framework, hierarchy or leadership is conceptualized as the
good that is produced and consumed. Leader produces leadership, and followers consume it. The
value of the good is assumed to be reflected in the price. For the producer, price is what he gains
for selling the good. The producer takes into account the cost for producing the good and weighs
in to decide whether the price he receives is worth his efforts. For the consumer, the price is what
he pays for buying the good. The consumer takes into account the opportunity cost of buying the
good and weighs in to decide whether the price he pays is worth the value he would get from the
good relative to other goods he could potentially buy. This relationship is drawn out in the
graphical representation of supply and demand (Recall Figure 1 from Chapter 1).

41

Figure 1 (from Chapter 1). Supply and Demand

The leader supplies leadership, and determines the extent of the supply by considering the
production costs, expectation of future prices, and a number of suppliers. Supply decisions of all
suppliers of leadership collectively form a market supply curve, and the curve slopes up. Higher
the price, higher the quantity the supplier wants. That is, if a leader can gain more from having
leadership, he would want influence to a greater extent. Price at which the hegemon “sells”
leadership is the benefit it reaps. The benefit includes tangible gains such as welfare gains for the
residents or constituents of the hegemonic state, seigniorage, and higher voting shares in
international institutions as well as intangible benefits such as reputation and status. The
individual supply curve is determined by marginal cost, which is the change in the total cost that
arises when an “extra unit” of leadership is provided. Costs of providing leadership include
resources needed to strengthen military weapons and personnel, provide military support
overseas, maintain diplomatic posts overseas, open the domestic market to international trade,
42

internationalize currency and establish international institutions. The leader would like to
minimize the overall cost of providing leadership, and especially the marginal cost producing an
extra “unit” of leadership, and reap greater benefit. The cost would increase if the leader faces
competitors and needs to invest more resources to provide better or more public goods and
secure his position of leadership. So when multiple suppliers emerge in the market, the supplier
curve would shift left (See Figure 3). If there is no competitor, the leader can reach an almost
monopolistic status. The leader prefers to incur a lower marginal cost to maintain its leadership
position. The leader is in favor of externalities kicking in, and his leadership status being “sticky”
or persistent, because that would require less of additional resources to maintain his position.
The follower demands leadership, and determines how much to consume depending on
his income, taste and preferences, expectation of future prices, and price of substitutes or
complements. Demand decisions of all followers collectively form the demand curve. The
demand curve slopes down. That is, higher the price, the lower quantity the consumer wants. If
the follower deems his submission to leadership to be costly, and increasingly so, he will want it
less. The demand curve is determined by marginal utility, which is additional satisfaction that the
follower gains from consuming one more “unit” of leadership. The follower consumes a
“quantity” of “leadership” at a given price, if the marginal utility of additional consumption
equals the opportunity cost, which is marginal utility of alternative choices. So the demand
schedule reflects the willingness and ability of the follower to give into the leadership despite the
availability of other choices. The price that the follower pays to purchase, consumer or give into
leadership is the cost that the follower incurs, for instance the incremental loss of autonomy,
lower status, risks or exposure to vulnerability. The demand curve shifts right when demand
increases due to non-price determinants. For instance, if the follower has higher economic or
43

military status and the price of alternative leadership is lower, demand would shift left or inward.
If the followers feel that they are self-sufficient, relatively stable, or secure enough, they would
not feel the need to rely on outside leadership. Their demand curve shifts left. Alternatively, if
the price of substitute goods, or alternative leadership, is high, then the demand would shift right
(See Figure 4). Changes in tastes and preferences also matter. In the short term, tastes and
preferences of the consumers are assumed to be fixed to derive a market demand curve. However,
in reality, the preferences are hardly constant or fixed. Their preferences are not unitary but
rather reflect multiple voices and conflicting interest of different within the countries. That is,
Follower Country A’s preference toward Leader A differ from Follower Country B’s preferences.
And within Follower Country A, Sectors (a), (b), and (c) have different opinions about what
position Follower Country A should take in regard to Leader A.
Figure 3. Supply Curve Shifts

44

Figure 4. Demand Curve Shifts

The supply and demand curves would intersect to produce an equilibrium point of price
and quantity. The price here refers to a benefit that the leader gains from having leadership, and
the cost the follower has to pay to rely on the leader’s leadership. The quantity is the extent or
sphere of influence. The leader gains this extent of leadership, and alternatively the follower
loses the extent of leadership. The equilibrium is not an instantaneous outcome, but rather a
product of numerous market interactions. Market interactions in this case refer to numerous
bilateral or multilateral interactions, political negotiations, and trade or currency exchanges.
The supply of leadership is initiated by the producer or a potential leader. The potential
leader harbors the ambitions to lead and establish a supply curve on the market. The potential
leader employs aggressive strategies and active politics to achieve that end. In the case of the U.S.
hierarchy, the U.S. government pursued strategic policies to expand trade, internationalize the
dollar, invest in overseas military presence and establish international institutions. From as early
45

as 1920s, the Federal Reserve and the U.S. Treasury pursued currency internationalization
initiatives. During and after World War II, the U.S. imported heavily from its European and
Asian allies, and provided much aid to the countries. Also, the U.S. deployed military troops and
provided security guarantees, especially in East Asia.
The demand for leadership is a response by consumers or followers. The followers
receive leadership provided and respond with a demand curve. The followers consider their
current economic or political status, preferences, future price of the leadership provided, and
availability of alternative “goods.” Alternative goods here refer to an alternative leadership or
hierarchical system. Weighing these determinants, the followers make a choice or choices. The
demand curve therefore is a culmination of carefully constructed political choices. The demand
curve also reflects the trilemma where the economies are forced to weigh the choices for
autonomy, stability and international integration. In Asia, smaller economies chose into the
reciprocal relationship with the U.S. and the subsequent dollar-centric hierarchy. In the process,
the Asian economies demonstrate both complicity and resistance in their positioning against the
U.S., and more specifically the U.S. dollar. The Asian economies hedge their currencies against
the dollar and at the same time rely on it to maintain stability.

46

Chapter 3. Rise and Maintenance of the U.S. Hierarchy in Asia, 1950s-1970s
This chapter describes how the Pax Americana in Asia came to rise, and how the supply
curve of the U.S. leadership was cemented between 1950s and 1970s. The chapter begins by
describing the geopolitical context that allowed the U.S. to rise as a major super power. Strong
military ties and bilateral alliances that began in 1950s served as the backbone of the relationship
between the U.S. and Asia. The high level of control that America was able to exercise over its
Asian partners by using economic and military aid as leverage sheds light on the extent of
asymmetry in the bilateral relationships and Asia’s dependence on the U.S. On the supply side,
America’s strategies for Pax Americana dated back to early as 1920s when the Federal Reserve
Bank internationalized the U.S. dollar. On the demand side, Asian countries did not pose direct
threat to the incumbent hegemon. Japan, South Korea and Taiwan accepted the U.S. leadership
out of need for security umbrella and economic assistance.

I. Geopolitical Contexts and Military Ties
Asia’s compliance to the U.S. military presence started after the Pacific War and
continued after the Korean War. The main security architecture within the region involved a
complex of bilateral military alliances and other non-alliance arrangements between the United
States and Japan, South Korea, the Philippines and Taiwan. During the Cold War period, the U.S.
invested much military resources Japan, Korea and Taiwan to put up a fort against the
communist USSR and China. However, even after the demise of the USSR and economic
transformation of China, America’s alliances continue to affirm U.S. military dominance and the
“hub and spoke” security structure in the region (Pempel 2010, 222). The context of strong
military ties provides the backdrop of the extent of U.S. influence in the Asia region. Starting
47

with the security priorities, the U.S. extended the scope of its relationship with Asian countries to
economic aid, trade and capital flows.

America’s Strategies to Win Japan
America’s position toward Japan evolved since the aftermath of the Pacific War, through
the Cold War period and in the recent years. In 1945 when the Pacific War ended with Japan’s
surrender, America’s primary objective with Japan was to demilitarize the country and prevent
fascist aggression from ever rising again. But as the U.S. entered a bigger war with the Soviet
Union, building Japan as a strong ally and bulwark against communism in the Asian region
became a more pressing priority. The U.S. needed a “Britain” in Asia, and Japan could be that.
The U.S. pursued to win Japan as a reliable and close ally. The U.S. established a strong bilateral
alliance with Japan and helped build the country that was not too weak that it would fall to
communism but not too strong that it would become an aggressor in the region again. Even after
the fall of the Soviet Union and subsequent end of the Cold War, the U.S. maintained close ties
with Japan to balance China and contain North Korea. The U.S.-Japan alliance shaped America’s
presence in Asia and Japan’s submission to the U.S.-centric hierarchy in the region. The tone of
the U.S.-Japan alliance had implications for regional stability (Christensen 1999, 51). The
alliance set off robust economic ties between the two countries, which contributed to Japan’s
economic development which also had spillover effects onto other parts of Asia, namely South
Korea and Taiwan. Therefore the U.S.-Japan relationship left a lasting legacy on how Asia
perceived and received the U.S. to the region.
The U.S.-Japan alliance began with the mutual defense treaty signed in 1951 and revised
in 1960. The treaty granted the U.S. right to military bases on the islands, and promised Japan
48

America’s protection in case of military conflicts. The treaty opened the doors for the U.S. to
manage and restrain Japan. The U.S. held sea and airbases on the home islands and on Okinawa.
Also, America’s military presence in Japan allowed the U.S. to extend its reach in other parts of
Asia. For example, the U.S. used the Japanese bases for combat operations during the Vietnam
War. In order to maintain the alliance, the U.S. provided large sums of economic assistance and
military payments to Japan. In addition to the official assistance, the Central Intelligence Agency
contributed millions of dollars to conservative politicians and the Liberal Democratic Party to
ensure that Japan’s domestic politics would not go against the U.S. interests (Cha 2010, 186). As
detailed in the Yoshida doctrine, Japan relied on the U.S. presence to divert the necessary
resources to focus on economic recovery and growth (Chai 1997). Although the alliance
reflected asymmetry of resources and control in favor of the U.S., Japan began to increase its
part in the relationship in the 1970s. In 1976, Japan set forth a comprehensive defense strategy,
and in 1978 Japan and the U.S. announced an agreement that set forth their military collaboration
(Xu 2014). Subsequently, the two countries launched joint military training exercises.

Korea’s Dependence on the U.S.
During the period of rise and maintenance of the U.S. hierarchy in Asia, the U.S.-Korea
relationship was mostly driven by the U.S. objectives due to Korea’s weakness and dependence
on American military and capital. The U.S. and Korean governments disagreed on how to
resolve the Korean War and deal with the North-South division, but ultimately the history took
course as the U.S. pushed through its objectives. The U.S. exercised leverage and threatened to
stop military and economic assistance, and Korea obliged. Korea had no other choice because it
was in such dire need for aid after the Pacific War and the Korean War. Syngman Rhee, South
49

Korea’s first president who was in office from 1948 to 1960, desired to completely end the
Korean War and unify the peninsula under South’s rule. On the other hand, the U.S. wanted to
cease fire and negotiate peaceful coexistence with North Korea. The U.S. feared being embroiled
and trapped on the Korean soil in the case that the War ensued. At the same time, the U.S. had to
prop the South Korean government and prevent it from collapsing and falling to communism.
The U.S. negotiated armistice with North Korea against South Korea’s wishes and remained in
South Korea to strengthen its defense and help economic growth.
Similar to the U.S.-Japan relationship, the U.S. wished to command a high level of
control and leverage over Korea. And the U.S. succeeded in doing so, due to the stark asymmetry
in power and resources. This is demonstrated in how the defense treaty was set up and in the
frequent instances that the U.S. threatened to stop assistance if Korea did not oblige. After the
Korean War broke out in 1950, Korea handed over operational command authority of South
Korean military forces to the commander in chief of the U.N. forces, which was the U.S. In 1954,
after the War ended, the U.S. and Korea signed a mutual defense treaty that allowed the U.S. to
retain full operational command authority of all South Korean military forces. The rationale
behind it was to restrain South Korea from provoking North Korea into another war (Cha 2010,
176). Furthermore, the U.S. threatened Korea that if South Korea initiated any aggressive action
against the North, then the U.N. forces will not support, the U.S. will not support, and all U.S.
economic aid to Korea will cease immediately (Cha 2010, 177). Both military dependence and
economic assistance were integral parts of the alliance relationship. On the condition that Korea
complied with the U.S. directives, the U.S. provided Korea with $12.6 billion in economic aid
and military assistance between 1946 and 1976. From 1953 to 1958, Korea received a staggering
sum of $270 million worth of economic aid per year, which amounted to about $12 per capita
50

and 15% of the gross national product. Under the Mutual Security Act, the U.S. dispensed a total
of $4,364 million to Korea in aid, loans and grants from 1953 to 1961 (Kang 2002, 43). The U.S.
aid financed almost 70% of total imports from overseas (Haggard 1990, 56). The imports ranged
from energy, raw materials and intermediate goods to consumer products. The input of U.S.
dollars helped Korea recover from the Korean War that devastated the peninsula. Three years of
fierce fighting on domestic soil exhausted the civilians and destroyed much of the fertile land.
Korea needed to industrialize in order to develop, and the development capital was provided by
the U.S. In addition, the U.S. dispatched a separate form of military aid in weaponry, personnel
and technology (Amsden 1989, 39). Between 1953 and 1962, the aid from the U.S. financed 70%
of South Korea’s imports and contributed 5% of its national GNP (Cha 2010, 187).
At the same time, the massive amounts of aid did not come free. Economic aid also
brought political pressure for America’s preferred direction of macroeconomic management,
development and/or distribution. The aid leverage was often exercised. For instance, in 1964, the
U.S. held back food aid to push the Korean government to devalue the won. Due to the famine
and food shortages that continued from the previous year, the Korean government was in dire
need for food aid. The government relented and devalued the won by almost 50% (Amsden 1989,
67). The U.S. knew that the Korean government was “extremely vulnerable to changes in aid
levels,” and thereby would comply with the U.S. pressures (Haggard 1990, 69).
Although the explicit forms of economic aid stopped, the military ties continued. In 1978,
a bilateral agreement placed the American military headquarters in charge of the combined
forces and staff. The Combined Forces Command has operational control over more than
600,000 active-duty military personnel of all services of both countries, and in wartime the
number can increase to 3.5 million including the reserve forces (USFK 2016). Team Spirit, a
51

series of major field training exercises began in 1976 and grew to nearly 200,000 ROK and U.S.
participants. The exercise was last held in 1993. The U.S. army also still holds Wartime
Operational Control of South Korea's Armed Forces ( 전시작전통제권). The U.S. returned
peacetime control to Seoul in 1994, but retained obligations to still command the combined
American-South Korean forces in the event of war. The pledge has been a central fixture of the
United States-South Korean military alliance, but many South Koreans, especially the postwar
generations, began seeing it as a slight to their national pride.

America’s Dual Deterrence Objectives in Taiwan
In the case of Taiwan, the U.S. sought to signal its resolve to deter China and contain
communism, and at the same time to deter Taiwan from engaging aggressive actions against the
mainland. The U.S. pledged defense commitment to Taiwan in a formal defense treaty in 1954,
and in exchange forced Chiang Kai-shek to commit not to provoke a war against the mainland
(Cha 2010, 173). Again, the U.S. did not want to be entrapped in another regional war and
wanted to minimize this risk. In order to do so, the U.S. practiced tight control over Taiwan by
inducing Taiwan to be economically and politically dependent on the U.S.
Similar to Korea, Taiwan also received massive amounts of aid which were economically
beneficial but politically controlling. Taiwan, just a strait away from the Communist People’s
Republic of China, was another beneficiary of Cold War geopolitics. From 1954 onwards, in
order to contain Communism, the US disbursed massive economic and military aid to strengthen
the Nationalist regime in Taiwan. Under the Mutual Security Act, the U.S. dispensed a total of
$3,039 million to Taiwan between 1953 and 1961 (Kang 2002, 43). Throughout the 1950s, the
economic aid amounted to about 6% of the gross national product and 40% of the gross
52

investment. A large share of the economic aid, about 38%, financed imports of intermediate
goods, including cotton, yarn, ores, metals, and fertilizer (Wade 2004, 82). In addition to these
raw material imports, technical assistance from American engineering firms benefited the
Taiwanese textile industry (Haggard 1990, 89). The U.S. aid was also used to import consumer
goods and food products as well as machinery and tools necessary for industrialization. In total,
the U.S. financed about 35 to 40% of Taiwan’s imports (Wade 2004, 82). These injections of
U.S. dollars helped stabilize the Taiwanese economy and assure its survival against the constant
threat of Mainland China. The U.S. aid also helped the Taiwanese government execute land
reforms and liberal economic reforms, control inflation and maintain a large military, all at the
same time. In this process, the Taiwanese government was a strategic recipient, because it used
the economic aid to solidify its domestic political legitimacy, especially to claim political power
over native islanders. As much as the economic aid was helpful to Taiwan and the domestic
government received it willingly and strategically, the aid also came with conditions. Explicitly
and implicitly, American economic and military advisors influenced the domestic economic
policies for financial liberalization, privatization and government spending, as well as a
reduction in military spending.

II. Strategies for Pax Americana in Asia
This section examines how Pax Americana came to rise and extended to the Asia region.
Pax Americana was not a precondition, but rather an outcome fashioned by geopolitics, market
dynamics and strategies. The U.S. was not a super power from the beginning. Its economy was
not always the largest and the dollar was not the most widely circulated. The American
ascendancy in international politics accelerated from 1945 following the Second World War and
53

through the Cold War years. The Soviet Union’s implosion heightened the unipolarity of the
powerful state of the United States. “Preserving the United States’ hegemonic role in a unipolar
world has been the overriding grand strategic objective of every post-Cold War administration
from George H. W. Bush’s to Barack Obama’s” (Layne 204). Domestic and international politics
promoted the U.S. economic hierarchy with extended trade relations and wide circulation of the
U.S. dollar. Domestically, political forces shaped market conditions on which the dollar was able
to rise and maintain its status. Internationally, foreign economies chose to prop the dollar
denominated assets and sustain the dollar centric monetary system.
Domestic policies, especially those related to trade and finance, have international
repercussions. A case in point would be America’s strategic actions to internationalize the U.S.
dollar. From as early as 1920s, the U.S. pursued policies to mold a dollar-centric international
monetary system. The newly established Federal Reserve back then purchased a massive amount
of secondary market credit bills and held between a quarter and two-thirds of total outstanding
acceptances. The injection of the dollar into the market lowered the interest rate to match the
open market rate the British pound (Eichengreen and Flandreau 2012). The rates were artificially
lowered in order to make the dollar competitive and appeal to borrowers. The Federal Reserve
promoted international circulation of the dollar and challenged the British pound as the primary
international currency at the time. Over the course of history, the Federal Reserve continued to
play an active role in maintaining the U.S. credit market by purchasing bills and injecting cash
into the market at large.

54

Domestic Politics
As the U.S. became a larger economy in the world, America’s trade and finance policies
began to have greater impact on international market conditions. Especially when the policies are
primarily motivated by domestic political interests or pressures, American domestic politics
cannot be excluded in the discussion of international monetary dynamics. An example is found
in America’s decision to leave the gold standard and the consequent demise of the Bretton
Woods system. This is a significant decision that set off anarchy of currency relations in the
world and eventually elevated the role of the dollar. Now that there were no longer set rules on
gold convertibility or exchange rates, the value of the dollar could move unpredictably and that
would affect the relative value of other currencies. Currencies were no longer pegged to absolute
values, but left to be evaluated in relation to others. The outbreak of the ongoing “currency war”
could be dated to have started with the U.S.’s decision to leave the Bretton Woods in 1971.
The motivation and timing of this pivotal juncture in history were decided primarily for
domestic political interests. It came with President Nixon’s announcement on August 15, 1971.
In a surprise speech, he announced a drastic move to freeze domestic wages, place import
surcharges and end the convertibility of the dollar to gold. The announcement of this New
Economic Policy (hereafter NEP) was made unilaterally without consultations with other major
economies and the International Monetary Fund. The drastic nature of the NEP and the timing of
the announcement was a shock to the world, especially because the NEP in effect discarded the
Bretton Woods system which provided international monetary stability for decades. Motivations
for the NEP mainly derived from domestic concerns for inflation, trade deficits and weakness of
the dollar; the timing for the announcement was purposely scheduled to re-affirm the strength of
the Nixon Administration. For some time after the World War II, the U.S. was able to finance its
55

foreign aid to European and Asian economies and military involvement abroad during the Cold
War period with a favorable balance of trade (Bundy 1998, 261). However, the overstretched
budget led to large deficits in the late 1960s. Money supply that was injected to cover the deficits
resulted the dollar to depreciate. Speculation against the dollar combined with the removal of the
dollar assets from the U.S. depleted America’s gold reserves. As a result, economic and political
pressures mounted for the Nixon Administration to save the strength of the dollar.
The objective of the policy was to improve America’s balance of payments position and
reform the international monetary system.
5
Instrumental in devising the NEP were Nixon’s close
advisers: John B. Connally, Secretary of the Treasury; Paul W. McCracken, the Chairman of the
Council of Economic Advisers; Paul A. Volcker, Under Secretary of the Treasury for Monetary
Affairs; George P. Schultz, Director of the Office of Management and Budget; Arthur Burns, the
Chairman of the Federal Reserve Board; and William B. Dale, US Executive Director of the
International Monetary Fund. They discussed a number of viable options including budget cuts,
trade imbalance turnaround, gold price adjustments, and wider margins of the dollar
convertibility.
6
The general consensus was to wait for “an appropriate time” for substantial
actions.
7
The advisers were aware that if the U.S. implemented measures that promoted exchange
rate flexibility, foreign powers would interpret the action as a self-centered attempt to avoid

5
Paper Prepared in the Department of the Treasury, Washington, May 8, 1971. Washington National Records
Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning
Papers. Reference from FRUS p 423-7
6
Memorandum of Conversation, Camp David, Maryland, May 3-5, 1970, Washington National Records Center,
Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Reference from US
Department of the State, Foreign Relations of the United States, 1969-1976, Volume III, Foreign Economic Policy,
1969-1972; International Monetary Policy, 1969-1972. (Washington, DC: US Government Printing Office, 2001),
hereafter FRUS, p 392-407
7
Ibid.
56

politically unpopular budget cuts in solving the domestic deficit problem.
8
While that was true to
an extent, such impression was to be avoided. In fact, foreign finance ministers, particularly the
French, frequently expressed this concern. France held a significant amount of gold reserves and
had leverage over a potential dollar crisis. Representatives of the French finance ministry were
adamant that they would not accept exchange rate flexibility as a way to solve the deficit
situation and instead suggested an increase of the gold price for a temporary relief.
9
In response,
the U.S. representatives were adamant that there will be no official change in the price of gold,
because the key concern was not the value correlation between dollar and gold but rather the
value relationship among dollar and other currencies. The rationale was that even after an
upward change in the gold price, other economies could seek further devaluation of the dollar in
terms of gold.
10
In addition to the concerns expressed in the diplomatic contexts, there were
internal disagreements over the policy options. The Council on International Economic Policy
was frequently convened to debate the options of implementing tariffs, trade barriers, capital
controls to support fixed exchange rates and/or international reforms for greater exchange rate
flexibility.
11
Until mid-August, Nixon and his advisers debated whether to abandon the gold
standard. All advisers had strong opinions, but Connally, the Secretary of Treasury at the time,

8
Volcker Group Paper, Washington, September 10, 1970. Washington National Records Center, Department of the
Treasury, Volcker Group Masters: FRC 56 86 30, 1970, VC/LIM/70-1-VG/LIM/70. Reference from FRUS p 409-
415
9
Reference cited in Footnote 2, plus, Memorandum of Conversation, Camp David, Maryland, May 20, 1971,
Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15,
France. Reference from FRUS p 434-7
10
Paper Prepared in the department of the Treasury, Washington, May 9, 1971. Washington National Records
Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26,
Contingency Planning 1971. Reference from FRUS p 427-31.
11
Memorandum from the Chairman of the Council of Economic Advisers (McCracken) to President Nixon,
Washington, June 2, 1971. National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218,
Council on International Economic Policy; Memorandum from the Secretary of the Treasury Connally to President
Nixon, Washington, June 8, 1971. Washington National Records Center, Department of the Treasury, Records of
Secretary Schultz: FRC 56 80 1, JBC-Memoranda from the White House 71; Memorandum from the Assistant
Director of the Office of Management and Budget (Schlesinger) to the President’s Assistant for International
Economic Affairs (Peterson), Washington, July 20, 1971. Washington National Records Center, Department of the
Treasury, Files of Under Secretary Volcker: FRC 56 79 15. Reference from FRUS p 438-47
57

was particularly assertive in pushing for the floating of the dollar (Haldeman 1994, 335-6). With
Connally’s push and Schultz’ support, the momentum to adopt measures that would freeze wages
and close the gold window grew stronger. President Nixon became more inclined to accept the
policies suggested by Connally.
As the substance of the agreement was being decided, the timing of announcement also
became a pertinent question. The deficit problem continued to worsen, and there were domestic
political pressures to take an action. Nixon also did not want to be associated with the
devaluation of the dollar. If he stalled on making a decisive action, he could well be faulted for a
weak economic performance during his tenure. Also, with so much discussion about what to do,
there could be leaks about pending actions. Bilateral meetings with Japan and European
countries were planned in September and October. If the NEP was announced after these
meetings, it could appear that he was adopting new measures in response to foreign requests or
pressures.
12
Nixon quickly summoned a confidential meeting at Camp David over the weekend
of August 13-15 to finalize the drafting of the NEP and the timing of the announcement.
13
After
addressing the above concerns, Nixon finally decided that the announcement would be made in
the evening of Sunday, August 15. Up until the afternoon of that day, they revised the speech.
Following the initial draft written by the President, Connally, Volcker, and Schultz contributed to
the revision process. At least four subsequent drafts followed, and the wording was carefully
refined to portray the Nixon Administration as taking the well-planned and decisive measures to

12
Editorial Note, FRUS; National Archives, Nixon Presidential Materials, White House Central Files, President’s
Daily Diary August 2, 1971. Reference from FRUS pg 453-6; National Archives, Nixon Presidential Materials,
Papers and Other Historical Materials, President’s Office Files, President’s Daily Schedule, Box 103, Nixon
Presidential Library, hereafter NPL.
13
National Archives, Nixon Presidential Materials, RN-Weekly Abstract of Presidential Activities 1969-74, Box 13:
Folder 7, NPL.
58

improve America’s economic situation, and protect the dollar against foreign speculation.
14
The
speech was broadcast and well received by the domestic audience. Both Democrats and
Republicans sent a number of letters and memos that praised Nixon’s decisiveness.
15
The NEP
effectively quelled fears about the weak dollar and budget deficits among the domestic
constituents. The content and the timing of the U.S. decision to leave the gold standard was
strategically and consciously motivated by domestic interests, and consequently instigated an
anarchic “currency war” in the international market.

Petrodollar Recycling
Petrodollar recycling is a phenomenon that was strategically pursued by the U.S.
government which in effect allowed the U.S. to continue to run deficits and to widen the
circulation of the U.S. dollar. Petrodollar recycling is when the surplus capital of oil exporters’ is
used to finance deficits of other countries, particularly importers. Oil exporters have a structural
trade surplus because they cannot increase their imports as fast as the price of oil rises, and this
means that there have to be trade deficits somewhere else in the world. Transferring the surplus
capital from the oil trade to the deficit countries is one way of adjusting balance of payments.
The U.S. captured the opportunity to benefit from petrodollar recycling in the 1970s. As
the world underwent waves of economic development, especially in the areas of manufacturing,
automobile industry and shipping, the world became more dependent on energy from fuels. The
worldwide demand for petroleum increased and price increased as well. Also, price of crude oil
increased as the existing oligopsony broke and independent oil buyers emerged. In the U.S., the

14
National Archives, Nixon Presidential Materials, President’s Speech Files, The Challenge of Peace Economic
Speech, August 15, 1971, Box 68, NPL.
15
National Archives, Nixon Presidential Materials, Papers and Other Historical Materials, President’s Office Files,
President’s Meeting Files and Memoranda, Box 85, NPL.
59

“Seven Sisters” of oil companies, of Standard Oil of New Jersey (Exxon), Standard Oil of New
York (Mobil), Standard Oil of California (Chevron), Texaco, Gulf, Shell, and BP, were the only
buyers of crude oil, and they colluded to limit the quantity of oil sold in the domestic market. In
effect they suppressed the price they paid for crude in order to maximize their profits at the local
gas stations they owned. However, when independent oil companies emerged into the world oil
industry, the collusion ended and the petroleum buying firms had to begin to pay higher prices
for crude oil (Spiro 1999, 24). Higher oil prices meant that the Saudis had a huge surplus capital
and had to look for ways to leverage it for more influence and/or profits.
Oil importing countries vied for this capital, and the United States was at the forefront.
On June 15, 1972, President Nixon and Prince Sultan bin abdul Azia Al-Saud, Minister of
Defense, convened to discuss a number of security related arrangements, including purchase of
American weaponry and America’s security guarantee for the Gulf.
16
Internal meeting notes
suggest that the Nixon administration discusses the need to assist the Saudis to produce excess
oil and in exchange recruit the capital to the U.S.
17
In 1974, the federal government was
increasingly running budget deficits, and the U.S. Treasury had to find a way to finance it.
William Simon, Treasury Secretary during the time, turned to the Organization of Petroleum
Exporting Countries to supplement funding. Simon’s main task was to sell bonds to OPEC
countries who were reaping in massive surplus capital. Secretary Simon negotiated a secret deal
with the Saudis that allowed the Saudi Arabian Monetary Agency to buy U.S. government
obligations without competitive bidding, and the average price was only marginally cheaper than
the average price for private firms (Spriro 1999, 109). The Saudis also wanted to increase their

16
Memorandum of Conversation between President Nixon and Prince Sultan bin abdul Azia Al-Saud, Minister of
Defense, Washington D.C., June 15, 1972. National Archives, Nixon Presidential Materials, NSC Files, Box 630.
17
Notes on “U.S.-Saudi Economic Issues and Their Relationship to U.S. Economic Policy Toward Europe”
Meeting, Washington D.C., 2:30 pm, May 9, 1973. E.O. 12958, Sect 3.5 NLN 01-28, NSC Files, Box 630.
60

influence through the IMF, by lending more money to the IMF and consequently increasing their
voting share. Since the United States had the most votes, they had to approve the review of the
funds and voting shares. In 1978, the United States agreed to a large increase in the Saudi quota
if the Saudis dropped the idea of pegging the price of oil to the SDR. The Saudis lent capital to
the IMF and kept oil priced in dollars in exchange for a change in voting rules. In adjusting the
voting share, the U.S. quota will be increased so that it retains its relative position (Spiro 1999,
105). The U.S. maintained its position in the IMF and maintained the U.S. dollar as a major oil
trade currency.
Denomination of oil trade in U.S. dollar allows the U.S. a powerful position, because the
dollar effective exchange rate affects the price of oil for all countries outside the U.S. A change
in the exchange rate can trigger changes in the demand and supply for oil, which an
indispensable commodity. On the flipside, changes in the oil price can also affect the effective
exchange rate of the dollar, where the change in oil price affects all the world imbalances and
therefor affect the change in international assets (Coudert et al, 2007). As for the impact of dollar
exchange rate on oil demand, countries with floating exchange rate regimes will be affected
more than countries with pegged regimes. Dollar depreciation would reduce the oil price in
domestic currencies, which would result in an increase in real income and increase in oil demand.
According to Coudert’s empirical study of the relationship between the real effective exchange
rate of dollar and the real oil price from January, 1974 to November, 2004, it was observed that
an increase in oil price is linked to dollar appreciation (Coudert et al 2007). Consequently, an
increase in oil price is likely to improve the U.S. net foreign asset position relative to the rest of
the world, which has a positive impact on the dollar appreciation as well. In effect, as long as the
OPEC oil was priced in the U.S. dollars, and as long as the OPEC countries invested the dollars
61

in the U.S. government instruments, the U.S. government enjoys a double loan (Spiro 1999, 121).
First, the U.S. government could potentially print dollars to pay for oil. Secondly, all other
economies have to trade their goods and services for dollars in order to pay for oil. So it was
important to keep the oil trade in dollar and recruit Arab capital.

Overflow of American Dominance to Asia
As America’s hegemonic reach over the world economy was being secured, it also
encompassed the Asia region. The combination of America’s relational and structural power in
East Asia was evident from the 1950s through the 1970s. Geopolitical circumstances of the civil
wars, Cold War and containment policies prompted the U.S. to assert a strong presence in Asia.
Politically, the United States pursued a hub and spokes model where the United States would be
at the core and the rest of the Asian countries in the periphery. Washington generally
discouraged regional forums of any kind that did not include the United States. A case in point is
the proposal for a Pacific pact among Taiwan, Korea and the Philippines in 1950s (Cha 2010,
178-9). Economically, a dollar bloc began to form loosely from 1950s as the U.S. provided
economic aid to Japan, Taiwan and Korea. Particularly, the aid helped revitalize war-devastated
Korea and industrialize non-Communist Taiwan. For both Korea and Taiwan, the injection of
U.S. dollars provided much needed financing for industrialization. But the help did not come free.
The relational power of the dollar coerced the Korean and Taiwanese governments into
practicing fiscal discipline and implementing liberal economic policies, as directed by the U.S.
Dependence on the U.S. continued to increase even after the direct economic aid stopped as the
U.S. remained an important trade partner for the export-oriented economies in the region.

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Chapter 4. Defense of the U.S. Hierarchy, 1990s to Present
This chapter describes the defense of the U.S. hierarchy from the 1990s to Present. The
chapter begins by describing the geopolitical contexts and military ties of that time. The
following section shows indicators of the U.S. hierarchy internationally and also particularly in
Asia. The chapter then explains the supply side of leadership. During this phase, Japan and China
contests the U.S., and the U.S. exerts efforts to contain the competitors. On the demand side,
middle-level follower economies show multi-faceted demand to the regional leadership by
accepting some aspects of the U.S. leadership and resisting others. For example, starting in the
1990s, the follower countries pursued a number of regional trade and monetary initiatives that
could potentially be an alternative to the U.S. monetary leadership. They also responded to the
power contests among the U.S., China and Japan in complex ways. For example, they supported
Japan’s contest for leadership but let political and historical tensions simmer. More recently, in
the wake of China’s rise, they have supported China’s efforts to internationalize the Chinese
yuan, but remain wary of China’s territorial ambitions.

I. Geopolitical Contexts and Military Ties
The United States remained heavily involved in the web of security structures in Asia
through the 1990s and to the present. Close military ties continued to set the tone for the current
landscape of relationships. Also, as unpredictable and aggressive North Korea and nuclear
threats posed new security challenges, the U.S. continued to be an important ally in the region.
North Korea serves as a common enemy that unites the U.S., Japan, South Korea, Taiwan, and
even China and Russia for collaborative deterrence efforts. The U.S. plays the central role in
organizing and exerting these efforts.

63

North Korea Problem
North Korea’s ballistic missile and nuclear program began to pose an existential military
threat in the region. In 1993, North Korea launched a Nodong missile into the Sea of Japan and
withdrew from the Nuclear Proliferation Treaty to begin developing nuclear weapons material.
North Korea remained aggressive and hostile, and in 1994, the U.S. established the momentous
Agreed Framework with North Korea to ensure peaceful coexistence. In 1995, in order to
support and implement the energy component of the Agreed Framework between the U.S. and
North Korea, the U.S., Japan and South Korea founded Korean Peninsula Energy Development
Organization (KEDO). Although initially these efforts seemed to appease North Korea and
quieted the region, the tensions were not resolved. In 1998, North Korea fired another missile
over Japanese airspace. These instances alarmed both the U.S. and Japan, and prompted them to
consolidate their ballistic missile defense program (Xu 2014). In 1999, the U.S., Japan and Korea
agreed to launch Trilateral Coordination and Oversight Group to institutionalize consultation and
coordination of policies toward North Korea (Ministry of Foreign Affairs 1999). The Six-Party
Talks were launched in 2003 as an outcome of long-standing efforts, driven primarily by the
United States, to prevent North Korea from pursuing a nuclear weapons program and to limit the
possibilities for global nuclear proliferation (Pempel 2010, 224). In 2006, North Korea admitted
to having conducted a nuclear test, and concerns for North Korea remain.

South Korea’s Complicity to American Military Presence
South Korea is the most vulnerable and sensitive to the North Korea threat, and in this
vein remains the most dependent on the security alliance with the U.S. However, Korea’s
complicity to the U.S. military presence is complicated, because the position is divided among
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Koreans themselves. Conservative, pro-U.S. alliance, and older generation political contingents
correlate the pullout of the U.S. forces in 1949 with the onset of the Korean War in 1950, and
wish to prolong the U.S. military presence in Korea. They doubt whether South Korea’s military
with reduced help form the U.S. is enough to defend against potential aggression from North
Korea. In fact Korea has supported to maintain the U.S. troops on the peninsula since the end of
the Korean War.
In 2000s, the U.S.-Korea military alliance underwent testy times. For instance, in 2002,
deaths of two school girls caused by a U.S. armored vehicle outraged the public and fueled anti-
American sentiments. In 2004, South Korea and the U.S. laid down for a blueprint for realigning
the United States Forces Korea (USFK) to combine and downsize the bases, and have half of the
soldiers in the U.S. ground forces permanently leave Korea. But the plan was delayed when the
South Korean government sent about 3,500 soldiers to the coalition efforts in Iraq. And the
American troops remained in Korea. Also, as the country experienced a wave of urbanization,
many U.S. military bases obstructed the development of neighboring cities and transportation
infrastructure. For instance, Amp Page in Chuncheon, Camp Market in Incheon, Camp Walker in
Daegu, and Hialeah in Busan stunted traffic flows and impeded geographical expansion (Nam
2006, 617). In early 2000s, the USFK discussed strategies to realign, reposition and improve the
bases. This was long overdue, because the U.S. military stationing in Korea was based on
warfare doctrines formulated in 1950s during the Korean War, and did not reflect many
technological and strategic changes since then. South Korea viewed that U.S. military’s
improved capabilities such as advanced attack helicopters and artillery-detection radars stationed
in the Seoul bases would be a necessary component of South Korea’s defense against a potential
aggression from North Korea (Nam 2006, 623). In 2007, Seoul requested the United States to
65

maintain the wartime control until 2012. During the postponed time, the plan was for South
Korea to build capabilities to play a lead role in the country’s defense. But the wartime control
remained with the U.S. military, and the date of return was pushed back to 2015. In the
meanwhile, North Korea torpedoed a South Korean worship in 2010, launched a long-range
rocket in 2012, and tested nuclear weapons in 2013. In late 2014, officials in both countries
discussed and agreed to put in effect Seoul’s proposal for a “conditions-based approach” to
transferring control “to ensure the combined defense posture remains strong and seamless”
(Choe 2014). Experts expect that the U.S. will maintain the control as far back as 2020 (Panda
2014). In the meantime, South Korea hopes to build an ability to detect and destroy any move by
the North to launch its nuclear weapons or missiles, as well as its vast arrays of frontline artillery
and rocket batteries. Until then, American military will maintain 28,500 military troops and
manage annual joint war games with South Korea’s 650,000-member military (Choe 2014).

Coordination between U.S. and Japanese Military Forces
The U.S.-Japan alliance endured several geopolitical transitions, from the postwar
security environment, the Cold War, the rise of China and nuclearizing North Korea. Over the
years Japan undertook steps to strengthen its military forces, and provided support to the U.S. in
its endeavors elsewhere in the world. In 2001, the Koizumi government deployed the maritime
forces to the Indian Ocean to support U.S. military operations in Afghanistan. This was Japan’s
first overseas military action during a combat operation. In 2002, Japan drafted a bill that would
allow the government to dispatch the Self-Defense Forces (SDF) to postwar Iraq. In 2003 the
defense forces were sent to aid in postwar reconstruction efforts. In 2013, the U.S. and Japanese
66

ministers of defense agreed to expand cooperation on counterterrorism and bolster mutual
defense commitments.
Collaborative efforts between the American and Japanese forces also went beyond the
scope of military operations. In 2011, when Japan suffered devastating earthquake and tsunami,
the U.S. forces came to work with the Japanese SDF for rescue operations. U.S. forces aided the
SDF in clearing Sendai's airport, assisted in search-and-rescue teams, and prepared Japan's
defense readiness (Xu 2014). Operation Tomodachi, as it was called, was the largest bilateral
mission in the history of the alliance. The alliance also advocated other initiatives in trade and
energy cooperation. As Japan began to reconsider its energy policies after the Fukushima nuclear
disaster in 2011, the U.S. agreed to a long-term liquefied natural gas export deal with Japan.
Japan’s push to upgrade its defense capabilities and take a more active role in the security
alliance call for an adjustment to the current setup of bilateral alliance and regional security
structure. In 2014, the Abe government announced to adopt a reinterpretation of the antiwar
Constitution that would allow Japanese forces to aid Japan’s allies under attack. The decision
marks a significant shift from a position that had strictly limited Japan to act solely in its own
defense (Xu 2014). This can potentially change the view that the alliance has been lopsided and
allowed Japan to free-ride. Previously, the alliance guaranteed the U.S. protection of Japan in
case of military conflicts, but stated no clear guarantees of even rudimentary assistance from
Japan if U.S. forces were to become embroiled in a regional armed conflict (Christensen 1999,
58). This was brought to attention in 1994 when North Korea conflict surfaced. Under the
existing agreement, in a scenario of a military conflict on the Korean peninsula, Japan was not
even obliged to allow the U.S. military use of its civilian airstrips or ports. In fact, if the crisis
had escalated, Japan might not have provided overt, tangible support of any kind. Even U.S.
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access to its bases in Japan for combat operations not directly tied to the defense of the Japanese
home islands was questionable. During the Clinton administration, there has been a widely held
concern that, purely on security grounds, the alliance could be dangerously weakened if Japanese
roles are not clarified and expanded and if the two militaries are not better integrated in
preparation for joint operation (Christensen, 59). In response to the criticism, President Clinton
and Prime Minister Hashimoto issued a joint communique that called for revitalization of the
alliance in 1996. As negotiation ensued, Japan agreed to guarantee base access for US. Forces
and committed to increasing logistics and backend support (Christensen 1999, 62)

Costs of Hosting U.S. Military Presence
To this day, Asian nations provide financial resources to support the American military
presence, and access to various capabilities. For instance, even after the U.S. closed the
American bases in the Philippines in 1992, the U.S. continued to benefit from access to a number
of Southeast Asian port, naval stations, repair facilities, training ranges and logistics support
(Department of Defense 1998, 12). As for Japan, the country provided peacetime host nation
support provided about $5 billion to support the U.S. troops into the 1990s (Department of
Defense 1998, 11). In 2015, the U.S. and Japan agreed to a five-year package under which Japan
will spend about $1.6 billion annually to support the operational readiness of the U.S. forces in
Japan (Cronk 2015). In addition, civilians near the bases also sacrifice and accommodate. For
instance, they accommodate high noise levels during artillery training and routine air operations.
Property damages include loss of crops and livestock, vibration and road damage during tank
maneuvers, and accidents during bombing and firing exercises. There are also concerns of
environment and public safety. Crimes or accidents involving U.S. military personnel and
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families are a long-running source of anti-American sentiments. Nonetheless, today the U.S.
Pacific Command are of responsibility encompasses about 360,000 military and civilian
personnel. Despite the costs and sacrifices, East Asia have not sought to counterbalance the
United States. Instead they have come together, and sometimes with the United States even, in a
variety of forums aimed at a mixture of confidence building, nontraditional security, and specific
problem solving (Pempel 2010, 222). And in the region, the U.S. military retains “command of
the commons,” that is, it can operate with impunity in the air, on oceans, and in space and can
defeat any single power in a direct battlefield test (Posen 2003).

II. Indicators of U.S. Hierarchy
This section presents numerical measures that show America’s status as a super power in
the world. A number of indicators measure a country’s international status: GDP, GDP growth,
population, military expenditures, the number of diplomatic posts overseas, the number of free
trade agreements, the amount foreign direct investment, the size of the bond market, total stock
market capitalization, and the list goes on. Military and political indicators measure country’s
defensive and offensive capabilities. Financial indicators reflect the level of a country’s
purchasing power, lifestyle afforded, and sophistication of domestic institutions. Strange argued
that there are five sources of power, and the hegemonic indicators should reflect those sources:
ability to protect allies, lead in the knowledge industry reserve currency status, share of
production and agenda-setting power (Strange 1987). Of all the possible indicators to reflect
these sources of power, a select number of quantifiable measures are included here: share of
world GDP, market capitalization, total value of stocks traded, share of world trade, share of U.S.
69

dollar in trade invoicing, reserve currency status, voting shares in international financial
institutions, and military expenditures.

Gross Domestic Product
The United States ranks the highest for most of the indicators. In the absolute numbers,
the U.S. holds the highest GDP and subsequently America’s share of world GDP shares are the
largest. In 1965, the United States contributed 36.7% of world production, in 2008, 23.4%, and
in 2014, 22.4% (World Development Indicators 2015). Comparatively, China’s contribution to
the world production increased from 3.6% in 1965 to 7.1% in 2008, and to 12.9% in 2014. As for
Japan, Japan’s share of world production increased from 4.7% in 1965 to 8.1% in 2008, and then
decreased to 5.1% in 2014. Share of world GDP contributed by Japan was on an increase until
early 2000s, and share of world GDP contributed by China continue to increase. On the other
hand, share contributed by the U.S. is in relative decline. Nonetheless, the U.S. still contributes
the most (See Table 2).
Table 2. Share of World GDP (%)

Source: World Development Indicators

Indicators of the Finance Industry
In the finance industry, the market capitalization of publicly listed companies and the
total value of stocks traded are highest for the U.S. The U.S. stock market is actively frequented
by companies and investors, both in America and overseas. In fact, being listed in the NASDAQ
or NYSE exchange is considered prestigious. Multinational corporations can be easily found to
be cross-listed in London, Tokyo, Hong Kong and/or New York. These companies work with
1970 1975 1980 1985 1990 1995 2000 2005 2010 2014
China 3.10 2.74 1.70 2.43 1.59 2.39 3.62 4.82 9.21 13.30
Japan 7.08 8.72 9.74 10.93 13.77 17.41 14.21 9.71 8.38 5.91
United States 36.45 28.71 25.66 34.33 26.53 25.02 30.89 27.80 22.82 22.38
70

banks or brokerage firms to issue American depository receipts, so that their stocks will be
tradable in the U.S. The extent of market capitalization and value of stocks traded reflect the trust
that companies have in the stability and liquidity of the U.S. finance market. In terms of both
market capitalization of listed companies and total value of stocks traded, the U.S. financial
market surpass other major exchanges in United Kingdom, Germany, France, Japan, China,
Hong Kong and Korea. This shows the expansive size of the U.S. market as well as the high
level of sophistication of the finance industry.
Figure 5. Market Capitalization of Publicly Listed Companies

Source: World Development Indicators

Figure 6. Total Value of Stocks Traded

Source: World Development Indicators
71

Trade Measures
Another measure of economic hierarchy is trade related indicators. Most common trade
indicators are values of exports and imports and shares of combined trade in world trade. The
trade market size shows a country’s capability to produce and export competitive products and
resources to import and consumer goods and services. Data on trade invoicing reveals a different
aspect of international trade. It shows how much the currency is trusted or considered reliable in
international exchange. Often, firms choose to bill and account their contracts in a currency that
is relatively more stable in price and liquid in transactions. Decisions on which currency to
invoice currency are matter, because that can significantly affect the volatility in the pricing. It is
reasonable to suspect that firms would opt to invoice their trade in either the importer’s or the
exporter’s currency, and that the share of trade and the share of trade invoicing would be roughly
in the same ball park. But in reality, this is not the case. Non-U.S. countries importing and
exporting with each other show that they invoice their trade in U.S. dollar. It is easy to find non-
U.S. trade is invoiced in the U.S. dollar. There could be a couple reasons for this. For one, if the
non-U.S. countries are conducting initial or intermediate stages of trade, and the final good is
exported to the U.S., then it is convenient to invoice all the primary and intermediate trade in U.S.
dollar so it is easier to reflect all the costs in the final price. Another reason would be that both
the non-U.S. countries involved in the trade have currencies that are not stable in exchange rate
and/or not liquid in the international market.
Currency distribution in the overall global foreign exchange market shows the highest
portion by the U.S. dollar (See Table 2). The top 10 currencies used in the foreign exchange
market in 2013 were U.S. dollar, euro, Japanese yen, British pound, Australian dollar, Swiss
Franc, Canadian dollar, Mexican peso, Chinese yuan and New Zealand dollar. The U.S. dollar
72

has been the most exchanged, and the euro the second most since its creation. The share of the
Japanese yen has fluctuated somewhat but maintained in the range of 17-23%. In 2013, Chinese
yen entered the top 10, and Swedish krona dropped down to 11
th
most used currency. Trade
invoicing data of individual countries further confirm the dominant place of the dollar in foreign
transactions (See Tables 3 and 4). Between 1998 and 2004, on average, Asian countries showed
high shares of both imports and exports conducted in the U.S. dollar. Indonesia, Korea and
Thiland invoiced more than, or close to, 80% of their imports and exports in the U.S. dollar.
More narrowly, the large share of the U.S. dollar used in the market confirms the dominant status
of the U.S. dollar in the trade market (See Tables 5 and 6).
Monetary leadership of the U.S. dollar derives from the size of the trade market and thus
capital market. It helps that the U.S. is the largest foreign direct and portfolio investor.
Furthermore, the U.S. is a large country with many people who will continue to pay taxes, so it is
unlikely that the country will go bankrupt. Americans are willing and able to borrow, so central
banks and investors around the world keep lending to the U.S., and all this conveniently happens
in the dollar. The positive feedback loop of these market dynamics gives rise to an extensive
international circulation of the dollar. The consensus in the literature is that the dollar is an
attractive international currency because the dollar is highly liquid and its future value is
probably stable. Economic factors like economic size (GDP) as well as the size of commercial
and financial markets determine a given capacity for international status (Bergsten 1975; Cohen
1977; Chinn and Frankel 2008). Liquidity, confidence and transnational networks are also seen
as economic supporting factors (Helleiner, 2008). The political stability and fiscal deep pocket of
the U.S. bolsters the widespread confidence in the dollar.

73

Table 3. Shares of Currency Distribution in Foreign Exchange Market
18

Source: Bank for International Settlements

Table 4. Shares of Imports Invoiced in U.S. dollar

Source: Annette Kamps (2006)

18
Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies
totals 200%.
Currency 1998 2001 2004 2007 2010 2013
USD 86.8 89.9 88.0 85.6 84.9 87.0
EUR N/A 37.9 37.4 37.0 39.1 33.4
JPY 21.7 23.5 20.8 17.2 19.0 23.0
GBP 11.0 13.0 16.5 14.9 12.9 11.8
AUD 3.0 4.3 6.0 6.6 7.6 8.6
CHF 7.1 6.0 6.0 6.8 6.3 5.2
CAD 3.5 4.5 4.2 4.3 5.3 4.6
MXN 0.5 0.8 1.1 1.3 1.3 2.5
CNY 0.0 0.0 0.1 0.5 0.9 2.2
NZD 0.2 0.6 1.1 1.9 1.6 2.0
Countries 1998 1999 2000 2001 2002 2003 2004 Average
Indonesia 77.4 83.3 79.9 80.0 79.6 80.3 82.5 80.4
Korea 80.4 82.2 80.6 78.3 80.4
Thailand 80.7 79.2 79.0 77.9 77.2 76.0 78.3
Japan 71.5 70.7 70.0 68.3 68.7 69.8
Greece 61.5 57.1 54.7 55.3 57.2
Lithuania 55.9 58.8 57.5 52.9 49.2 42.0 39.3 50.8
Australia 52.5 49.7 51.4 49.5 50.1 47.9 50.2
France 48.4 57.2 45.7 45.2 46.9 48.7
Netherlands 44.3 45.6 52.8 48.5 43.8 47.0
Spain 46.4 44.4 48.2 43.7 38.9 34.9 35.5 41.7
Latvia 42.4 37.3 29.7 34.0 34.9 35.7
UK 30.0 34.0 38.0 37.0 34.8
Poland 32.3 32.1 34.8 32.9 28.6 27.2 26.1 30.6
Hungary 27.0 22.5 23.2 21.7 18.5 17.7 18.8 21.3
Denmark 20.6 24.1 24.3 19.3 17.4 17.0 20.5
Czech 18.8 20.5 19.7 19.5 18.3 18.5 19.2
Slovenia 17.9 15.7 14.2 13.2 15.3
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Table 5. Shares of Exports Invoiced in U.S. Dollar

Source: Annette Kamps (2006)

Table 6. Shares of Korea’s Imports Invoiced in U.S. Dollar

Source: Bank of Korea Economic Statistic System

Country 1998 1999 2000 2001 2002 2003 2004 Average
Indonesia 93.7 92.9 92.7 91 91.4 92.8 93.6 92.59
Thailand 90.6 87.6 87 85.7 84.7 84.4 86.67
Korea 84.8 87.4 86.8 84.6 85.90
Australia 66 64.2 68.4 68.8 67.9 67.5 67.13
Greece 67.7 52.6 45.9 51.2 54.35
Lithuania 62.5 60.7 54.3 46.3 43.6 42 51.57
Japan 51.2 52.4 52.8 51.7 48 51.22
Spain 40.1 39.1 40.9 52 57.5 61.7 62.2 50.50
Latvia 46.9 41.4 36.2 38.3 35.2 39.60
France 35.5 42.6 41 37 33.6 37.94
Netherlands 32 32 41.3 39.2 35.2 35.94
Poland 40 36.3 36.2 33.8 29.9 25.2 21.4 31.83
UK 27 29 29 26 27.75
Slovakia 28.4 30 26.4 23.2 19 25.40
Denmark 19.7 25.4 25.6 22 19.5 19.5 21.95
Hungary 28.5 21.2 17.5 15.7 12.2 10.1 9.6 16.40
Czech 13.1 14.4 14.1 14.7 13.5 12 13.63
Slovenia 10.4 10.3 9.5 8.1 9.58
Currency 1992 1995 2000 2005 2010 2015
USD 77.90 78.60 80.80 79.30 81.30 81.80
EUR 5.50 6.10 4.00 5.40 5.40 6.30
JPY 13.50 13.10 13.10 12.60 9.90 5.50
KRW 0.20 0.20 0.80 1.60 2.40 4.80
Others 3.00 2.00 1.40 1.10 1.00 1.60
RMB 0.00 0.00 0.00 0.00 0.00 0.60
GBP 0.80 0.80 0.70 0.40 0.30 0.40
SGD 0.00 0.10 0.10 0.00 0.10 0.10
AUD 0.20 0.30 0.20 0.20 0.10 0.10
HKD 0.10 0.10 0.10 0.00 0.00 0.00
75

Table 7. Shares of Korea’s Exports Invoiced in U.S. Dollar

Source: Bank of Korea Economic Statistic System

The high shares of U.S. dollar in Korea’s trade invoicing notable, especially considering
that the share of trade with the U.S. has been declining over the years (See Table 7). If share of
the U.S. dollar invoicing are plotted against the share of trade with the U.S., dependence on the
U.S. dollar in trade invoicing is more visible (See Figure 7). The dollar invoicing share in export
and import transactions (vertical axis) are contrasted with the share of the U.S. as the direct
partner of the exports and imports (horizontal axis). Under an assumption that all trade with the
U.S. will be invoiced in dollar but nothing else, then the points would lie along the diagonal of
the chart. But in reality, all data points are to the left of the 45 degree line, showing a strong
evidence of the dollar being used as a major vehicle currency in Korea. The prevalence of trade
invoicing in dollar is far greater than what would be expected purely on the basis of the direct
importance of the U.S. as the direct trade partner. This finding is consistent with the findings by
Goldberg and Tille (2008).
Table 8. U.S. Share of Korea’s Exports and Imports

Source: Korea International Trade Association
Currency 1992 1995 2000 2005 2010 2015
USD 89.0 88.0 87.5 82.9 85.9 86.1
EUR 3.0 3.3 4.4 8.5 6.0 5.0
Others 1.3 1.3 1.7 2.5 2.6 3.7
JPY 6.6 7.3 6.1 5.6 4.4 2.8
KRW 0.1 0.1 0.2 0.5 1.1 2.4
RMB 0.0 0.0 0.0 0.1 1.0
AUD 0.2 0.2 0.3 0.5 0.7 0.5
GBP 0.5 0.6 0.6 1.0 0.3 0.4
BRL 0.0 0.3
RUB 0.2 0.2
SGD 0.0 0.1 0.1 0.1 0.1 0.1
HKD 0.1 0.1 0.3 0.1 0.0 0.0
1991 1995 2000 2005 2010 2015
Export % 25.82 19.30 21.83 14.54 10.68 13.26
Import % 7.02 5.82 6.43 4.01 2.52 2.47
76

Figure 7. Shares of Trade with U.S. vs in U.S. Dollar

Source: Bank of Korea and Korea International Trade Association

International Reserves
As for currency composition of international reserves, the U.S. dollar has been the
primary reserve currency since 1970s. Between 2007 and 2008, there was a slight plateau in the
accumulation of the dollar as foreign reserves, but the overall direction even today remains
upward. In absolute numbers, the U.S. dollar remains the most preferred currency for
international reserves. However, in relative terms, the trajectory of the dollar is in decline. The
share of the dollar in the allocated reserves of the world declined from 71% in 2000 to 62% in
2012. And the decrease in the share of dollar reserves is offset by the increase in the share of
euro reserves. The share of the euro increased from 18% in 2000 to 24% in 2012. Even through
the Global Financial Crisis and “Great Recession,” central banks around the world still place
much trust in the dollar. That there is no alternative has been established by various studies that
capture the uphill of the capital flows from the emerging markets to the U.S.. And data shows
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that the dollar is still the primary reserve currency, with the euro, the Swiss franc, the Japanese
yen and others trailing far behind (Prasad 2014).
Figure 8. Currency Composition of International Reserves

Source: IMF COFER Database

Figure 9. Share of U.S. Dollar in Reserves Figure 10. Share of Euro in Reserves

Source: IMF COFER Database

The motivation to accumulate reserves in the dollar is intuitive: the currency is backed by
the largest market and is the most stable. The sheer size of the trade market and the tax base
naturally induced positive externalities and generated a market for the dollar trade. However, the
intuition is not entirely straightforward when tested against a panel regression between the dollar
claims in international reserves versus a few key U.S. economic variables of GDP,
unemployment rate and consumption expenditure, during the time period from 2000 to 2011.
Overall, the relationships between the reserves and the domestic economic indicators show a
mixed picture. The increase in the claims held in US dollars for international reserves is
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positively correlated with the increase in the GDP and GDP per capita of the U.S. This means
that higher GDP and GDP per capita are correlated with a higher value of dollar claims in
international reserves. A positive correlation between reserves and the GDP and GDP per capita
indicate a positive correlation between reserves and domestic economic strength. But this
correlation does not stand in the correlation between reserves and the unemployment rate.
An increase in the unemployment rate reflects decline in domestic economic strength. A
high unemployment rate reflects a weak domestic economy and therefore should predict a lower
level of dollar claims in international reserves. However, the data shows the opposite. A higher
unemployment is correlated with a higher level of dollar claims in international reserves, which
is the opposite of the relationship between the reserves and GDP.
Figure 11. Relationship between Economic Indicators and U.S. Dollar Claims in Reserves

Sources: World Development Indicators and IMF COFER Database

Consumption is also an important indicator especially for the U.S., because consumption
takes up 70% of the GDP. Also, the large U.S. consumer market sustains much of the world
production and trade. Therefore, strong consumer confidence means a strong economy for the
U.S. High domestic consumption levels in the U.S. would also mean large volumes of trade with
the U.S. If the US is an important trade partner, there is a stronger incentive to link their
currencies to the US dollar. Reasonably, we can suspect that an increasing level of private
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consumption expenditure would be associated with an increasing level of dollar claims in
international reserves. But in fact, we find no relationship. Taken altogether, the relationship
between the dollar reserves and domestic economic indicators is puzzling.
19

Figure 12. Relationship between Consumption Expenditure and U.S. Dollar Claims in
Reserves

Source: World Development Indicators and IMF COFER Database

The recent global financial crisis exhibited a hint of American decline. The U.S.
experienced a substantial decrease in its domestic economic strength in the gross domestic
product, employment rate and consumption. With the financial blow, the real economy suffered.
But how much did the decline in the domestic strength challenge the international power status
of the dollar? And how long does it take for such effect to take place? The period of the financial
crisis can be dated as 2007-08, but some argue that the crisis is not yet over. And it is unclear
how immediately the crisis affects the decision to accumulate international reserves in the U.S.
dollar.

19
A caveat is that the data set of economic indicators for 2000-2012 may not be large enough. The initial plan was
to run fixed effects regression on the panel data, but the number of observation was too small to run regressions
and generate reliable findings. At best I could run a linear fit for the reserves on the domestic economic indicators
to observe the relationship. Nonetheless, although the data is less than complete, we can still see that we cannot
establish a clear direction in the relationship between the international status of the dollar and domestic economic
indicators.
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Global Financial Crisis
Although it is not entirely clear whether the Global Financial Crisis had a direct effect on
the level of international reserves or trade invoicing in the U.S. dollar, the Crisis exposed
vulnerability of the finance industry and left repercussions in the domestic market. The Global
Financial Crisis was not an overnight phenomenon, but rather a gradual outcome of deregulation
of the U.S. finance industry. Over the years, the financial market had become increasingly risky
following a generation of deregulations that allowed investment banks to hold less reserve
capital and increase leverage. This allowed the existing banks to take more risks with their
investments, and also allowed new investment intermediaries to enter the market more easily.
Concurrently, technological innovation expanded ways of engineering and generating various
financial products. This meant that investment managers could be geographically far away from
their clients and still easily conduct transactions. The process of investment contribution,
brokerage, trade and distribution became less personal and less accountable. On top of that, the
short-term performance-based incentive structures encouraged the investment managers to take
risky decisions. Investment managers became more prone to make highly risky decisions on a
small possibility of large payoffs (Rajan 2006).
After the implosion of the Global Financial Crisis, recession ensued. U.S. budget deficits
kept increasing. The budget deficits were at massive US$1.4 trillion in 2009 and remained over
US$1 trillion until 2012. In 2013, the fiscal drama continued in the United States, with budget
sequesters and government spending freeze. The 2013 fiscal year deficit decreased to US$680
billion, and further down to US$483 billion in 2014. As of June of 2015, the U.S. government
budget deficit at US$412 billion returned to pre-recession levels (Congressional Budget Office
and U.S. Treasury Department; WSJ “Budget Deficit Returns to Prerecession Levels,” Oct 15,
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2014). In August, 2014, amid the political gridlock over the debt limit and government spending,
Standard & Poor’s downgraded the U.S. credit rating one notch below AAA to AA+, and this
rating remained until June, 2015. With the ongoing enormous financial crises around the world,
the U.S. economy and fiscal position eroded, and the dollar declined relative to other currencies.
The perplexing situation was that even through all the turmoil, emerging markets were
still investing in the U.S. Treasuries and storing the U.S. dollars. Also, yields to the U.S.
Treasury Bonds remained fairly low, which meant that the cost to borrow remained fairly low for
the U.S. In 2013, the 10-year Treasury yields were at 2.56%. In 2014, the yield fell as low as
1.38%, and in 2015, the yield ranges between 2.13 and 2.21%. Yields on the U.S. Treasury
bonds remained stable, and the Treasuries were still in high demand (Prasad 2014). On the trade
front, the U.S. dollar also remained a major trade invoicing currency (Goldberg and Tille 2009,
Ito et al, 2010). For instance in Asia, even with the growing intra-Asia trade volume and the
proximity among the Asian economies, the primary trade invoicing currency remained U.S.
dollar. And this defies a study on trade currencies that suggest that “agents appear more willing
to trade currencies issued by geographically close countries” (Flandreau and Jobst, 650).
The U.S. dollar remained the predominant international currency throughout the financial
crisis and into the recession. If all currencies in the world were to be rank ordered in the
categories of how extensively they were used as a medium of exchange, a unit of account and a
store of value, the U.S. dollar would place in the first place by a large margin. The dollar is still
the most traded currency in the foreign exchange market, the most cited anchor currency in
exchange rate regimes especially for emerging economies, and the most held reserve currency in
the world. Sustained dominance of the U.S. dollar arises from the fact that fundamental risks are
outweighed by perceived safety. And there is a simple reason for this: there is no better
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alternative. Although dollar has been oversupplied and the treasury bonds may be unpayable one
day, with no serious contenders in sight, it is still the most preferred store of value for saving and
investment, medium of exchange for settlement and unit of account for denomination (Prasad
2014; Kawai and Pontines 2014; Frankel 2013; Bank for International Settlements 2013;
Goldberg and Tille 2009).
The perceived safety and trust in the dollar is not unreasonable. Investors make decisions
based on plausible calculations. The massive size of the U.S. market assures us that the overall
American economy is too big to fail. Liquidity of the massive U.S. bond market is unparalleled.
Now that the dollar has been so extensively circulated for decades, the consequent externalities
lower the transaction cost and prolong the positive feedback loop. American laws and rights are
respected with accountability and transparency. The U.S. – troubles aside – is seen as one of the
most stable political systems in the world. These reasons merit the U.S. dollar a status of
dominance.

Voting Shares in International Institutions
Another measure of economic hierarchy is voting power in international institutions.
Institutions can be modes through which states exercise power as well as constrain themselves by
binding themselves to a set of transnational rules or norms. But when states have a voice in the
institutions that have influential decision making authority in the areas international development,
aid, loans, sanctions, and military deployment, the states can channel influence in significant
ways. For instance, the U.S. has the largest voting shares in the World Bank and the IMF, and
wield significant influence on setting the agenda, directing the strategies and distributing the
funds. For a measure of institutional influence in the Asia region, voting shares within
multilateral development banks that contribute financial and/or technical assistance to the Asian
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region are calculated. Included institutions are the IMF and the World Bank Group funds and
Asian Development Bank. The World Bank Group is composed of International Bank for
Reconstruction and Development (IBRD), International Development Association (IDA),
International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA) and
International Center for the Settlement of Investment and Disputes (ICSID). Of those entities,
IBRD, IDA, IFC and MIGA are governed by the member countries with voting shares and offer
low-interest loans, credits, grants and technical assistance to developing countries. Voting shares
for these banks were separately calculated, because they manage separate funds and distribute
them according to the decisions made by their boards. ICSID does not offer assistance, so it is
excluded here. Other multilateral institutions such as African Development Bank, European
Bank for Reconstruction and Development, and Inter-American Development Bank Group are
excluded here, because they do not contribute to the Asian region. In these banks, the voting
shares of the U.S. far exceed the rest of the voters, except for the Asian Development Bank,
where the U.S. and Japan share roughly similar voting shares. On average, the U.S. holds more
than twice the voting shares than Japan who ranks in the second. The caveat would be that if all
the European voters combine their votes, then they can potentially outweigh the voting shares
held by the United States. Out of the top 15 countries that hold voting shares in the multilateral
banks that provide development funding to Asia, only seven countries are located in the Asia
Pacific region, which is less than half. Out of the seven, only two are in the top ten. The sum of
the seven countries’ average shares is 18.22%, which is only slightly higher than the average
share of just one U.S. This shows that the United States and western countries have a significant
influence on how developmental capital is contributed into the Asia Pacific region, more than the
Asian nations themselves.
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Table 9. Ranking of Voting Shares in the Multilateral Banks that Contribute to Asia

Sources: Annual Reports and publications on voting shares published by the institutions as of
2014

Military Expenditures
As for military expenditures, according to the data compiled by the Stockholm
International Peace Research Institute, the U.S. is by far the largest military spender for the last
twenty years, consistently spending between 34-42%. Before 1992, the Soviet Union was the
closest rival accounting for 18-23% of the world total, but soon after the collapse, Russia’s
spending dropped to around 5% in 1992 and continues to hover in the 3-5% range. As for China,
the country with the second largest share today, accounts for only 12%. As for the euro area,
even if all the shares were combined, it would account for 22%, lower than the U.S. share of the
world total. If technological sophistication of American weaponry is taken into account, the U.S.
is clearly peerless in the security sphere. As of September of 2015, the U.S. military maintains
Rank Countries IMF IBRD IFC IDA MIGA ADB Average
1 United States 16.74 16.12 20.99 10.47 15.02 12.75 15.35
2 Japan 6.23 7.47 6.01 8.45 4.22 12.84 7.54
3 Germany 5.81 4.37 4.77 5.46 4.20 3.78 4.73
4 United Kingdom 4.29 3.92 4.48 6.04 4.03 1.94 4.12
5 France 4.29 3.92 4.48 3.82 4.03 2.17 3.78
6 China 3.81 4.82 2.30 2.12 2.64 5.48 3.53
7 India 2.34 3.04 3.82 2.96 2.56 5.39 3.35
8 Canada 2.56 2.65 3.02 2.63 2.50 4.50 2.98
9 Italy 3.16 2.47 3.02 2.28 2.38 1.75 2.51
10 Saudi Arabia 2.80 3.02 1.91 3.24 2.64 0.00 2.27
11 Australia 1.31 1.45 1.77 1.24 1.49 4.95 2.03
12 Russian Federation 2.39 2.82 3.82 0.33 2.64 0.00 2.00
13 Korea 1.36 1.65 1.07 0.84 0.47 4.35 1.62
14 Indonesia 0.85 0.98 1.19 0.81 0.95 4.40 1.53
15 Malaysia 0.73 0.47 2.49 0.37 0.57 2.49 1.19
16 Philippines 0.43 0.46 0.53 0.54 0.49 2.21 0.78
17 Turkey 0.61 1.18 0.61 0.60 0.48 0.57 0.68
18 Thailand 0.60 0.49 0.46 0.39 0.44 1.39 0.63
19 Iran 0.62 1.60 0.08 0.45 0.86 0.00 0.60
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more than 1.3 military personnel in the Army, Navy, Marine Corps and Air Force, and over
170,000 troops in 173 countries (Department of Defense 2015). The U.S. military also directly
hires more than 46,000 civilian employees in 82 foreign countries. Superiority of American
military power consolidates its hegemonic position in the world and especially in the Asia.
Figure 13. Top 10 Military Expenditures as Shares of the World Total

Source: Stockholm International Peace Research Institute 2015

III. Strategies to Maintain Pax Americana and Manage Competitors
This section discusses how the U.S. engaged in strategies to defend its presence in the
Asian region and deter competition. According to the supply and demand framework, in order to
keep the marginal cost of supplying leadership down, in other words maintain a manageable
supply curve, it is crucial for the leader to manage competitors who might enter the market and
supply substitute goods. If competitors can potentially provide a good alternative good, then the
supplier has invest more resources in order to be able to provide a better good and hopefully fend
off competition. The cost of production would increase. It applies to the U.S. case, where in
order to consolidate its hegemonic status in Asia the United States has to manage the potential
competitors, mainly Japan and China. Japan and China are major economies in Asia that can
potentially replace the U.S. as a regional hegemon. In the currency market, the U.S. dollar has
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been the most used and circulated, but the Japanese yen and the Chinese yuan could potentially
become major currencies used in the region. In order to maintain a strong hierarchy in Asia, the
U.S. mostly blocked or opposed Asia-only regional financial initiatives pursued by Japan and
China in the 1990s and 2000s. Japan mostly collaborated with the U.S., but China tended to
contest the U.S. presence in the region.

America’s Monetary and Trade Policies
The U.S. issues the strongest currency in the world, and pursues policies to maintain it.
One way is to sustain the international circulation and use of the currency. For example, the
Federal Reserve establishes currency swap agreements with foreign central banks that can
potentially mobilize international loans denominated in dollar. In 2007 and 2008, the Federal
Open Market Committee (FOMC) authorized dollar liquidity swap agreements with 14 foreign
central banks. These arrangements expired in February 2010, and the FOMC re-authorized the
swap lines with five foreign central banks. Although the Federal Reserve has not drawn on any
of the swap lines, the availability of the arrangements shows that the Federal Reserve is able to
serve as the lender of the last resort for foreign central banks. Between December 2007 and July,
2010, Banco de Mexico, Bank of England, Bank of Japan, Bank of Korea, Denmark National
Bank, European Central Bank, Norges Bank, Reserve Bank of Australia, Sveriges Riksbank, and
Swiss National Bank, in aggregate sum, drew more than $10 trillion dollars in 569 settlements
(Federal Reserve Bank Data as of December 9, 2014).
On the surface, the statistics of the U.S. trade deficits and liabilities look bleak. The U.S.
has run massive deficits. In 2006, the trade deficits were recorded as $753 billion, and in 2015
the figure decreased but still was at massive $532 billion. In 2008, America’s net external
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liabilities were at $4.2 trillion and this number increased to $7.3 trillion by the end of the third
quarter in 2015 (Bureau of Economic Analysis 2009 and 2015). The numbers alone seem dismal,
but the situation is not all bad. In fact, the trade deficits and debt can actually work in favor. In
trade, the U.S. systematically absorbs more imports than exports. The deficits allow consumers
to enjoy goods beyond the production and export capacity, and allow firms to expand the
production and sale of final goods by importing cheap intermediate inputs. Although the U.S.
borrows much, it also invests and lends overseas. In the monetary system, the U.S. makes more
money from lending than pays on its borrowing (Norrloff 2010, 5-6). Overall, the U.S. benefits
from its multi-purpose power base to absorb more capital and goods through capital and
exchange rate gains in the international investment position, and adjust the imbalances through
dollar-denominated assets purchased by foreign investors (Norrlof 2010).

U.S. and Collaborative Japan
Until 1990s, the U.S. did not face much of a challenge to its presence in Asia, as the key
Asian countries were dependent on the U.S. military and economic assistance. However, as
Japan and China began to emerge as regional powers, the status of the U.S.-centric Asian
political economy came to be in question. To begin with, Japan expressed interest in undertaking
a larger leadership role in the region. The U.S. allowed its rise to a certain extent, but resisted it
when it seemed to challenge or go against American interests. In the end, Japan acquiesced and
succumbed to the U.S. directives.
After World War II, The U.S. maintained a strong military and political alliance with
Japan, and Japan was mostly collaborative. Tokyo has been a close U.S. ally and has “a strong
trans-Pacific identity” (Feigenbaum 2015). Japan adapted an American style of leadership in
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international institutions, for instance as a primary supporter of the Asian Development Bank
(ADB), which models closely after the West dominated IBRD or IMF. The management
structure of membership, board of governors and board of directors is very similar to that of the
IBRD or the IMF. When the ADB was first established in 1966, Takeshi Watanabe, a Japanese
bureaucrat, became the first president. Since the inception, all nine presidents have been from
Japan. ADB’s first bonds worth about $16.7 million were issued in Japan in 1970 (Asian
Development Bank). Japan contributed $23.99 billion in capital subscription as of 2014, and
committed $12.68 billion to special projects. Japan’s capital subscription is 15.67% of the total,
and Japan holds the most voting shares with 12.84% of total membership. Japan’s leadership
position is shared with the United States, a major non-regional member that contributed $23.83
billion in capital subscription and committed $4.29 billion to special funds since joining in 1966.
Capital subscription from the U.S. is at 15.57% of total, and voting power at 12.75% (Asian
Development Bank Annual Report 2014). The capital subscription and voting power Japan and
the U.S. are very close. Japan and the U.S. share the leadership at the Bank.
Japan’s stance on sharing the leadership with the U.S. changed in late 1990s, in the
aftermath of the Asian Financial Crisis. During and after the Crisis, the solutions that the IMF
and the U.S. prescribed to the crisis stricken Asian economies attacked the “Asian” model. Japan
represented the Asian model of economic growth, and was a significant part of the regional
growth as well. In the early 1990s, Japan commissioned the World Bank for an extensive report
on the Asian economic development model, which was well received in both policy and
academic circles (World Bank 1993). But when the financial crisis broke out in 1997,
policymakers and scholars strongly criticized and blamed the “Asian” model that consists of
close government-business relationships and interventions for economic mismanagement and the
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subsequent crisis. Studies by Lin and Rajan (2001), Amyx (2002 and 2005) and Lee (2006)
analyze the AMF episode in detail. Stringent IMF bailout packages were prescribed to Thailand
in early August in 1997. The package stipulated high interest rates, steep expenditure cuts and
other structural adjustment programs for austerity measure and structural reforms that called to
close insolvent financial firms. In mid-August, Japan secured more economic data from Thailand,
and decided that the Thai crisis was about temporary liquidity crunch, not insolvency and
disagreed with the IMF’s operation conditionality. Upon learning that that the U.S. Treasury
department spearheaded the crafting of the terms of the IMF conditionality, Japan tried to lessen
the gravity of the IMF conditionality to no avail. In Thailand, capital flight worsened, and the
financial situation worsened after the IMF bailout. Later in August, Thai government called for
an establishment of an Asian fund to support Asian currencies against foreign speculators. In
September, Japan informally discussed with Hong Kong, Singapore, Malaysia, Thailand and
Korea to create a $100 billion Asian Monetary Fund, of which $50 billion would come from
Japan and the rest from other Asian countries. Asian economies collectively felt that the situation
was wrongly diagnosed by the Western institutions, and suffered in consequence. They sought to
seek a measure that would prevent misdiagnose and misunderstanding, something that would
protect the Asian economies. Japan was a major power in the region that had a shot at
challenging and disrupting the hierarchy, and they took the initiative and proposed the Asian
Monetary Fund (AMF) that would be run by and for Asia. The AMF would provide liquidity to
Asian economies in the cases of liquidity crunches or financial crises.
Upon learning that they will be excluded from the proposal, the United States vehemently
opposed and blocked the proposal. This was Japan’s first-ever attempt to intentionally exclude
the United States from an international institution in the postwar era. The U.S. employed
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diplomatic pressures to force Japan to withdraw the plan (Lee 2006). The U.S. Treasury severely
criticized the proposal, and the Secretary of the Treasury called his counterpart in Japan to
dissuade him from going forth. The Secretary of the Treasury and the Chairman of the Federal
Reserve Board sent a memo to finance ministers of APEC to convey the message that the U.S.
was determined to work with the IMF to initiate measures that would help the IMF respond to
financial crises more effectively especially in Asia. The U.S. mobilized diplomatic efforts to
persuade other Asian and European countries to reject the AMF proposal. Nonetheless, Japan
went ahead with the proposal for the creation of the AMF on September 21, 1997 at the Annual
Meetings of the World Bank and IMF. After the proposal, Japan’s finance ministry faced
opposition both internationally and domestically. In October, Germany and Australia voiced
opposition, and China withheld support. Internally, the Japanese Ministry of Foreign Affairs
criticized the exclusion of the U.S. and the IMF. Only after two months, in November, Japan
retracted the proposal, and the proposal for the Asian Monetary Fund never came to fruition.
Consequently Japan lost a chance for sole leadership in a pan-Asia institution. The AMF episode
highlights that the U.S. maintains strong involvement in the Asian affairs. It also shows that the
U.S. will exert necessary efforts and pressures to curb a challenge to the U.S. hierarchy in the
region. In the case of Japan and the AMF, the U.S. actively managed the competition in the
region and prevailed.

Testy Relations between the U.S. and Rising China
Unlike Japan, China does not have the history of military and economic dependence on
the U.S. In fact, the U.S. and China have been on the opposite side of the table in tense standoffs
since the establishment of the People’s Republic of China was established in 1945. The U.S.-
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Sino tensions boiled through the Korean War, Taiwan Strait Crisis, Tibetan Uprising and China’s
atomic tests. In the early 1970s, the two countries began to make progress in normalizing their
relations and engaged in diplomatic talks. Therefore China’s perception of and position toward
the U.S. presence in Asia widely differs from that of Japan. China does not shy away from
directly challenging America’s place in Asia. Into the 1990s and 2000s, as China grew as the
second largest economy and manufacturing hub of the world, China began to pose competition
against the U.S.
The ascent of China may seem like a recent phenomenon to younger generations who
mostly know of China as the manufacturing powerhouse, but China’s dominance is not new in
history. Centuries ago, China was the middle kingdom and a heavy weight that secured stability
and order in Asia (Kang 2008). China’s legacy in history, society, politics and culture in Asia is
undeniable. For one, China’s linguistic and cultural legacy is evident in Japan and Korea. In the
recent years, China re-entered the international stage of market and politics, first with the
admission of China to the World Trade Organization in 2001. China’s ascension fueled China’s
integration into the world economy, and China greatly increased its external trade. China
emerged as an economic powerhouse. In 2013, China’s outbound foreign direct investment
exceeded US$100 billion, which matched inbound foreign direct investment that also exceeded
$100 billion (People’s Republic of China Ministry of Finance 2014).China also expanded its
political influence by establishing diplomatic relations and involving itself in multilateral
institutions (Shambaugh 2004, Foot 2006, Steinfed 2010, Shambugh 2013).
In 2013, China’s bids to establish the Asian Infrastructure Investment Bank (AIIB)
alerted the world again that China is advancing. As the primary architect of the AIIB, China
proposed capital pool of $100 billion dollars. The AIIB signifies China’s ascent in a more visible
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and tangible way. The objective of the bank is to offer an alternate source of capital for
infrastructure related projects, and other developing countries in Asia are positioned to benefit
from it. In the new institution, China is expected to hold the most votes with estimated 25-30%
for providing about 30% of the capital, although the exact figures are not yet announced (CSIS
2015, CNBC 2015). In 2014, 22 countries in Asia and Europe signed the Memorandum of
Understanding to establish the AIIB and selected Beijing as the Bank headquarters. By 2015, the
founding members increased to 57 countries (AIIB 2016).
China’s proposal to establish the Asian Infrastructure Investment Bank has been
interpreted as a challenge to the U.S. hierarchy in Asia, and the U.S. vehemently opposed the
proposal. The United States has been wary about China’s rise and expressed undisguised
opposition to the establishment of the AIIB. The U.S. lobbied Asian nations to dissuade them
from joining the AIIB and in fact reject the proposal (Keck 2014, Perlez 2014). However,
America’s efforts were futile, and twenty-two nations signed the Memorandum of Understanding
to establish the AIIB and selected Beijing as the Bank headquarters in October 2014. By 2015,
the founding members increased to 57 countries. By April 2015, the U.S. adopted a softer
approach, and even President Obama publicly stated that “we’re all for it” if the AIIB
incorporates strong financial, social and environment safeguards (Talley 215). In the end, the
U.S. relented. America’s opposition did not at all prevent China from pursuing and establishing
the Bank, and also did not dissuade Asian and European nations from joining the Bank. Nearly
20 years ago, the U.S. undertook a similar position toward Japan and the AMF, but this time, the
outcome was in sharp contrast. In the case of China and the AIIB, the U.S. attempted to restrain
competition, but did not succeed. The U.S. has to manage peaceful co-existence.
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Understanding the AIIB initiatives can be further contextualized in China extensive trade
and internationalization efforts. In the recent years, China surpassed all others in the sheer
volume and value of trade, and the finance market also underwent a process of liberalization. In
the early 2000s, China surpassed the U.S. as the top trade partner for Korea and Taiwan.
Importance of China in regional and world trade is unmistakable. China used to be a major
exporter of cheap manufactured goods, but now China is transitioning into a major importer of
consumer goods and value added items as well.
Figure 14. Korea’s Trade Value Figure 15. Taiwan’s Trade Value

Source: Bank of Korea Source: Taiwan Bureau of Statistics

Along with growing trade, the process of internationalization of the renminbi is
progressing along. The process of RMB internationalization has been politically motivated on
China’s side. In terms of international currency holdings, the renminbi falls behind the top seven
currencies: the U.S. dollar, euro, yen, pound sterling, the Canadian dollar and the Australian
dollar (IMF 2015b). In 2013, the share of the Chinese renminbi in the foreign exchange markets
hovered around the 2% range, lower than the shares attributed to the Canadian dollar, the
Australian dollar, the Swiss franc and the Mexican peso (IMF 2015b). Considering that the share
of the renminbi in the worldwide foreign exchange market is much smaller than the share of
China’s trade in the world trade, “it would be more accurate to say that the renminbi is becoming
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a normal currency than to say that it is becoming an international currency, let alone the top
international currency” (Frankel 2014).
While the RMB still has ways to go before it becomes a major international currency,
recent efforts exerted by the Chinese government to internationalize its currency are worth
noting. Through internationalization of the RMB, the Chinese government pursues multiple
goals, for instance to reduce China’s reliance on the U.S. dollar, to strengthen China’s
international influence, and to accelerate domestic financial reforms (Kirshner 2014; Yu 2014).
In 2007, China started to issue renminbi bonds in Hong Kong and formally started the Qualified
Foreign Institutional Investors to allow foreign investors to purchase assets dominated in
renminbi. Since 2008, China also began to establish bilateral local currency central bank swap
agreements with a number of Asian nations. The bilateral swap agreements activate actual
exchange of currency when the central banks decide to tap into the agreements. If the agreements
are not activated, they remain on paper and mostly symbolic. Nonetheless, the agreements are
significant in that they reflect the negotiations and exchanges between the central banks involved.
By 2012, fifteen countries including Korea, Hong Kong, Indonesia, Singapore, Thailand and the
UAE signed swap agreements. The latest agreement signed in 2011 with the Bank of Korea
amounts to 180 billion yuan (equivalent of $56.5 billion) (Prasad and Ye 2012). By 2015, China
has signed bilateral swap lines with over 30 foreign central banks, cumulatively worth over RMB
3 trillion. Partners include 13 countries in greater Asia: Hong Kong, Korea, Singapore, Australia,
Malaysia, Indonesia, Thailand, New Zealand, Mongolia, Pakistan, Sri Lanka, Kazakhstan and
Uzbekistan. Also, 19 countries from Europe, Americas and the Middle East have bilateral swap
lines with China. The stated purposes of each bilateral currency swap arrangement include
promoting bilateral trade and direct investment for economic development of the two countries,
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supporting domestic financial market stability, and other purposes agreed upon by both parties.
Swap agreements are effective for a three year period from the effective date of agreement and
the drawing or usage period is up to 12 months. The RMB leg of the swap is priced off SHIBOR
as the benchmark rate, with the spread over the benchmark priced according to the counterpart’s
credit rating, credit default swap spread, and other factors. The PBC does not provide an implicit
agreement to convert RMB into a major reserve currency (IMF 2015 Aug, 54).
Renminbi has also become a reference currency for a number of emerging market
economies. Currencies of these emerging economies exhibit “a high degree of co-movement
(CMC),” these movements are strongly associated with trade integration (Subramanian and
Kessler 2013). The Subramanian and Kessler study suggests that there is already a renminbi bloc,
with the renminbi having eclipsed the dollar and become the dominant reference currency in
Asia. Additional reforms in the financial market and capital account liberalization are expected
to further promote the role of the renminbi.
Efforts to internationalize the RMB were once again affirmed when the IMF announced
that RMB will be included in the basket of currencies which make up the IMF’s Special Drawing
Right (SDR). On December 1, 2015, the IMF announced that the Chinese currency renminbi will
be included in the basket of currencies which make up the IMF’s Special Drawing Right, or SDR.
The Renminbi is the fifth currency making up SDR basket. Starting from October 1, 2016, the
SDR basket will be composed of the U.S. dollar (41.73%), the Euro (30.93%), the Chinese
renminbi (10.92%), the Japanese yen (8.33%), and Pound. The weights are based on the value of
the issuing country’s exports, the amount of reserves denominated in the currencies, foreign
exchange turnover, international bank liabilities, and international debt securities denominated in
the currencies (IMF 2015, Nov). The change in the SDR basket comes for the first time in more
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than 15 years. The inclusion is an important milestone in China’s global financial integration,
and the decision reflects growing international use and trading of renminbi (IMF 2015 Dec 1). It
is an official acknowledgement of China as one of the largest exporter with a currency that is
more accessible and usable. Efforts by the Chinese authorities in reforming and
internationalizing China’s monetary and financial systems are paying off. It shows that China is
moving toward a more open and market-based economy. For instance, the Chinese authorities
granted the reserve managers and their agents of the IMF, international financial institutions,
sovereign wealth funds a full access to the onshore bond and foreign exchange markets. This
grants SDR users sufficient access to onshore markets to perform Fund-related and reserve
management transactions without difficulties (IMF 2015 Nov).
The IMF review of inclusion of SDR in the basket included evaluation of RMB-
denominated instruments and international transactions of RMB. The study was to evaluate a
range of RMB-denominated interest rate instruments to see if they are sustainable and reflective
of the actual market conditions. The instruments included the Shanghai interbank offered rate
(SHIBOR), commercial bank certificates of deposit (CD) rates, interbank repo rates, yields on
PBC securities, policy bank bonds issued by state owned development banks, and treasury
securities issued by the Ministry of Finance (IMF 2015 Nov). Also, the study found a substantial
increase of the RMB usage for international transactions. Exporters and importers are growingly
using the currency directly to invoice and pay. As for foreign direct investment, close to 30% of
FDI transactions involving China were settled in RMB in 2014, up from 13% in 2012. Even
more impressive is RMB invoicing for China’s outward investment. Close to 16% of China’s
outward investment was settled in RMB, up from 4% in 2012. This shows that more countries
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are willing to settle transactions in RMB, and this means that RMB is considered more liquid
(IMF 2015 Aug, 49).
Instrumental to the process of the RMB liberalization was Hong Kong Special
Administrative Region. In November 2003, the Hong Kong SAR banks were the first to offer
RMB-denominated personal accounts to the residents, and in November 2003 the banks
established clearing bank arrangements to facilitate RMB payments with Mainland China (IMF
2015 Aug, 47). The Chinese Ministry of Finance also issued the RMB-denominated bonds
overseas for the first time in Hong Kong. Hong Kong was a test bed for cross-border trade
invoicing and settlements in RMB. Much of the capital flows include inward and outward
portfolio investment flows through the Shanghai-Hong Kong Stock Connect cross-boundary
investment channel, and others. Notably, the Hong Kong Monetary Authority also put
established an RMB Real-Time Gross Settlement system, which is linked with the Mainland's
National Advanced Payment System and allows banks from all over the world to handle RMB
transactions with the Mainland while eliminating settlement risk. Payments through the system
reached the equivalent of some $140 billion per day by the end of 2014. About 10 percent of
these payments were cross-border flows between Hong Kong SAR and the Mainland, while the
rest were offshore transactions (IMF 2015 Aug, 48).
As for the bond market, the issuance of offshore RMB bonds was initially restricted to
Mainland banks and Chinese banks in Hong Kong. China’s own sovereign issuance in Hong
Kong SAR has been an important driver of the market, with the first auction taking place in
September 2009. Several corporate issuers have also tapped RMB funds in the offshore market,
including foreign companies such McDonald’s, Volkswagen and Caterpillar. Issuance activity
has since spread, including to centers outside Asia such as London, where the first RMB-
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denominated bond was issued in April 2012 by HSBC. As of April 2015, outstanding offshore
RMB bonds including certificates of deposit stood at RMB 702 billion, of which about 2 percent
is with the offshore bond market. Much of the bonds, about 65 percent of outstanding bonds are
accounted for by issuers incorporated in China and Hong Kong SAR. A further 6 percent is
accounted for by other Asian issuers and the remaining 29 percent by non-Asian entities (IMF
2015 Aug, 50). Internationally, overseas agencies and banks also started issuing RMB bonds. In
September 2014, the International Financial Corporation issued what was then the largest
London-listed RMB bond worth RMB 1 billion. In October 2014, the UK issued its first RMB-
denominated sovereign bond by raising RMB 3 billion and indicated that the proceeds would be
held as foreign exchange reserves. A month later, the Canadian province of British Columbia
issued in Hong Kong SAR its second RMB-denominated bond for RMB 3 billion (IMF 2015,
Aug, 51). Despite sparse data, as of April 2015, the People’s Bank of China (PBC) estimates the
total offshore holding of bonds, stocks, deposits and other RMB assets by foreign central banks
and monetary authorities amounted to RMB 666.7 billion, which is approximately over USD 100
billion (IMF 2015 Aug, 51). On the individual level, non-resident interest in RMB as a funding
and investment currency increased. In 2011, the “Renminbi Qualified Foreign Institutional
Investor (R-QFII)” program began to allow foreign asset managers to channel offshore RMB
funds into the Mainland securities markets, which was subject to approval from two agencies: a
license from the China Securities Regulatory Commission (CSRC) and a quota from State
Administration of Foreign Exchange (IMF 2015 Aug, 52). While the initiative to allow R-QFII
shows China’s willing to open the finance industry and promote transactions in RMB, the
effectiveness is not guaranteed. In Korea’s case, although the QFII quota for the Bank of Korea
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was US$600 million, but this amount amounted to about 1% of the Bank of Korea’s total foreign
exchange reserves in 2012 (Chey 2015, 9).

IV. State of Asia: Diverse Interests and Positions
As a region, Asia achieved a remarkable economic growth and political stability. East
Asian states in 2015 are richer, wealthier per capita, and more stable and peaceful than any time
since the arrival of the British traders and the Opium Wars of the 1840s. The share of Asia in
world gross domestic product increased from 5.3% in 1985 to 19.4% in 2014 (See Figure 14).
20

Along with the rise of Japan, economic growth of middle income nations such as South Korea,
Taiwan and Hong Kong contributed to the regional growth. Collectively, the region growingly
contributes to the world production and consumption. During the years of “Pax Asiatica,” East
Asian governments achieved export-led economic growth and integrated well into the global
political economy (Solingen 2007). More than a decade of high rates of GNP growth and rapid
economic growth was praised as the “East Asian miracle” (World Bank 1993). A number of
factors including export-oriented models, trade openness, resource mobilization, high rates of
savings and investments, literacy, technical education, low cost labor, foreign direct investment,
foreign aid, security alliances, and macroeconomic stability all worked in their favor for
remarkable economic performance and political stability (Noland and Pack 2005; Amsden;
Haggard; McIntyre and Naughton 2005). Asian firms and economies became more
interdependent and integrated into the global economy as they received investments and formed
regional production networks (Pempel 2010, 214). Finance industries became more sophisticated,

20
Data was collected from the World Bank Development indicators and Taiwan Statistical Bureau. Here included
are data for China, Hong Kong, Indonesia, South Korea, Lao, Macao, Malaysia, Mongolia, Philippines, Singapore,
Thailand, and Vietnam for years 1985-2014. Data for Taiwan are included for years 1991-2014. Data for Cambodia
are added for years 1993-2014. The unit is in current US$.
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and stock exchanges became active. Tokyo, Singapore and Hong Kong emerged as major
financial capitals in the region. A number of multinational corporations located their Asia
headquarters in Singapore and Hong Kong. Also, as the East Asian economies grew, they
became more integrated to the world economy through trade. The share of Asia in world trade
increased from 3.9% in 1966 to 23% in 2014 (See Figure 15).
21
Also as China became the world
factory, much of intermediate trade flowed through the region. Concurrently, intraregional trade
within the Asian region increased dramatically during the years of development and growth. For
instance, Japan’s exports to China, Japan, Hong Kong, Korea, Taiwan and ASEAN nations
increased from 46.9% in 2004 to 52.3% in 2014 (Japan External Trade Organization). Korea’s
exports to neighboring East Asian countries consistently ranged between 50-59% from 2004 to
2015 (Korea International Trade Association). Taiwan’s exports to Asia increased from already
high 63% in 2004 to 70.9% in 2014 (National Statistics Bureau of Taiwan).
Figure 16. Share of Asia in World GDP

Source: World Bank Development Indicators and Taiwan Bureau of Foreign Trade

21
Data was collected from the World Bank Development Indicators and Taiwan Bureau of Foreign Trade. Here
included are data for Cambodia, China, Hong Kong, Indonesia, South Korea, Lao, Macao, Malaysia, Mongolia,
Philippines, Singapore, Thailand and Vietnam for years 1966-2014. Trade data for Taiwan are added for years 1989-
2014. The unit is in current US$.
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Figure 17. Share of Asia in World Trade

Source: World Bank Development Indicators and Taiwan Bureau of Foreign Trade
One factor that fueled intraregional trade was the increase of regional production
networks. For instance, in the early 1990s, more than half of Japanese brand color television sets
were produced overseas. The overseas production ratio of Japanese video cassette recorders
increased from 29% in 1991 to 71% in 1994 (Kim 1997, 2). Korean and Taiwanese electronics
firms also increased their outward foreign direct investment to other parts in Asia, and the
overseas production network expanded to ASEAN countries, China, and India. As Asian
economies increased their external trade, they actively promoted trade and capital flows by
establishing trade agreements with countries both within and outside the region (Solis et al.
2009). Within the region, trade barriers lowered significantly and trade volume increased.
East Asian countries also established a plethora of preferential trade agreements. The
frenzy for preferential trade agreements is a recent phenomenon. In 2000, there were only Asia-
Pacific Trade Agreement, ASEAN Free Trade Area, and Lao PDR-Thailand Preferential Trading
Agreement in effect, but by 2009, East Asia had 37 FTAs concluded, more than 40 under
negotiations, and 26 proposed (Kawai and Wignaraja 2009: Appendix Table A1). In 2015, South
Korea alone had 14 FTAs in effect with 51 partner countries, two concluded, eight in
negotiations, and three proposed (Ministry of Trade, Industry and Energy of Korea). Korea’s
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FTA with China is in effect as of December 20, 2015. China and Japan have not yet reached an
agreement, and there are separate rounds of negotiations for the China-Japan-Korea Trade
Agreement. These trade agreements are both bilateral and cross-regional. While these
agreements show that the participant countries increasingly view each other as important trade
partners and negotiate for trade relations, it is not entirely clear whether these agreements
actually impact the trade values and/or lead to a greater regional cooperation. It is difficult to
tease out the effect of the lower tariffs or trade barriers on the trade value for individual
commodities, because there are so many other factors that determine export and import decisions.
It is difficult to trace the effect also because the individual agreements stipulate complex rules
for individual commodities in the different industries. On whether these free trade agreements
strengthen regional cooperation, the effect is also debatable. On one hand, despite growing
suggestions for region-wide FTAs, there have been no region-wide efforts to establish such
comprehensive measures that encompass ASEAN, East Asia, and other Asian countries. East
Asia’s FTA network remains fragmented, despite the growth in intraregional trade and regional
production networks. Furthermore, competitive motives for establishing these free trade
agreements work against motives to pursue coherent regional integration projects (Solis,
Stallings and Katada 2009). Competitive pressures range from “economic to political to legal,
and because small and large countries are influenced by different forms of FTAs, these pressures
create multiple layers of challenges to coherent regional integration projects” (Stallings and
Katada 2009, 250). Even though the plethora of free trade agreements signed and negotiated by
the East Asian countries do not naturally lead to stronger regional integration, the free trade
agreements within the region signify that there is a growing sense of economic interdependence
among the neighbors, and that they are increasingly formalizing their relations.
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As the region developed and grew wealthy, they became less dependent on the U.S. for
trade. The share of Asia’s exports to the United States have been decreasing. For instance, in the
last ten years, Japan’s share of exports to the U.S. decreased from 22% in 2004 to 19% in 2014.
The trend was similar for China. South Korea’s share of exports to the U.S. decreased also from
17% in 2004 to 12% in 2014. Taiwan’s exports to the U.S. also decreased 5%p in during the
same period, from 16% in 2004 to 11% in 2014.
Figure 18. Asia’s Share of Exports to the U.S.

Sources: Japan External Trade Organization, Korea International Trade Association, and
National Statistics Bureau of Taiwan

Over the years, economic hierarchy in East Asia has changed considerably. And it is
undeniable that much of this wealth and political stability was achieved under the umbrella of
American hegemony that provided military security. Often, countries want U.S. leadership, but
want it in a particular way, on particular matters, and at a particular time. Most East Asian
economies willingly accepted American leadership, but that acceptance was not uncritical.
Rather, there are two elements of East Asia going on at the same time: complicity with American
hierarchy, and resistance to American hierarchy.

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Complicity: East Asian States for American Leadership
It is quite clear that many countries actively desire greater American presence. Bilateral
alliances with the U.S. are preferred than multilateral regional institutions. East Asian countries
have greater interregional international trade and investment flows, but they have not been as
well integrated politically. “Intraregional rivalries and competitive jockeying complicate [the
region’s] relations with outsides powers (Kupchan 1998, 54). It is possible that, without
America’s paperweight-like presence with security umbrella, “these rivalries would likely
intensify, embroiling East Asia in conflict and jeopardizing its engagement with other regions”
(Kupchan 54). Territorial disputes, confrontational rhetoric, and uneasy tensions abound in Asia,
but “Asia’s regionalizing moves have shown no signs of such hard balancing against either the
United States or China” (Pempel, 2010, 210). More recently, with the ongoing security threat
posed by North Korea, East Asian nations perceive that the U.S. presence in the region is
necessary and indispensable. This is also partly because North Korea repeatedly expressed a
strong desire for a nonaggression security pledge from the U.S. that would also normalize
relations with Washington. Since 2003, China, the U.S., Russia, Japan, South Korea and North
Korea have been intermittently involved in the Six Party Talks to end North Korea’s nuclear
program. America’s presence is an instrumental part in the negotiations and talks regarding
North Korea. And we see Asia’s complicity to American leadership in the cases of military
authority. Military authority is relevant to economic hierarchy, because the security umbrella
provides the political stability that is indispensable to market stability.
Another area that Asia shows complicity to U.S. is finance, more specifically on currency.
There has been a long history of dollar dependence in Asia, both in literal and figurative terms.
That is, the region has been dependent on the inflow of hard currency from the U.S. in the form
of development aid. America’s postwar aid to Japan, Korea and Taiwan helped the East Asian
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countries focus on economic growth in 1950s to 1970s. After the direct aid stopped, the U.S.
remained an important trade partner and investor in Asia. As trade with the U.S. increased,
invoicing trade in the U.S. dollar also increased, and this motivated Asian countries to maintain
close linkages in exchange rates against the dollar. For these reasons, East Asia has been termed
as a de facto dollar bloc (McKinnon and Schnabl 2004). As much of trade invoicing has done in
the U.S. dollar, maintaining stability in the exchange rate against the U.S. dollar has also been
important. In order to ensure this, countries have decided to link closely to the U.S. dollar and to
maintain the exchange rate within a certain range.
Adopting the dollar as an anchor currency has mixed effects on economic stability. On
one hand, the dollar standard provides exchange rate stability and transactional convenience,
especially there is a large volume of transactions done in the U.S. dollar. On the other hand, the
currencies that are largely pegged to the dollar may be vulnerable to moral hazards and
speculative attacks. That is, the exchange rates that are artificially managed may wrongly signal
the actual strength of the currency. Also, if it is suspected that the exchange rates will be
devalued or overvalued, then this invites speculative attacks on the currency. In East Asia, the
dollar standard has been quite successful in ensuring exchange rate stability. Although not
explicitly stated by the central banks, East Asian currencies have maintained a narrow range of
fluctuations against the dollar. The central banks pursued strategies that mitigate frequencies
against the dollar (McKinnon and Schnabl 2004). In particular, the Korean and Taiwanese
currencies have linked to a basket of currencies in which the dollar weight has been significant
(McKinnon and Schnabl 2004, 336). Other East Asian economies including Hong Kong,
Indonesia, Malaysia, Philippines, Singapore and Thailand also have matched their currencies
closely to the dollar. Only Japan has been the outlier and has remained a free floater. A stable
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link to the U.S. dollar helped to “harmonize nominal currency values, thus removing the
exchange rate variations within the region as a possible threat to relative competitive positions”
(Cohen 2008, 34). The collective dollar anchor therefore provided further stability in the region
(McKinnon and Schnabl 2004, 336). An informal common monetary standard was set, and China
later joined when it adopted a stable peg to the dollar. This collective anchor seemed “more
rational than the IMF’s cumulative institutional wisdom of pushing for greater exchange rate
flexibility, with no well-defined constraint on how any one country’s rate affects its neighbors”
(McKinnon and Schnable 2004, 358). “Against the outside world, the area [provided] insulation
as well as the potential for the mobilization and coordination of resources” (Kirshner 1997, 13).
As long as the value of the dollar remained stable with the management by the U.S. Federal
Reserve Bank, using the dollar as the anchor currency had a stabilizing effect in East Asia.
The U.S. dollar remained a major currency circulated in Asia, because the Asian
economies willingly used the currency domestically and internationally. For instance, Japan has
faithfully supported the dollar-dominant global economy. Despite potential economic and
political gains and/or ability, Japan did not challenge the dollar domination. Japan and other East
Asian countries predominantly used the U.S. dollar for external transactions. In this way, the
dollar also served a political function of integrating the Japanese economy back into the world
(Katada 2008, 401). Wide use of the U.S. dollar was not forced or requested by the U.S., but
rather chosen. Internationalization of the Japanese yen did not emerge as an agenda until 1990s,
and many domestic actors actually preferred to use the U.S. dollar rather than the Japanese yen
for international transactions. On the firm level, Japanese companies in the trade and finance
sectors maintained their preferences in invoicing trade in the U.S. dollar, and on the government
level, there was no strong motivation to internationalize the yen (Katada 2008, 402). In the 1980s,
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70-90% of Japanese imports from the world were invoiced in the U.S. dollar, and only 1-10%
were invoiced in the Japanese yen. In the 1990s, the share of the U.S. dollar invoicing of
Japanese imports declined somewhat to around 70%, but remain in the similar range into the
2000s. Even for the imports from Asia, 70-90% are invoiced in the U.S. dollar from 1980 to
2008. The share of Japanese yen invoicing remained between 10-30% (Ito et al. 2010, Appendix
1). Trade invoicing patterns showed that Japan’s exports and imports, especially resource
imports, were priced to the market and invoiced in the dollar (Sato 1999, 549-50). This kind of
supportive policies shifted in the late 1990s following the Asian Financial Crisis. Japan began to
undertake more initiatives for regional monetary integration. More on that will be discussed later
in the section on Asia’s resistance to the U.S. economic hierarchy.
Later during the Global Financial Crisis, Korea and Singapore displayed compliance with
the U.S. monetary leadership. In the fall of 2008, Korea and Singapore experienced liquidity
crunches, and they requested help from the U.S., rather than tapping into the existing Chiang Mai
Initiative swap lines within Asia. On October 28, 2008, the Federal Reserve authorized the
establishment of temporary liquidity swap facilities to provide U.S. dollar liquidity in amounts of
up to $30 billion to the Banco Central do Brasil, the Banco de Mexico, Bank of Korea and the
Monetary Authority of Singapore. The reciprocal currency arrangements were authorized
through April 30, 2009 (Federal Reserve Press Release October 29, 2008). This was notable
setback to the regional initiative, because “this was despite the very fact that East Asian
monetary authorities established the facility precisely to prepare the region against a GFC-type
financial crisis” (Katada 2011, 274). Although the reasons for choosing the swap lines with the
Federal Reserve over the CMI are not clear, but this shows that Asia’s reluctance to tap into the
regional financial arrangements, which in effect shows preference for the provisions by the U.S.
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Asia’s Resistance to American Leadership
The Asia region as a whole achieved economic development and political stability, and a
number of regional institutions emerged to further promote growth and peace. At the same time,
these institutions have “so many distinct institutions with different memberships and limited
agendas,” that their collective success has been stunted. Nonetheless, active regional activities
show that the United States is not the only major power that influences the market and politics in
Asia. It is clear that they are also moving in parallel with American-dominated institutions to
create their own institutions that complement, surpass and/or even compete with American
institutions. The regional alternatives provide “a counterweight strategy for the region as it
pursues legitimacy and voice without confronting head-on the global economic governance
debate dominated by the United States” (Katada 2011, 275). Especially after the Asian Financial
Crisis, the East Asian leaders and policy makers increasingly banded together to build a
communal fort. The experience of the Asian Financial Crisis brought about “politics of
resentment” against the West, particularly the U.S. dollar hegemony (Katada 2008). In the wake
of the Asian Financial Crisis, the United States and the International Monetary Fund shaped the
mainstream rhetoric that blamed the Asian countries for economic mismanagement and crony
capitalistic practices. Asia perceived the West’s interpretation as “a globalized attack on Asian
development patterns, particularly national autonomy in monetary and currency policies”
(Pempel, 2010, 216). East Asian governments found themselves sharing “a common purpose –
namely, collective protection from the hazards to their continued prosperity … products of global
finance: rapid fire currency transfers, derivatives, sweeping trade liberalization, securitization,
and even in some cases, short-term stock market speculation” (Pempel 2010, 212). At the
domestic level, the states were focused on surviving the crisis. Meetings about how to remake
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the financial order on a pan-Asian basis began to form, and these meetings “will remain a lasting
feature of political and economic reality in Asia. And they are almost certain to pose a growing
competitive challenge to U.S. leadership in the Pacific” (Feigenbaum 2015). Regionally, a
number of multilateral institutions emerged to hedge for the region’s monetary and currency
systems, and to balance against the U.S. global financial hegemony, the ideology behind the
“Washington Consensus,” and the institutional preeminence of the already extant international
financial institutions. But the weakness of these regional institutions was that most of the
institutions lacked “administrative structures and their policymaking autonomy … a common
agenda, and a willingness to sacrifice large measures of state autonomy in pursuit of a common
purpose. Instead, they reflected the underlying wariness of the Asian members about one another
as well as their collective reluctance to surrender substantial national sovereignty to such
regional bodies” (Pempel 2010, 230). These regional initiatives had too diverse goals with
limited resources and support from the participating countries. These weaknesses were due to
deep rooted historical conflicts and complex issues in Asia.
Individual countries hold onto diverse political and economic interests which have to be
assessed and managed cooperatively. Overall, there is no one to take the leading role in pursuing
the regional initiative. For instance, China favors regional bodies that limit the U.S. or Western
influence, whereas Japan and Taiwan would prefer including the American presence (Pempel,
2008, 175-76). The relationship between China and Taiwan has to be resolved somehow. Korea
bears the burden of the North Korea problem, and as long as the North Korea threat remains,
South Korea cannot be free of its alliance with the U.S. and subsequent political and economic
dependence on their ally. Similarly, Japan is diplomatically sensitive to its bilateral relationship
with the U.S., especially in regard to security arrangements. ASEAN would prefer closer
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regional security cooperation and stronger economic relationship with the Northeast. Both
ASEAN and Japan have consistently pursued regional initiatives in the economic and financial
fronts, but China, Taiwan and Korea, the other major countries in East Asia, have participated to
a limited extent. Such diversity of interests and involvement furthermore blurs the projection of
who would undertake a leadership role. Japan’s initiative to lead can potentially generate fear
and awaken past memories from the past. China disfavors Japanese leadership, and has territorial
issues to resolve with Taiwan and other ethnic minorities. Korea is overburdened with juggling
between North Korea and the U.S. ASEAN lacks economic power and hence political leverage
and the U.S. leadership would betray the Asian character of the East Asian regionalism. In Asia,
there have been no formal structures such as the NATO, World Bank or the IMF, except for the
Asian Development Bank that still draws much resources and leadership from the West. But
formal institutions are signs of cooperation. Formal agreements, institutions and rules signify that
countries have come together and reached some sort of mutual understanding. These are
typically seen in the West.
Although there are pessimistic prospects for strong and extensive regionalism in Asia, a
number of factors are not to be overlooked. For one, intraregional trade is on the rise, and more
Asian nations are becoming consuming economies. The heightened trade activities and
integrative trade patterns increase communications and cooperation. Although a number of
regional financial initiatives have not necessarily resulted in an exclusive and functional financial
regime, they at least represent “a symbol of Asian solidarity” and encourage policy dialogues
and information exchanges (Amyx 2008, 137). Also, Hong Kong and Singapore serve as major
financial capitals for a growing number of companies, especially when Asian firms pursue initial
public offerings (Pampel 2008, 171). The recognition of an East Asian city as a financial
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destination helps retain much of Asian capital within Asia. The East Asia Summit began in 2005,
with its ambitious goals to create a comprehensive “East Asian Community” capable of cross-
border collaboration including economic cooperation, development, diplomacy and security.
Although it was opposed by Washington as either irrelevant without the United States or as an
explicit threat to U.S. interests, the EAS was pushed strongly by Japan, Indonesia and Singapore,
who were troubled by the preeminent influence of the People’s Republic of China within the
ASEAN Plus Three (Pempel 2010, 228). The EAS meetings were long on rhetoric and short on
tangible outcomes despite an ambitious framework for cooperation on energy, environment
economics, education, and a host of nontraditional security challenges such as pandemic diseases
(Pempel 2010, 229). Through these processes, interconnections at the individual, firm and
government levels are growing at large. Although these transnational linkages produce still less
than a completely exclusive regional regime and the existing initiatives seem inadequate at least
to the Western standards, the East Asian nations are crafting regionalism in their own account, in
favor of mutual understanding of and respect for each other.

Asia’s Position on Japan’s Asia Monetary Fund
When Japan proposed the Asian Monetary Fund (AMF), the U.S. viewed it as a direct
challenge to the U.S.-centric monetary system and blocked the efforts. The AMF episode is
remembered as a power contest between the incumbent supplier of leadership and the challenger.
But how did the rest of Asia see Japan’s proposal? Until 1990s, before Japan fell into the Lost
Two Decades of recession and China emerged as a powerhouse, Japan was the only economy in
Asia that could seriously challenge the U.S. hierarchy in the region. Japan was the wealthiest
economy in Asia and exerted influence in international stage. Japan undertook leadership of the
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Asian Development Bank and invested much capital into developing countries the region. Japan
also invested in strengthening its soft power by expending resources to think tanks, policy
institutes, lobby groups and foundations. In many ways, Japan was a model for East Asian
economic growth. In fact a number of East Asian economies followed and emulated Japan’s
industrialization and export growth strategies. Japan represented the Asian economic success,
and in the early 1990s, Japan commissioned the World Bank for a report on the Asian economic
development model, which was well received in both policy and academic circles (World Bank
1993). And then when policymakers and scholars in the West criticized and blamed the Asian
governments for economic mismanagement and the subsequent crisis, Japan was “interested in
defending the Asian model of economic development against the U.S.-led IMF bailout operation
in Thailand,” and initiated a formation of the AMF that would better cater to the “Asian”
economies (Lee 2006, 339). And in 1998, Japan assumed a leading role in establishing an
international financial institution in Asia, for Asia and by Asia.
The Asian Monetary Fund, proposed by Japan, would provide liquidity to Asian
economies in the cases of liquidity crunches or financial crises. It would be a regional solution to
financial crises within the region. The proposal came in the aftermath of the Asian Financial
Crisis, during which the solutions provided by the IMF and the U.S. seemed to attack on the
“Asian” model. At first, at the outbreak of the crisis, Japan was ready to cooperate with the
United States in taking care of East Asia’s economic needs under the crisis. But soon after, some
Japanese policy makers resented its inability to take leadership in addressing the Asian path to
crisis management (Katada 2011, 279). The IMF and the U.S. diagnosed the cause of the AFC to
be fundamental structural problems, while Japan and Asian countries found that the problem was
more about a temporary liquidity crunch. Understanding of the AFC and the Perceptions of the
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Crisis and economic situation of the affected economies differed starkly across the regional
divide. The conditionality imposed by the IMF packages to Thailand and Korea worsened the
capital flight problem and weakened the fundamentals. Japan and Asian countries felt that they
needed to find an alternative solution to the IMF and U.S., and protect themselves.
The 1997-98 AFC left a searing legacy on Asia. Across the region, the United States was
viewed as “arrogant and aloof, dictating clichéd solutions to skeptical Asians” (Feigenbaum and
Manning 2009, 7). After the Asian financial crises erupted, East Asian economies began to feel a
need for greater regional financial coordination. A wave of pan-Asian multilateralism set off
various ideas and proposals for currency swaps, trade and investment pacts, regional bond funds,
and others. Many of them were for Asia only and excluded the United States. The region’s
principal multilateral entity was the ASEAN became central to regional initiatives. For instance,
the Regional Comprehensive Economic Partnership includes ASEAN countries and Australia,
China, India, Japan, South Korea and New Zealand form the region. After the Asian Financial
Crisis (AFC), Japan spearheaded the efforts to create regional financial institutions that could be
alternatives to the American led institutions. Asian countries generally shared the desire to
pursue more regional solidarity, but these sentiments did not lead to concrete agreements or
institutional structures (Amyx 2008). A number of regional initiatives signaled extensive
financial cooperation, but in actuality these initiatives did not integrate the Asian financial
markets. Of the regional institutions, the efforts to build the Asian Monetary Fund are worth re-
visiting, because although the proposal never came to being, the efforts posed a direct challenge
to the U.S. dominant hierarchy in Asia.
The major proponent for the AMF was Japan, a major power in the region that had a shot
at challenging and disrupting the hierarchy. The Japanese finance minister proposed the creation
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of a $100 billion regional fund that would be managed by Asian countries only and would be
used to help regional economies cope with the currency crisis. The qualifier “only Asian”
excluded the United States from the AMF membership, and this constituted Japan’s first-ever
attempt to intentionally exclude the United States from an international institution in the postwar
era. Japan’s unconventionally bold move resulted from its assessment of the IMF bailout
operation in Thailand. The Japanese Ministry of Finance strongly felt that the U.S. together with
the IMF had a part in “bringing down the Asian model with no appropriate reason to do so” (Lee
2006, 350). Initially, the Asian Monetary Fund was to closer to a “self-defense mechanism in the
event of volatility in international markets, designed to initially ward off [sic] further hostile
attack from hedge funds … [and] provide a framework for ‘policy dialogue’” (Lee 2006, 351).
When it was known that the U.S. would be excluded from the AMF, the U.S. and the IMF
strongly opposed the proposal.
The proposal for the AMF was Japan’s attempt to provide an alternative to the IMF
solutions, and consequently it would have shaken the U.S. hierarchy. However, it was not merely
a contest between Japan and the U.S. Asian economies suffered under stringent conditionality
imposed by the IMF rescue packages and others were indirectly affected. They also had a stake
in how the proposal turns out. Asian economies could benefit from the AMF in cases of liquidity
crunches. Southeast Asian nations and South Korea were supportive for the proposal. On
September 23, Malaysia’s Deputy Prime Minister and Finance Minister Anwar Ibrahim
announced that Malaysia’s Finance Ministry expects the AMF to be about $50-60 billion dollars
and plans to ratify and support the AMF (Maeil 1997) On November 28, 1998, Korea’s then
Prime Minister Jong Pil Kim met with Japan’s then Prime Minister Keizo Obuchi to suggest to
reconsider the Asian Monetary Fund and to expand the size and scope of the existing Miyazawa
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Plan (Kim 1998). However, regional support was insufficient, especially from China. Initially,
Japanese officials worked through the Hong Kong Monetary Authority to promote the Fund.
They later consulted directly with the People’s Bank of China, but the proposal had to be
discussed among the finance minister and other government officials. Also, the timing was
complex. China was in intense negotiations regarding the ascension to the World Trade
Organization, and China was sensitive to how the support for the AMF might affect the U.S. and
other WTO member nations (Amyx 2005, 2). Chinese officials requested that Japan would wait
until the Chinese officials could reach a decision, but Japan went ahead with the proposal. And
also because China’s financial markets were closed and insulated, the Asian Financial Crisis did
not greatly affect China, and the officials did not share the similar sense of crisis as other Asian
economies (Amyx 2005, 3). Overall, the AMF could not garner enough support to counter the
U.S. opposition.
Increasing East Asia’s global political influence through international institutions has not
been an easy feat. For instance, Japan has been a major contributor to the IMF aid packages and
other funds, but their share of votes does not reflect their contribution. After decades of lobbying,
Japan managed to become the second largest quota holder at the IMF with 6.23% of votes, which
is far below 16.74% of the United States (IMF 2015). China also has not been successful in
increasing its influence in international institutions, for instance the IMF. On average, Japan and
China hold less than half the votes than the U.S. (Recall Table 1 on the voting shares in
international institutions from Section II).

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Regional Monetary Initiatives
Regional monetary initiatives in Asia did not result in strong regionalism in Asia. After
the AMF did not materialize, the idea for regional financial cooperation remained, and Asian
economies pursued currency swap agreements and Asian bond initiatives. Economists and policy
makers shared a common sentiment that stressed “the importance of regional financial and
monetary governance that address the danger of excessive reliance on foreign, particularly short-
term, capital and of dollar dependence” (Katada 2011, 274). Most of the initiatives attempted to
promote more financial exchanges and institutionalize cooperation, for instance multilateral
currency swap agreements, Asian Bond Market and Asian Currency Unit. But these attempts did
not gain enough attraction to emerge as an alternative to the U.S. Treasury and the U.S. dollar.
Nonetheless, these attempts are worth studying, because they show that the Asian nations
resisted to the existing structure and actively sought to craft an Asian solution.
One of the biggest initiative is Chiang Mai Initiative Multilateralization. In 2000,
ASEAN members plus Japan, China and Korea met in Chiang Mai, Thailand, and constructed
the Chiang Mai Initiative (CMI), a web of bilateral currency swap agreements to provide short-
term loans specifically to Asian countries suffering from liquidity crunches (Grimes 2006;
Henning 2009; Pempel 2010; Katada 2011). Details of the loan agreements such as borrowing
periods, premium rates and amounts vary depending on bilateral negotiations (Amyx 2008). The
arrangement was multi-lateralized in 2010 and relabeled as the Chiang Mai Initiative
Multilateralization (CMIM) as a self-managed reserve pooling mechanism for its member
economies. CMIM involves a low level of commitment from the individual countries, because
there were no up-front costs. In 2012, the finance ministers of ASEAN+3 countries announced
CMIM will expand from $120 billion to $240 billion. The threshold before IMF involvement, in
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other words, the portion that the CMIM could mobilize without the IMF increased from 20% to
30%. That is, the CMIM can potentially mobilize up to $72 billion. The CMIM shows regional
commitment to a regional financial structure. In April 2011, the ASEAN+3 Microeconomic
Research Office (AMRO) was established in Singapore to support and implement CMIM
decision-making (amro-asia.org). While the CMIM appears as a good step toward establishing
regional insurance, the arrangement has a few crucial weaknesses. First of all, the arrangement is
more like a series of promises to provide funds, rather than an actual pool of funds. The funds
can be dispersed subject to surveillance and conditionality to be individually negotiated. Lastly,
there is no contingency plan for an emergency situation of financial crisis or liquidity crunch. In
order for the CMIM to be operational, AMRO needs to be reformed and strengthened to gain
credibility, the membership and the fund pool should be expanded (Hill and Menon, 2012). The
CMIM imposes no legal or contractual obligations, so participating countries could opt out
anytime at will. The CMI had never been mobilized in action. In fact, when East Asian
economies were in need of capital, swap agreements with the U.S. were the preferred help over
Asian regional swap agreements. In addition to the CMIM, a number of bilateral currency swap
agreements emerged. For instance, the value of the Japan–Korea swap increased from the $3
billion to $20 billion, and the China–Korea swap was established to amount to $26 billion
(Katada 2011, 283). These bilateral swap agreements show a closer relationship between the
central banks, and more significantly, the agreement allows for dealings in their respective
currencies of the yen, won and RMB.
Other financial initiatives like the Asian Bond Funds and the Asian Bond Market
Initiatives were also regional in character and attempted to stimulate intraregional financial
cooperation. The objectives were to invest Asia’s foreign reserves and savings in Asia without
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routing through Western financiers (Sohn, 498). This would allow Asian governments to
mobilize regional savings for intra-Asian investment, thereby reducing the region’s dependency
on the U.S. dollar. Locally denominated bond markets would also limit Asia’s vulnerability to
any U.S. abuse of its position as the issuer of the world’s most popular currency, a particularly
strong fear following the 2008-2009 crisis and the mounting U.S. government deficit (Pempel
2010, 218). By strengthening the regional bond market, Asian countries would be better
protected against double mismatches of currency and maturity in their investments, and they
would be less vulnerable to fluctuations in the value of the U.S. dollar (Grimes, 362). Although
these financial initiatives were a force for deeper financial regionalism, their success was limited.
Asian bond markets still lag behind the European and American counterparts in drawing
investors. The initiatives do not represent any clean break with existing global bodies such as the
IMF, the World Bank, or the like; they do not move Asia toward an alternative Asian currency
nor do they challenge dollar supremacy (Cohen 2008). Despite these past initiatives, an Asian
financial bloc never fully materialized, and Asia remains predisposed to the dominance of the
U.S. market and the U.S. dollar.

Demand for RMB in Korea
As China secures an expanded role in the international market, how does the rest of Asia
respond? The success of China’s efforts to internationalize the RMB depends on how these
efforts are received by other economies, particularly in Asia. In other words, the extent of
internationalization of RMB ultimately requires the use of the RMB by non-Chinese (Chey 2015,
2). The supply of internationalization efforts have to be demanded by non-Chinese economies.
So far, the demand has been receptive. We can see this in the growing number of offshore
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clearing centers that allow real-time settlements and immediate exchanges between RMB and
other currencies. People’s Bank of China appointed China Construction Bank for clearing in
London, Bank of China for Frankfurt, Bank of China for Hong Kong, Macau and Taipei, and
Industrial & Commercial Bank of China for Singapore (Li 2014). Additional clearing banks were
established in France, Luxembourg, Qatar, Canada, Australia, Malaysia, Thailand, Chile,
Hungary and South Africa. These institutions participate in China’s real-time gross settlement
system and intermediate exchange of RMB against foreign currencies, between offshore and
onshore banks. Clearing banks have a settlement account with China and have access to RMB
liquidity from China or through their headquarters in China. In addition, they have access to the
onshore inter-bank lending and bond market, and the foreign exchange market. They thus
provide liquidity to the offshore markets, while also allowing the PBC to monitor the RMB flows
(IMF 2015 Aug, 53).
In Korea, wider use of RMB is not yet supported by market forces, but political dynamics
are likely to boost the use. In Korea’s trade settlements, the use of RMB remains trivial. The
share of total Korean exports settled in RMB first appeared in 2010 at 0.1%. The figure increased
tenfold, to 1% in 2015. The share of exports to China settled in RMB first appeared in 2010 at
0.2%, and the figured increased about fifteen fold, to 3.1%. On the other hand, the share of trade
settled in USD was higher than 80% for in exports to the world, and the higher than 90% for
exports to China. The import side shows a similar trend. Korea’s use of the RMB in trade
settlements was almost exclusively for trade with China. One obstacle to use of the RMB is high
transaction cost for firms. In order to settle trade in RMB, Korean firms have to have costly
operating systems. Also, in order to use RMB letters of credit, they pay higher exchange rate
commissions than using letter of credit in dollar (Chey 2015, 8). Another reason that the use of
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RMB remains low in Korea is that besides trade, opportunity to invest in RMB is limited.
Interest in the RMB business is not growing, but investment options are not widely available.
Table 10. Shares of USD and RMB in Total Korean Trade Settlements 2000 to 2015 (%)

Source: Bank of Korea

Although the market The Korean government established the infrastructure necessary for
simulating RMB use even in the absence of strong private sector demand, and introduced policy
measures to create incentives for greater use of the RMB (Chey 2015, 3). In 2013, the two-way
trade between China and Korea amounted to $230 billion, and continued to increase (KITA). For
Korea, the increase in the use of the RMB for trade settlement would reduce costs for local
exporters. In 2014, South Korea and China discussed and agreed on the outline of a free trade
deal, and moved forward on establishing an offshore RMB trading hub in Korea. After Xi
Jinping’s state visit to Korea, the Korean government became more supportive of initiatives that
would promote RMB use in Korea. Eunbo Jung, Korea’s deputy finance minister at the time
acknowledged that “greater use of the yuan in Korea also would reduce appreciation pressures on
the won … Korea over time hopes to develop a deep offshore market for yuan-denominated
bonds and other financial instruments” (Wright 2014). Eventually, the Korean government will
support to expand the share of RMB use in Korea-Chinese trade and increase the volume of
RMB bonds, derivatives and deposits (Ministry of Strategy and Finance 2014). The Korean
government seems to pursue a top-down approach to promote RMB use in Korea and further
Exports 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
To the World
USD 87.5 87.1 86.5 85.3 84.2 82.9 83.2 82.2 84.3 85.4 85.9 85.7 85.1 85.2 85.8 86.1
RMB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.4 0.4 1.0
To China
USD 96.9 98.4 98.5 98.6 98.3 98.1 97.6 97.5 97.3 97.3 97.3 96.9 96.7 95.3 95.4 93.8
RMB 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.6 1.0 1.6 1.7 3.1
Imports 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
From the World
USD 80.8 80.4 78.2 76.7 77.2 79.3 80.9 80.7 82.0 80.1 81.3 82.5 83.9 84.2 84.3 81.8
RMB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.6
From China
USD 97.3 96.6 95.7 95.0 95.3 95.8 95.2 95.0 94.5 93.8 95.3 94.1 94.8 94.9 95.3 93.7
RMB 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.3 0.7 0.9 2.7
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build Korea as an RMB hub in Asia. However, in order to sustain the momentum, the private
sector has to catch on.
Nonetheless, as the government pursued to promote the use of RMB in Korea, more
Chinese banks began to operate in Korea. The first Chinese bank was to do so was China’s Bank
of Communications that was established in 1908 and set up a branch in Seoul in 2005. In 2014
the Seoul branch expanded the scope of its activities and became one of overseas RMB clearing
banks in Korea. The direct trade of RMB in Korea started on October 30, 2014 (Bank of
Communications). The Chinese banks operating in Korea increased RMB deposits in Korea as
they were able to enjoy arbitrage profits by borrowing RMB from Korean depositors at interest
rates higher than those of Korean banks, and lending at even higher rates in China (Chey 2015,
10). They could do this because in Korea average annual deposit interest rates decreased from
3.8% in 2011 and to below 2.2% in October 2014 (Bank of Korea). In contrast, the Chinese
benchmark 1-year lending rate was between 5 and 6% between 2011 and 2015 (Bloomberg). The
RMB deposits in Korea have been made mostly by institutional investors such as securities firms
and insurance companies that borrowed funds in the Korean won, exchanged them for dollars,
sold the dollars for RMB and then deposited them in Chinese banks for higher interest rate gains
(Kwon 2014). The arbitrage opportunities are fleeting motivations, because lending rate in China
is declining, at least from late 2015 to present. As China’s growth plateaus, it is not likely that
the lending rates will remain high.
The Korean government’s initiatives can still generate incentives and interests for the
domestic private sector to use RMB. For instance, Korea’s quota for the RQFII allows
institutional investors, banks and insurance companies to invest in Chinese equities and bonds
through the use of offshore RMB. In fact, a number of Korean financial institutions submitted
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applications for RQFII quotas, and Shinhan BNP Paribas Asset Management became the first
one to be awarded the license in October 2014 with facilitation from HSBC Korea (HSBC 2014).
Korean banks can also access China’s interbank bond market which is worth US$5.7 trillion
(Bloomberg 2015). The government also plans to allow the share of Chinese government bonds
in publicly offered funds up to 30%, and allow the RMB clearing bank to expand its scope of
business (Chey 2015, 16). These measures give the Korean financial institutions new business
and profit opportunities. As trade with China and capital flow from China continue to expand,
business interests in China are likely to expand as well.
The Global Financial Crisis of 2007-08 shook confidence in the U.S. dollar especially in
Asia. Asia was especially overexposed and overly dependent on the dollar. Diversification of
risks is pressing, and to that end, the Governor of the People’s Bank of China, Zhou Xiaochuan
(2009), argued in favor of international monetary reform and increased use of special drawing
rights (SDR) in order to lessen dependence on the dollar. The regional currency architecture
gained strategic salience in Japan too as the former Prime Minister Nakasone began to urge a
common currency area in East Asia. Despite the rhetoric, there has yet to emerge a consensus as
to how such a regional currency or financial structure would operate, and the central bankers are
not yet fully on board (Katada 2011, 281). Recently, it has become fashionable to ascribe efforts
to build a pan-Asian economic and institutional order to rising Chinese assertiveness, or more
precisely, to Chinese ambition. And that is a simple and straightforward enough narrative. But it
is just one part of the story. In fact, contemporary Asian regionalism – the desire to forge at least
some cohesion out of the region’s enormous diversity – has found expression not just in China
but across Asia and over many decades” (Feigenbaum 2015). The increased awareness of the
need and desire for regional alternatives to the U.S. dollar and/or U.S. dominant institutions is a
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signal of Asia’s resistance and underlies their choices and preferences for a hierarchical structure
in their own region.

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Chapter 5. Conclusion and a View to the Future
The U.S. is perceived as the most powerful nation in the world. Images of the U.S.
military overseas and the wide circulation of the U.S. dollar even in most remote places in the
world affirm this perception. The United States maintains a “privileged position, in terms of its
power of initiative, and its capacity to extract benefits from international cooperation, when it
towered over other states, and its power base was twice as large as Germany and Japan’s
combined” (Norloff 2010, 54). The U.S. benefitted greatly from the existing system of
international finance and institutions. But from the 1990s and into 2000s, the world’s largest
economy suffered a series of economic setbacks and ran into budget deficit problems. The
rhetoric that days of the dominant U.S. are numbered has become more pervasive. Previously,
the U.S. hegemony was seen as a product of the dominant dollar, multinational corporations and
military might. But these bases of power have become overstretched or fragile. America’s over-
extended military commitments and unilateral foreign policy campaigns began to undermine the
American hegemony (Kennedy 1987). The 2007-2008 housing market collapse and the
subsequent Global Financial Crisis was a definite blow to America’s status in the world. The fall
of many American financial institutions set off waves of panic throughout the international
financial system. The stock market collapsed, and the ripple effects led to a global financial crisis.
Examining the U.S. hegemony continuing into the 21
st
century is interesting because the
U.S. faces internal and external challenges. Internally, the country has to deal with the recession,
budget crisis, and public discontentment with the political establishment. Externally, the ascent
of China in Asia and pervasiveness of terrorism and instability in the Middle East present
diplomatic and military challenges. How the U.S. hegemony will play out in the East Asia region
in the coming years is also interesting, because Asia as a region is rapidly growing and changing.
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The dissertation finds that America’s economic dominance is not solely an outcome of U.S.
policy strategies or the regional weakness of East Asia. Rather, through resistance and
compliance, East Asian economies have demanded and consumed the hegemonic system
dominated by the U.S. The question of how the U.S. has established and sustained the leadership
role in the region is answered with the supply and demand framework: the leader contests to
provide the product of leadership and the followers demand it. The dissertation builds on the
existing literature on power, hegemony, hierarchy and Pax Americana. It also contributes to the
debate on a power transition in East Asia. There is an emerging debate about whether China
actually poses a regional or even global challenge to the United States (Goh 2013; Womack 2014;
Johnston 2008; Friedberg 2010; Weber et al 2015; Kang 2007). This debate mostly focuses on
security issues and discusses economic issues only in passing. However, it is increasingly clear
that the economic institutions are just as integral to U.S. preeminence in Asia as are its military
or diplomatic structures.
In particular, monetary policies and currency-related politics are pertinent to study,
because the capital flows and relevant policies are shaped by market and political dynamics.
Market dynamics include liquidity, opportunity costs and positive externalities that influence
decisions on which currency to hold or use. Traders, investors and central bankers around the
world calculate costs and risks in order to make currency decisions. At the same time, the market
is susceptible to domestic and international politics. Domestic and international politics play a
central role in determining the future of an international currency either as “top” or “negotiated”
currencies (Strange 1971). Politics matter in a way that political forces shape market conditions
that incentivize the use of a particular currency. The underlying assumption for this political
approach is that governments or central banks institute measures to promote the use of a
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particular currency in consideration of geopolitical motivations or power relationships. On the
supply side, the dollar centric monetary system was propped up not only by the extensive size of
the U.S. trade, bonds and capital market, but also by active politics. The domestic strategic
directions pursued by the U.S. Federal Reserve and the U.S. Treasury certainly internationalized
the currency. The Nixon administration in the 1970s made decisions to take the dollar of the
Bretton Wood system. The dollar was no longer pegged to the gold price, and volatility in the
value of the currency had larger effect on the international currency market. Also, the U.S
government strategized to persuade the oil producer countries to invoice the oil trade in the U.S.
dollar and recruit petrodollar back to the U.S. These policies and actions further widened the
international use of the U.S. dollar, and consequently strongly influenced the international trade
and currency market. This was pertinent in Asia also. Politics promoted the role of the U.S.
dollar, and at the same time demoted the status of other currencies. Compared to the dollar, the
Japanese yen or the Chinese yuan seemed not as attractive as an international currency. Also, the
unsuccessful efforts to promote one of the Asian currencies and/or create a collective Asian
currency bloc helped the dollar case.
The debate about the viability of the dollar as a dominant currency in East Asia and in the
rest of the world is situated in the discussion about American decline. From the end of the World
War II through the Cold War, the dominance of the U.S. as the preeminent world power was
visible and evident in the massive economic aid, trade market and military presence all over the
world. After the Soviet Union fell, the unipolarity of the U.S. was even more evident. Recently
however, the dominance of the U.S. is not as clear as it once was. The U.S. is less of an imperial
power than it used to be during the Cold War period, and “the salience of even informal imperial
elations in American foreign policy may be in decline” (Nexon and Wright 2007, 267). With the
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over-stretch of the U.S. military presence, the global financial crisis and the subsequent recession,
the U.S.-dominated world seems to be losing a sense of “geopolitical alliance glue” (Kirshner
2012). There is sufficient reason to doubt the prolonged dominance of the dollar. With the ever
mounting debt, chronic payment deficits are rising, and the confidence in the dollar is falling
(Cohen 2012). The problem of chronic deficits is making the U.S. economy vulnerable to
potential crises. Government deficits lead to higher debt and interest payments, and consequently
an excessive share of tax revenues will have to be spent to pay for the interest payments. Further
quantitative easing further encourages inflation, weakens the dollar and worsens the situation
(Eichengreen 2010). A quite bleak case scenario of capital flight is possible with liquidation and
collapse of the dollar. And this scenario is not too farfetched, considering the mounting
government deficits. Eichengreen warns that the fall of the dollar can happen abruptly one day
and generate severe repercussions.
Also, there are potential rivals to challenge the U.S. dominance. As the European Union
underwent the unionization process, policymakers and scholars conjectured that the Euro-bloc
can be a potential rival to U.S. dominance, despite many challenges (Marsh 2009). Certainly,
with many problems that have been unveiled recently, the Euro is now thought to have a long
way to go before it can pose a significant challenge to the dollar-bloc. At the same time, there
may be an impending challenge from the East. There is much talk about the descent of the West
and the ascent of the East, especially with the rise of China (Layne 2012). As China slowly
opens up and flexes its muscle, it is now easier to imagine that China will exercise economic
leverage and provide alternate sources of economic and political support to lesser powers in the
world, many of which are currently or potentially American peripheries.
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At the same time, we have to remember that the American hegemony in East Asia is been
wide in scope and stems from a more deeply rooted history. American leadership has been
embedded in America-led institutions in a number of practices. The most relevant institutions are
global, such as the World Bank and the IMF. They remain the bedrock institutions of the
America-dominated international economic system. It is the power of these institutions that
constituted and maintained American hegemony. The liberal order of economic and security
interdependence which America has championed persists, and the potential challenges to
America’s hegemony resulted because of the function of the very liberal order, therefore
America’s hegemonic influence persists (Ikenberry 2011). A case in point would be East Asia,
where the extensive alliance system and trade relations consolidated the American hegemony.
The most important and enduring institutions that affect East Asia’s foreign security and
economic policies are America-created or America-dominated.
Financially, East Asia has long been considered a de facto dollar bloc, although it was not
always accepted as so. East Asian economies did not acquiesce. There were government-level
attempts to establish an alternative regional currency or financial bloc that would be an
alternative option to being a dollar bloc. Particularly, Japan pursued regional financial initiatives
that would create institutions or arrangements that would rival the IMF, America’s deep bond
market or swap agreements with the U.S. But these attempts were blocked politically or
economically unsuccessful. Nonetheless, the U.S. economic leadership, and Western-derived
international institutions such as the Asian Development Bank and the International Monetary
Fund have undergone challenges in Asia. China’s creation of the “Asian Infrastructure
Investment Bank” (AIIB) is widely seen as a direct challenge to American institutions. China’s
AIIB would move the East Asian economies to deviate from the U.S.-led equilibrium.
129

The nature of U.S. economic hierarchy in East Asia is changing. At one time, when East
Asian states were recovering from the devastating wars and industrializing rapidly to survive,
they were in need of money and weaponry from the United States. Asia as a whole welcomed
and appreciated the U.S. presence. But now that the second and third highest GDPs in the world
as well as solid middle-level income scores are recorded in Asia, dependence on American
money is not as dire as before. The output from Asia easily matches that of North America or
Europe. In a few years, the size of China’s economy could well be larger than the sum of the top
seven economies in the world. Militarily, North Korea remains the self-reliant yet nuclear-
dependent rogue state, but the level of existential security threat is far below that of the earlier
years between 1950s and 80s. The terrain of politics in Asia has changed. No longer is the
United States the unquestioned hegemon, the unquestioned leader, or even the unquestioned
most important economy in the world. New challengers have arisen, most notably China. For
instance, China’s growing anti-access/area denial capabilities pose risks to U.S. assets located
within the South Pacific region near Guam (Green 2012, 19). The United States itself faces
domestic challenges, many of its own making, whereas East Asian in 2015 is more stable, rich
and secure than they have been at any time in the past two centuries. The need and the demand
for U.S. leadership are thus unsurprisingly diminished. As Barma Ratner, and Weber observed in
2014:
Rising powers [are] beginning to build a “World Without the West” … What is
happening … is a concerted effort by the emerging powers to construct parallel
multilateral architectures that route around the liberal order and will likely reshape
international politics and economics in fundamental ways. The latest and most vivid
example of this dynamic is the new Asian Infrastructure Investment Bank (AIIB), which
aims to provide an alternative to the iconic Bretton Woods institutions, the World Bank
and the International Monetary Fund and their regional sibling, the Asian Development
Bank (Barma, Ratner and Weber 2014).

130

But this does not mean that the U.S. is unimportant; nor does it mean that the American
role as hegemon has ended. On one hand, there is history. Historical legacy does not end sharply
as the theater curtains go up and down. Periods of hegemony are not clearly demarcated. The
United States remains a vitally important country whose actions have a direct impact on the
livelihood of the East Asian countries. According to the data published by the Census Bureau in
2015, the U.S. imported more than $924 billion worth of goods from Asia, and exported more
than $419 billion dollars. The total trade consistently amounted to more than $1 trillion dollars
for ten years, and close to $1 trillion dollars before that. In 2012, the U.S. firms made $651
billion worth of direct investment in Asia across all industries (Jackson 2013, 4). More than
thirty U.S. firms rank in the top 100 of the Fortune Global 500 list. On the whole, the American
firms invest overseas, serve foreign markets and create jobs. They do not solely produce overseas
and export directly back to the U.S. How this relationship will evolve, and whether the United
States remains as important in the future as it is today, depends on two key issues.
The first key issue is whether the United States actively desires to remain the hegemon in
East Asia. On one hand, there seems to be no reason to expect otherwise. Why give up power
and status when you do not have to? In effect, the United States remains the main driving force
behind the Asia Pacific Economic Forum and the Six Party Talks on North Korea’s Nuclear
Program. The United States Pacific Command (USPACOM) is headquartered in Hawaii, and
USPACOM Area of Responsibility (AOR) encompasses the waters off the west coast of the U.S.
to the western border of India. According to the USPACOM website as of 2016, approximately
360,000 U.S. military and civilian personnel are assigned to the area, with the U.S. Pacific Fleet
of approximately 200 ships, nearly 1,100 aircraft, and 140 sailors and civilians. The U.S. Marine
Corps Forces for the area includes about 860,000 personnel and 640 aircraft, and the U.S. Pacific
131

Air Forces comprises of over 300 aircraft and five watercraft. Department of Defense civilian
employees assigned to the Pacific Command number about 39,000 people. The American
military has access to various military facilities in Japan, Korea, the Philippines, Singapore,
Australia, Thailand and Vietnam. Clearly, the United States is committed to be present in Asia.
Leadership requires attention, energy and vision; more recently, the United States is
increasingly focused on other issues. The past two decades have seen the United States focus on
other things. In addition to various economic and fiscal woes, terrorist attacks and violence
breakouts on the domestic soil have emerged as pressing priorities. Budget cuts in different
government sectors ensued, and the U.S. Pacific Command faced a budget cut of $487 billion in
2012 (Green 2012, 18). It seems that Asia is slipping down on the ladder of priorities.
Diplomatically, President Obama cancelled numerous trips to East Asia because other concerns
became more urgent. That is understandable, but it does not change the fact that other concerns
became more pressing than visits to East Asia. When Obama actually did go to the region, the
results were generally quite impressive. In terms of international agreements, the passage of the
Trans Pacific-Partnership – a key element of continued American economic dominance in the
region – has taken years and faced continued problems in the United States due to domestic
opposition. Furthermore, the economic troubles in the United States do not bode well for
continued dominance. If the United States cannot even run its own economy, how can it presume
to continue to be the leader in Asia? The U.S. faces a range of budgetary, military and political
challenges to sustaining a forward presence in the Western Pacific. In the 21
st
century, the United
States has provided a mixed answer to the question about whether it truly wishes to continue its
position as the leader at the top of the economic hierarchy, especially in East Asia. The United
States makes continued rhetorical claims to caring about East Asia, but the real question is
132

whether the United States acts on those claims. Whether and how the United States resolves
these issues will have a major impact on the continued presence of the United States as the Asian
economic hegemon. By the time its focus returns to Asia, will it be able to recover the vision and
focus it once had?
The second key issue is whether East Asian states continue to want the United States to
lead. It is very clear that America is an important military and trade partner to East Asia, and that
is viewed with far more trust, sympathy, and warmth than many other would-be leaders. China’s
aggressive diplomatic and military assertion of its territorial claims in the East and South China
Seas has prompted almost every neighboring state to seek closer ties with the United States and a
more sustained U.S. military presence (Green 2012, 20). For instance, South Korea hosts the
American military base in the heart of the capital city, and entrusts the wartime operational
control of its military with the United States. The North Korea threat is not overlooked in the
South Korean military strategies, and North Korea seems to fear the United States more than
they fear South Korea. South Korea remains a faithful ally to the United States. When there was
a liquidity crunch in 2008, the South Korean central bank activated the currency swap line and
sought help from the U.S. There is the sense of trust that the U.S. will remain a benevolent ally
and hegemon in the region.
However, that trust is not unending. Through the rise of Japan, the Asian Financial Crisis
and the rise of China, it became more apparent that East Asian countries were not well integrated
to the global politics. The voting shares for Japan and China in the International Monetary Fund
and the World Bank do not reflect their economic clout. Regional initiatives in Asia that did not
include the United States were discouraged. East Asian countries recognize a need for a regional
strength and character. Japan, China, Korea and ASEAN have pursued a number of regional
133

initiatives that promoted cooperation and exchanges among the countries. In the early years
through 1980s and 1990s, Japan spearheaded much of the efforts. Japan adapted to the Western
ways of investing into the policy-relevant think tanks, nurturing an international voice and
influencing scholarship. Japan integrated into the international financial institutions and has been
a primary supporter of the Asian Development Bank. But other than the Asian Development
Bank, Japan’s influence in other international financial institutions remains minimal. When
Japan adapted and exerted efforts to gain influence in the “Western” ways, they were successful
to a limited extent, even though the Japanese economy was the largest in the region and the
second in the world. Japan remains a regional power. And more recently, as China rose as an
economic powerhouse, it became more active in regional and global politics. China has
repeatedly asked for an increase in its voting shares in IMF to no avail. China sought to integrate
into the “liberal leviathan,” but was viewed as a threat. China then pursued its own course to
influence. It increased outward foreign direct investment in Africa, Southeast Asia and
developing areas elsewhere. It accumulated lands and resources. It led the establishment of the
Asian Infrastructure Investment Bank. The new Bank is cited as an alternative to the World Bank
or the Asian Development Bank, and a challenge to the U.S. dominated institutions.
With Japan and China along with Korea, Taiwan, Hong Kong, and Singapore,
consumption in Asia is rising. Intraregional trade of goods and services is increasing. Investment
among Asian nationals and firms is on the rise. As intraregional capital flows increase, Asian
countries are becoming more self-sufficient. Intraregional flows of people are increasing as well.
Culturally, East Asian countries growingly share similar tastes in music, film and entertainment.
As Asia becomes more connected and even integrated, it seems that Asia is becoming
less reliant on the United States and emerging as a regional bloc. But how do we measure the
134

status of regionalization and the strength of its regional presence against the U.S.? The “Western”
way of connection and integration is via written contracts and formal institutions.
According to this Western standard of regionalization, Asia has a long way to go. There are no
organizations like the European Commission or North Atlantic Treaty Organization in Asia. The
best known and most powerful multilateral organizations such as the United Nations, the World
Bank, the International Monetary Fund, and the World Trade Organization are systemized, well-
networked and incredibly U.S.-centric. In fact, much of the U.S. economic hierarchy derives
from its influence over these international institutions. On the other hand, Asia-focused
institutions such as the Association of Southeast Asian Nations, the ASEAN Regional Forum,
the Korean Peninsula Development Organization, Asia Pacific Economic Cooperation and
Chiang Mai Initiative are nowhere near the level of organization of those in the West. But does
this mean that Asia is far from providing an alternative to the U.S. hierarchy? The Asian
approach to remain stable, to grow economically and to form a bloc may look different than how
the U.S. hierarchy has been established. The U.S. hierarchy was asserted into the region during
times of need. The leadership was supplied, even over-supplied, according to America’s
aspirations and strategies. Domestic politics influenced the timing and agenda in Asia. It was
then Asia’s responsibility to determine how to receive this leadership. Asia was not a passive
recipient that took in all that was supplied. Rather, Asia selectively received and declined. Asia,
in its own way, formed a bloc with a complex demand for external leadership. The supply alone
or the demand alone did not and does not explain the U.S. hierarchy in Asia. Rather, the supply
and demand together shaped and now shape the regional power terrains.
So far, China and Japan have been the major economies that drove Asia’s growth,
represented Asia’s clout and contested the U.S. hierarchy in the region. However, there is a layer
135

of small and medium sized economies that also contribute significantly to Asia’s voice. Notably,
Korea, Taiwan and Singapore have been the middle powers, and the ASEAN economies together
have risen to a notable status. Trade, finance and transnational production networks are dense
among the Asian economies, and interdependence encompasses economics, environment, human
rights, social media and culture. Regionalism in Asia is open and overlapping with multiple
layers of government, firms and people. Contests among the great powers, including the U.S.,
China, and Japan are not the only dynamics that influence the regional identity and structure in
Asia. “Power hierarchies remain, but the overall architecture is non-hegemonic. Global
hegemons are in retreat … In our multiplex world, there are powerful incentives to pluralistic
and shared leadership among nation states” (Drysdale 2015). Ambitions, resources and strategies
by one super power or one regional power alone cannot guarantee hierarchy. Negotiations and
decisions by the rest of the region are indispensable in shaping a sustainable hierarchical
structure.

136

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Asset Metadata

Creator Koo, Gloria Minkyung (author)

Core Title Supply and demand of economic hierarchy: the Northeast Asia case

School College of Letters, Arts and Sciences

Degree Doctor of Philosophy

Degree Program Political Science and International Relations

Publication Date 08/31/2017

Defense Date 06/21/2016

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag hierarchy,leadership,Northeast Asia,OAI-PMH Harvest,US

Format application/pdf (imt)

Language English

Contributor Electronically uploaded by the author (provenance)

Advisor Kang, David (committee chair), Aizenman, Joshua (committee member), Katada, Saori (committee member), Nugent, Jeffrey (committee member)

Creator Email gloriakoo@gmail.com

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c40-302589

Unique identifier UC11281201

Identifier etd-KooGloriaM-4779.pdf (filename),usctheses-c40-302589 (legacy record id)

Legacy Identifier etd-KooGloriaM-4779.pdf

Dmrecord 302589

Document Type Dissertation

Format application/pdf (imt)

Rights Koo, Gloria Minkyung

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the a...

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