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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is research fellow at the Mossavar-Rahmani Center for Business and Government in the Harvard Kennedy School and former assistant secretary for international affairs at the US Treasury
Donald Trump has already withdrawn the US from the Paris climate agreement and the World Health Organization. Is the IMF next?
Project 2025, the controversial and radical policy manifesto for a second Trump term issued by the Heritage Foundation think-tank, advocates US withdrawal from the fund. The authors argue that the IMF espouses economic theories and policies that are inimical to the free market and American principles of limited government.
Withdrawing from the fund would be a significant own goal. If it were to do so, the US would lose all influence over the IMF’s policies and operations. More importantly, withdrawal would dramatically diminish the international role of the US dollar.
The vast bulk of the IMF’s operations is conducted in dollars; most IMF borrowers request dollars and make repayments in dollars. If the dollars do not come from the US commitment to the fund, other members provide them from their own reserves.
International demand for funds has declined by 5.6 per cent over the past four years. That trend would accelerate if the US were to withdraw from the fund. The dollar would then be excluded from use by the fund, and what nation would want to hold assets in a currency that cannot be used in IMF transactions issued by a country that has abdicated its international financial responsibilities?
Although today the IMF operates predominantly in dollars, it has a multicurrency structure. The issuers of other major currencies such as China and the EU would be delighted to have those inherit the special status of the dollar.
Consider, for example, the IMF’s special drawing rights, an international reserve asset that supplements the reserves of member countries. The dollar now has the largest weight (43 per cent) in the basket of five currencies that value the SDR. The currency with the next largest weight is the euro, followed by those of China, Japan and the UK. If the US withdrew from the IMF, the dollar would have to be removed from the valuation of the SDR, since it can only include the currencies of members.
If the US abdicated IMF leadership, China would be positioned to challenge the Europeans for the largest weight in the basket. They would be likely to simultaneously move to acquire a disproportionate portion of the current US share of IMF voting power and to shift the fund’s headquarters to China.
The US would not only shed international prestige by withdrawing from the IMF, it would also lose a channel through which to provide financial assistance to countries it wants to support. Whatever critics think about perceived flaws in the policies promoted by the IMF, the US would no longer have any leverage over them.
Withdrawal from the IMF would spell the end of America’s status as the principal reserve provider to the rest of the world, a status that the chair of Trump’s Council of Economic Advisers, Stephen Miran, says he wants to preserve even as he wants other countries to pay for the right to use the dollar in this way.
Most importantly, as the currencies of China, the EU and smaller countries replaced the dollar in official international finance, it would be replaced in private international finance too. As a result, the privileged role of US financial institutions, with their direct and indirect preferential access to dollar support from the Federal Reserve, would be undercut.
The financial dominance of the US and its currency would shrink sharply, and the effectiveness of American financial sanctions would be weakened, perhaps fatally.
In short, withdrawal from the IMF would be an economic, financial and political blunder of gigantic proportions.
