The UK must resist taking sides as the US and China fight for financial supremacy

Our ‘special relationship’ with the US gets forgotten when America looks at threats to the dollar’s dominance

For a while now the phrase “special relationship” has sounded a touch desperate when spoken in a British accent and a tad condescending if uttered by an American.

The lopsidedness of this transatlantic alliance was highlighted yet again last week when an unnamed senior US official gave the UK a short, sharp diplomatic spanking. Washington was, we were informed, unhappy about the UK becoming a founding member of the Chinese-led Asian Infrastructure Investment Bank (AIIB). This was the latest example, to Washington’s thinking, of the UK’s “constant accommodation” of China.

Well, that’s us told.

But beneath the hectoring tone it is possible to detect a note of concern. It seems odd to suggest this as the dollar approaches euro parity, but might Washington be worried that America’s financial hegemony is under threat?

There is certainly a great deal at stake. The dollar’s unrivalled position as the world’s reserve currency of choice has become America’s main policy tool in a wide range of areas, from tax-collecting to crime-fighting and from diplomacy to national security.

One low-level but illustrative example is the Foreign Account Tax Compliance Act, or Fatca, which Barack Obama signed into law during his first term. In short, this forces financial institutions around the world to reveal which of their clients are American citizens with more than $50,000 in investments.

The law is designed to make life hard for tax evaders – fair enough. But it does so at huge cost and effort to global financial institutions, effectively forcing them to become the long arms of the Internal Revenue Service.

Why don’t those foreign banks tell the US regulators where to get off? Because Uncle Sam wields a hefty stick. US regulators can shut foreign firms out of America’s capital markets – home to about a third of global equities by value, well over a third of all outstanding global debt, and, of course, the mighty dollar.

Ask bank chief executives if they would rather pay a ten-figure fine or be banned from moving money in and out of the US, and they’ll have their (shareholders’) chequebooks out faster than you can say “dollar clearing”.

One book currently sitting on the bedside tables of many bank bosses is Treasury’s War by Juan Zarate. It details how US Treasury and White House officials, of whom the author was one, began to realise that the “centrality of American financial power and influence” meant that money had become not only America’s “greatest asset” but also its enemies’ “greatest vulnerability”.

Money has long been synonymous with security in the American psyche. It’s worth remembering that the US Secret Service was set up by Abraham Lincoln as a unit within the Treasury Department to tackle the vast amount of counterfeit currency in circulation during the American Civil War. It only moved to its new home within the Department of Homeland Security in 2003 and still investigates financial crimes.

Zarate describes how more recently the US has developed and deployed a variety of financial techniques against terrorist groups, organised criminals and enemy states such as Syria, North Korea and Iran. The book “also raises a wary eye to competitor states like China… that might use the lessons of the last 10 years to wage financial battles against the United States”.

America’s influence is derived from its economic might but also the sway it holds over the Washington-based International Monetary Fund and World Bank. Last week, China reportedly asked the IMF to include the yuan in its basket of reserve currencies. Time will tell whether the IMF agrees. It seems clear that Washington would like to restrict China’s access to, and influence on, the global financial system until Beijing makes unlikely concessions.

Of course, the creation of Asian-based supranational institutions – such as the AIIB – would help accelerate the rise of the yuan and lessen the need for any such concessions. It is this possibility that appears to be rattling Washington policymakers.

Poor old Blighty finds itself stuck in the middle. The UK has said it has become a founding member of the AIIB to ensure that it is set up in an ethical and transparent manner. Well, maybe. More likely, it doesn’t want to be left on the sidelines when China picks trade and investment partners.

David Cameron has been quick to follow the French and German lead in building trade ties with China. George Osborne has been pushing to make the City of London the main financial hub for Chinese currency dealing.

They are absolutely right to do so. Britain’s best interests are served by attracting more foreign investment and boosting exports to a wider range of markets. If it fails to do so, its economy and global diplomatic relevance will both suffer, regardless of the specialness of its relationship with the US.

The secret to America’s success is that it hosts the financial party to which everyone would like to be invited; the secret to the UK’s, is that it hosts the one to which everyone is.

George Osborne has confirmed that millions of people who have used their pension pots to buy an annuity will be able to sell it for a lump sum. This follows on from the announcement of so-called “pension freedom” rules that allow savers to decide how they spend their pension pot when they retire.

Giving people more control in how they manage their own finances is to be welcomed. As the Chancellor said, the changes come down to “trusting people who have worked hard and saved hard all their lives”. And quite right, too.

But it’s worth noting that one of the most successful pension policy initiatives of recent years – automatic enrolment – does the exact opposite. Those people auto-enrolled into a default pension scheme will effectively have three decisions made on their behalf: whether to save, how much to save and what to invest in.

True, everyone has the ability to opt out of auto-enrolment (if they can be bothered), whereas the old annuity rules were mandatory.

Nevertheless, we are in danger of adopting an asymmetric pensions paternalism, with the young being nudged in specific directions and older people being given carte blanche.