The most formidable element of U.S. national power isn’t its military. The trillions spent on the mighty American military machine pale beside the influence created by the dominance of the dollar in the international economy.

The central role of the U.S in global business exempted it from many of the normal rules while extending leverage over countries that use its currency or seek to do business with it. That role is being challenged but it is unlikely to be replaced — unless, as in most such matters, the U.S. undermines the currency itself.

The dollar’s “exorbitant privilege,” in the characterization of former French Prime Minister Valery Giscard d’Estaing, creates constant complaint. Marcus Noland, executive vice president of the Peterson Institute for International Economics, detailed Asian governments’ unhappiness with this arrangement and their efforts to seek “greater autonomy within the existing monetary system” in a paper published late last year for the East-West Center.

Noland explained how the region’s irritation boiled over after the arrogant and fitful response of international financial institutions to the 1997-98 Asian Financial Crisis; efforts to develop alternatives redoubled after the Global Financial Crisis a decade later. Recent developments have pushed other governments to take similar action.

While Washington has long yielded its economic stick against countries like Iran, North Korea and Cuba, the success of the Western sanctions campaign against Russia after Moscow’s invasion of Ukraine awakened other governments to the possibility that they too might feel the lash.

Even governments that are secure in their relationship with Washington are often frustrated by U.S. decisions and (in)action that don’t reflect their economic conditions and still hurt their economies. That list is long and lengthening: the 2007-08 Global Financial Crisis, the Fed’s efforts to crush inflation, the Silicon Valley Bank collapse.

The search for alternatives has accelerated as China’s role in the international economy expands. As trade with China grows, it makes sense to invoice those transactions in Chinese yuan instead of dollars. That makes even more sense when China loans the money — as in the trillion-dollar Belt and Road Initiative — to finance the trade.

Noland notes that by 2015, a quarter of Chinese trade was invoiced in yuan, “making it the world’s second most frequently used invoice currency.” He added that “the complementarity between trade invoicing, bank funding and use as central bank reserves means that the expanding use of yuan in trade use should induce greater use in these other areas as well.”

Predictably, Russian President Vladimir Putin promised when he visited Beijing earlier this year to use the yuan for “payments between Russia and countries of Asia, Africa and Latin America.” Last year, he announced that the BRICS countries — Brazil, Russia, India, China and South Africa — were working to develop a reserve currency based on a basket of currencies for its member countries.

Brazilian President Luiz Inácio Lula da Silva echoed Putin last week during his visit to China. Asking, “Why can’t we do trade based on our own currencies?” Lula called on the BRICS to develop their own currency for their trade. He was speaking in Shanghai at the inauguration of his protege, former President Dilma Rousseff, as head of the New Development Bank (formerly the BRICS bank). (Those keeping score will contrast that appointment with the selection of Ajay Banga by the U.S. to head the World Bank, continuing the tradition of a U.S. citizen in the top position of that institution.) The buzz has been amplified by a call from Jim O’Neill, the former Goldman Sachs analyst who coined the term BRICs in 2001, for emerging countries to reduce reliance on the dollar to cut their risks.

This isn’t idle chatter. In 2015, Beijing set up CIPS, the Cross-Border Interbank Payment System, as an alternative to SWIFT, the interbank messaging system that is used to settle accounts between financial institutions in different counties and is one of the primary instruments of U.S. control of the international economic system. Total settlements on CIPSs totaled 97 trillion yuan last year, or $14 trillion, a 21% increase from 2021.

Russia has been relying on the Chinese currency for transactions as a result of Western sanctions. Earlier this month, the Brazilian branch of the Industrial and Commercial Bank of China settled its first transaction directly in yuan. With Brazil-China two-way trade reaching $150.4 billion last year, there is room for a lot of growth. Meanwhile, Saudi Arabia announced that it will start invoicing some oil exports to China in yuan and France recently concluded its first liquid natural gas sale in the Chinese currency. Beijing is pressing other governments in Southeast Asia, the Middle East and Latin America to use the yuan for China-related trade.

Another development — promoted by China but not strictly its doing — could contribute to the erosion of dollar dominance: the growing use of central bank digital currencies. More than half the world’s central banks are studying or developing digital currencies and linking them replicates — and renders redundant — the current system that relies on the dollar. Funds should be able to flow among those banks in their own currencies, cutting out the U.S. currency.

Other experiments include the use of blockchain-based systems, such as the Interbank Information Network that is being developed by a consortium of banks.

From one angle, the progress is impressive. The yuan's share of trade finance has more than doubled since the invasion of Ukraine, and according to one analysis, now exceeds the use of the euro for trade invoicing. It still lags China’s total share of total trade, which means that yuan invoicing should continue to grow.

But don’t hyperventilate. “More than doubling” its use in trade finance means the yuan's share of the market has grown from less than 2% in early 2022 to 4.5% a year later. The U.S. share has indeed fallen: from 86.8% to 84.3% over the same time. The dollar still dominates.

More important though is the fact that only the U.S. dollar has, despite its flaws, the support and trust of governments and businesses needed for it to serve as the central currency of a deeply integrated international economic system. Eswar Prasad, an economist at the Brookings Institution, highlights the larger institutional context that is the foundation of the dollar’s value and use. He points to a credible and independent central bank, an independent judiciary that ensures the rule of law and a system of political checks and balances that allow others to believe that objective decisions will be made and the system will be stable, reliable and predictable.

That seems to be the consensus view, even though it’s couched in grotty prose. Gillian Tett of the Financial Times calls the dollar-based system “the least ugly option in a very ugly world,” a view shared by her colleague Alan Beattie, who writes that the current system “isn’t ideal, but so far the Fed has done enough on more than one occasion to prevent global system meltdown and there’s no real prospect of anyone else taking over.”

Use of the yuan will grow, and most experts think it should given China’s role in global trade, but they expect its popularity to rise at the expense of other currencies — the yen, the euro, the British pound and the Swiss franc.

The preferred status of the dollar isn’t guaranteed, however. A genuine decoupling of the world economy would encourage — if not mandate — the rise of a second currency to settle accounts in the non-U.S.-based economy. (Without it, there is no real decoupling.)

More likely, though, is undermining the credibility of U.S. economic managers. One potential trigger is the upcoming raising of the debt ceiling. Failure of the U.S. government to pay its bills and thus default on its debt would be a potentially fatal blow to the trust and credibility of the U.S. As usual, the greatest threat to the U.S. role in the world, is itself.

Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).