When cooperation becomes optional: dollar hierarchy and the durability of financial cooperation in East Asia

Why do currency swap arrangements survive deteriorating political relations? Financial statecraft explains their formation better than their persistence. Swap arrangements are formally reciprocal yet asymmetric in practice, leaving the weaker-currency side an implicit borrower and the other an implicit lender. We argue that durability under political pressure depends less on the borrower’s level of demand than on the political price it will pay to keep the arrangement. Federal Reserve access supplies direct claims on the primary reserve currency and a stabilising signal. Once a borrower is shown eligible, its other arrangements are demoted to supplementary insurance and its willingness to absorb political costs falls. Survival then rests with the lender. Lenders with system-level objectives such as currency internationalization cannot let arrangements lapse without damaging credibility across their partner network, while bilateral or regional interests face no comparable constraint. We test this argument against Korea’s arrangements with Japan and China.