DE-DOLLARISATION MOVE SHOULD WORRY TRUMP MORE THAN NON-EXISTENT BRICS

US president-elect Donald Trump’s threat to slap a 100 percent tariff on nine-member BRICS Plus countries if they try to replace the US dollar with a common BRICS currency may at best be called as a panic reaction
to Brazilian President Luiz Inacio Lula da Silva’s wish to create a common BRICS currency to reduce the growing vulnerability to US dollar exchange rate fluctuations. President Lula made the common BRICS currency proposal at a BRICS summit at Johannesburg in August last year.

More recently, Russian President Vladimir Putin called for a new international payments system at the latest BRICS summit at Kazan (Russia), saying “the dollar is being used as a weapon.” The Kazan summit underlined BRICS’s ambition to foster relations with the Global South, and its aim of shaping an alternative multipolar orld order, particularly in the global financial and trade system.

Obviously, the idea of floating an alternative currency to US$ did not go down well with Trump, who reacted rather nervously without giving much thought on the subject or the ground level difficulties involved in creating such a competing new international currency given the geographical, political, trade and economic
diversities clubbing together the nine BRICS nations — Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran and the United Arab Emirates – spread over four continents. China, the largest and most influential of the BRICS countries, itself may not be interested in having a common BRICS currency, at least for now.

While China’s Renminbi is fast gathering importance in the international market, the country is unlikely to disturb US$, the world’s main reserve currency representing around 58 percent of the global foreign exchange reserves. China is the second largest holder of the US debt with a total investment of around $775 billion in US government securities alone. China has been buying US Treasury securities for decades.

Many see the idea of building a BRICS currency is more political than practical. The project is easier concepted than contemplated with proper plans. It will require the setting-up of a banking union as well as a fiscal union. There will have to be a disciplining mechanism to deal with the countries that fall out of
line with the system. It will require a common central bank. Trade imbalances could pose a major problem. Out of the nine BRICS countries, China’s trade balance is close to a trillion US dollars in its favour.

China’s global merchandise trade surplus was around $823.2 billion, with exports of about $3.38 trillion and imports of about $2.56 trillion, last year. Whereas India runs a trade deficit worth US$240 billion, almost a half of it with China. India, Egypt and Ethiopia are high on import and low on export, running large deficit trade balances. All the member countries of BRICS have China as their main trading partner. They do little trade with each other. The individual trade, economic and diplomatic concerns of BRICS nations highlight the complex interplay between economic potentials and geopolitical influence. It may be important to critically examine how these dynamics shape established power configurations and alliances.

As of now, China considers investments in the US safe and stable. Theoretically, China could sell off its US debt holdings as a retaliatory measure but it is most unlikely to happen as the disposal of a large amount of debt would also pose risks for China. Over the years, China’s export-focussed economy flourished at the cost of the US, the single largest importer of Chinese merchandise. Despite a $109-billion drop in imports
from China in 2023, the US trade deficit with China was $279.4 billion. The total value of the US trade with China was around $575 billion, last year.

China may maintain a low trade and investment profile during the four year term of Donald Trump expecting the hostile trade and economic relations between the two countries to ease off in due course. Chinese President Xi Jinping is unlikely to rush with the Lula-Putin proposal for an alternative global financial and trade system. Moreover, politically and economically mature China is fully aware that putting together a BRICS currency as an alternative reserve currency to the US$ is not plausible in the short or medium term. Incidentally, Like China, India, the second largest BRICS economy, is yet to press for an alternative currency to US$.

However, more than the possibility of a BRICS currency coming anytime soon to unsettle the substantial US dollar grip over the global trade and commerce, the next US president should be more concerned about the process of dedollarisation which has been gaining ground, especially after the US trade and financial sanction against Russia, following the Ukraine war. Russia has been happily engaged in energy trade
with several West European countries, China, West Asian countries, including Saudi Arabia and the UAE, and India.

The seemingly long-drawn Ukraine war has given a fresh push to bilateralism as more and more
importers and exporters, as well as borrowers, lenders and currency traders, are independently deciding on the use of other currencies. This has been strengthening the de-dollarisation process, engendering a multitude of effects on the international monetary system, encompassing potential alterations in exchange
rate volatility, trade patterns, and presenting challenges for established financial institutions.

The so-called BRICS currency proposal is a non-issue while the de-dollarisation process should concern the US as a real threat. In the commodities space, energy transactions are increasingly priced in non-US currencies. It may also be interesting to note that central banks, especially those in emerging economies, are raising their gold hoardings to diversify away from a US dollar-centric financial system.

According to J.P. Morgan’s global commodities research team, central banks collectively bought a net 1,136 tonnes of gold in 2022, the highest annual demand on record, and another 1,037 tonnes in 2023. This reduces their need for precautionary reserves of US dollars and US Treasuries, which in turn frees up capital to be deployed in growth-boosting domestic projects, it explained.

The next US president would do  well by  taking actions to contain the NATO, which it leads, to help end the Ukraine-Russia war in order to slow down the dedollarisation process, help stop further escalation of the Israel- Hamas war expanding to new frontiers such as the Red Sea and Lebanon and bring back Russia on its side to curtail growing Chinese influence on global commerce and diplomacy, especially in the West Asian region.