 "Why is Donald Trump threatening Brics members against de-dollarisation?")
Trump has demanded that Brics member nations promise not to create a new currency or support another currency to replace the United States dollar.
He has said they will face 100 per cent tariffs if they do not do so.
“We require a commitment from these countries that they will neither create a new Brics currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariffs, and should expect to say goodbye to selling into the wonderful US Economy,” Trump wrote on his social media platform Truth Social.
“They can go find another ‘sucker’. There is no chance that the Brics will replace the US Dollar in International Trade, and any Country that tries should wave goodbye to America.”
But why does the world want to reduce its dependence on the dollar? And how does the US benefit from it?
Let’s take a closer look:
The almighty dollar
First let’s take a brief look at the dollar.
The dollar has been the world’s reserve currency for decades – and is known as the ‘king of currency.’
It got its lofty status as a result of the famous Bretton Woods agreement made by 44 nations in 1944.
This got a further fillip when Nixon in 1971 delinked the dollar from the price of gold.
Today, dollars comprise 90 per cent of the global currency reserves and trade.
As per Brookings.edu, governments around the world and central banks keep a healthy reserves of the US dollar in order to control the foreign exchange value of their currencies or in case of economic shocks.
They also borrow in dollars – as this protect their creditors against foreign exchange risk. Today, 64 per cent of the world’s debt is held in the form of dollars.
As Brookings’ Eswar Prasad noted, “Economic and geopolitical turmoil serves only to intensify the quest for safe investments, usually leading investors back to the dollar, which remains the most trusted currency.”
But how does this benefit America, you may well ask?
Because the “exorbitant privilege” – as France’s Finance Minister Valéry Giscard d’Estaing called it in 1965 lets the US pay for its trade and budget deficits.
The US essentially has put a moat against having a balance of payments crisis.
This is as it imports and borrows in its own currency.
It can also use quantitative easing – which in simple terms is called printing money – to fluctuate the value of the dollar.
However, the most power the US gets from this cozy arrangements is that it allows for sanctions to be levied against countries.
It does this through a variety of laws including the International Emergency Economic Powers Act, the Trading With the Enemy Act and the Patriot Act allow Washington to weaponise payment flows.
Why world wants to reduce dependence on dollar
Because the countries say the United States is ‘abusing’ its power.
As Russian President Vladimir Putin said at the Brics summit in October, “The dollar is being used as a weapon. We really see that this is so. I think that this is a big mistake by those who do this.”
Washington removed Iran and Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 2012 and 2022 over the nuclear programme and the Ukraine war respectively.
SWIFT is a secure messaging system to ensure rapid cross-border payments which has become the principal mechanism to finance international trade.
The combination of the sanctions and the control of SWIFT gives the US unparalleled control over the global economic system, as per Bloomberg.
Russia has set up its own network, the System for Transfer of Financial Messages (SPFS), as an alternative to SWIFT.
It sent about 2 million messages in 2020, or about a fifth of Russian internal traffic, says the central bank, which aims to up this share to 30 per cent in 2023.
But SPFS, which limits the size of messages and operates only on weekdays, has found it hard to add foreign members
Countries for the past few years have been looking to counter the US’ dominance by trying to find an alternative to the dollar – a process known as de-dollarisation.
Leaders of the original five Brics nations – Brazil, Russia, India, China and South Africa – have for years tried to float the idea of a common Brics currency.
China, the world’s second-largest economy, has also tried to put for the renminbi, its own currency, as a substitute for the dollar.
However, these ideas have had little success thus far.
“The Chinese government has been advancing policies on multiple fronts to promote renminbi internationalization, including the development of a cross-border payment system, the extension of swap lines, and piloting a central bank digital currency. It is thus interesting to note that renminbi internationalization, at least as measured by the currency’s reserve share, shows signs of stalling out,” the IMF said, as per The Times of India.
There are also internal differences.
“China is very keen to assume a dominant role to use the (BRICS) bloc against the US, though India, Brazil and South Africa are more keen to work with the US and settle the differences amicably through negotiations,” Federation of Indian Export Organisations (FIEO) Director General & CEO Ajay Sahai told the newspaper.
What do experts say?
That the US only has itself to blame for countries looking for an alternative to its dollar.
As Ajay Srivastava, ex-trade officer and head of think tank Global Trade Research Initiative, told Indian Express, “It is the actions of the United States that have pushed many countries to seek alternatives to the US dollar. The US has a history of leveraging its influence over global financial systems, such as the SWIFT network, to impose unilateral sanctions. SWIFT is essential for secure and standardised international financial transactions. By blocking countries like Russia and Iran from accessing SWIFT, the US has effectively weaponised the global financial infrastructure, forcing other nations to find alternative payment mechanisms to continue legitimate trade.”
They also say that the US ought to tread carefully.
Brookings.Edu quoted US Treasury Secretary Janet Yellen as warning that the dollar could ultimately be cast aside as the world’s dominant currency “if the United States is capricious with sanctions, acts unilaterally, and fails to develop a doctrine of economic statecraft.”
In short, there is no threat to the US dollar’s dominance at the moment.
However, in the long run, things could change.
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