BRICS Currency: A Threat to Dollar Dominance?

Explore the implications of a BRICS currency on the US dollar's dominance and the justification of Trump's tariff threat.

The idea of a BRICS currency has been gaining traction, and former US President Donald Trump's tariff threat has sparked a heated debate. But is the threat justified?

The BRICS nations, consisting of Brazil, Russia, India, China, and South Africa, aim to reduce their dependence on the US dollar. They plan to achieve this by increasing the use of local currencies in trade and finance. This move is driven by frustrations with the dollar's dominance, which can lead to economic instability and vulnerability to US economic sanctions.

The dollar's widespread use in global trade and finance gives the US significant economic advantages. However, the BRICS nations argue that this dominance also creates risks for their economies. They point to the impact of US monetary policy on emerging markets, which can lead to currency fluctuations, inflation, and economic instability ¹.

In response to these concerns, the BRICS nations are exploring alternative currencies, such as the Chinese renminbi. However, the renminbi's growth is still limited compared to the dollar, and it faces significant challenges in becoming a widely accepted global currency ¹.

So, is Trump's tariff threat justified? While the US has legitimate concerns about the potential impact of a BRICS currency on the dollar's dominance, the threat of tariffs may not be the most effective response. Instead, the US could engage in diplomatic efforts to address its concerns and promote a more stable and cooperative international economic order.

The BRICS nations, comprising Brazil, Russia, India, China, and South Africa, are seeking to reduce their reliance on the US dollar, the world's dominant reserve currency. This move is driven by the desire to minimize their exposure to dollar-related risks and promote trade within the bloc using national currencies. By challenging the dollar's dominance, the BRICS nations aim to create a more multipolar international monetary system.

The US dollar's dominance in global trade, accounting for nearly 80% of transactions, provides the United States with significant economic advantages. Most economists agree that the dollar-dominated financial system allows the US to enjoy lower borrowing costs, sustain larger fiscal deficits, and maintain exchange-rate stability, among other benefits. The dollar's stability also makes it an attractive safe-haven asset during times of economic uncertainty, with investors often flocking to the dollar.

The dollar's influence extends beyond trade, as it is also the primary currency used to price commodities such as oil and gold. This perpetuates the dollar's dominance, as countries must hold dollars to purchase these essential commodities. By promoting the use of their national currencies, the BRICS nations aim to reduce their dependence on the dollar and create a more diversified international monetary system.

The US dollar's dominance in global trade and finance gives Washington significant geopolitical influence, allowing it to impose sanctions on other nations and restrict their access to trade and capital. This phenomenon, known as “dollarization,” has led to accusations from BRICS nations that the US is “weaponizing” the dollar to further its interests.

The BRICS nations, which have recently expanded to include Iran, Egypt, Ethiopia, and the United Arab Emirates, are concerned about being targeted by US sanctions if they fall out with the West. These concerns have gained traction since the US and European Union imposed sanctions on Russia over its 2022 invasion of Ukraine. In response, discussions about creating a new joint currency have gained momentum, aiming to reduce dependence on the US dollar and promote economic cooperation among BRICS nations.

The US dollar's dominance has been a cornerstone of American economic power, but the rise of alternative currencies and economic blocs, such as the BRICS nations, poses a challenge to this status quo. As the global economy becomes increasingly interconnected, the use of economic sanctions as a foreign policy tool is also being reevaluated, with some arguing that it can have unintended consequences and collateral damage.

The concept of a BRICS currency was first proposed in the aftermath of the 2008/9 financial crisis, which highlighted the vulnerability of the global economy to US-centric financial instability. The crisis, triggered by a US real estate bubble and lax regulations, nearly collapsed the entire global banking system. In response, the BRICS nations began exploring alternatives to the US dollar-dominated financial system.

The idea of a BRICS currency gained momentum at last year's BRICS summit in South Africa, where the bloc agreed to study the feasibility of creating a common currency. The primary objective of such a currency would be to minimize the BRICS nations' exposure to dollar-related risks. While BRICS leaders acknowledged that the creation of a common currency would likely take many years, the proposal marked an important step towards reducing the bloc's dependence on the US dollar.

Russian President Vladimir Putin took the concept a step further during the recent BRICS summit in Kazan, proposing the development of a blockchain-based payments system. This system, designed to circumvent Western sanctions, would enable the BRICS nations to settle transactions without relying on the US dollar or traditional payment systems. Putin's proposal reflects the growing desire among the BRICS nations to reduce their vulnerability to Western economic sanctions and promote greater economic cooperation within the bloc.

The feasibility of a common BRICS currency is a complex issue. While Putin and his Brazilian counterpart Luiz Inacio Lula da Silva are strong proponents of the idea, other member states have expressed caution. China, for instance, has not explicitly stated its position, but has supported initiatives to reduce reliance on the US dollar. India, on the other hand, is more cautious about the idea.

A common currency would require significant economic integration and policy coordination among BRICS nations. However, the bloc's diverse political and economic systems, varying stages of economic development, and different growth rates pose significant challenges. The idea of a common currency is attractive, but its implementation is daunting.

In fact, some experts argue that BRICS does not meet the criteria for an Optimum Currency Area (OCA), which is a region that would benefit from adopting a common currency or a fixed exchange rate regime. The lack of sufficient economic integration, policy coordination, and institutional harmonization among BRICS members makes a common currency unlikely in the near future.

Instead of a common currency, BRICS nations may focus on facilitating more trade in local currencies, as agreed upon by the leaders. This approach would help reduce their reliance on the US dollar without the need for a full-fledged common currency.

China's dominant position within the BRICS bloc presents a significant challenge to the idea of a shared currency. As an authoritarian state, China accounts for approximately 70% of the bloc's total gross domestic product (GDP), with a staggering $17.8 trillion (€17 trillion) in economic output. China's trade surplus and large holdings of US dollars support its competitiveness as a major exporter, but also create an imbalance that could overshadow the interests of other BRICS members.

India, the world's largest democracy, has a significantly smaller economy, worth $3.7 trillion. Unlike China, India runs a trade deficit, which could make it more difficult for New Delhi to agree on a framework for a new currency that would not compromise its national interests. The disparities between India and China, as well as among other BRICS members, are likely to spur resistance to a shared currency, highlighting the need for careful consideration and negotiation.

The significant economic and political differences among BRICS members pose a substantial obstacle to the creation of a shared currency. The bloc's diversity, while a strength in many ways, also creates challenges in terms of coordinating economic policies and finding common ground. As the BRICS nations continue to explore the idea of a shared currency, they will need to carefully navigate these differences and find ways to balance their individual interests with the need for greater economic cooperation.

BRICS leaders have been discussing a dollar alternative, exploring options to reduce their dependence on the US currency. This move is driven by the desire to minimize exposure to dollar-related risks and promote economic cooperation within the bloc.

The idea of a BRICS currency has been around since the 2008/9 financial crisis, but it gained momentum after Western sanctions were imposed on Russia following its invasion of Ukraine. The BRICS nations are seeking to create a more multipolar international monetary system, reducing their reliance on the US dollar.

A fully-traded currency like the dollar or euro is unlikely to be the goal for BRICS members. Instead, they may opt for a joint currency used solely for trade, valued based on a basket of currencies and/or commodities like gold or oil. This approach would allow them to reduce their dependence on the dollar without creating a fully-fledged alternative currency.

The concept of a BRICS currency is still in its infancy, and its development is likely to be a long-term process. The idea is to create a currency that works similarly to the International Monetary Fund's (IMF) Special Drawing Rights (SDR), which is valued based on the daily exchange rates of major currencies like the dollar, euro, yuan, yen, and pound.

Some proponents suggest that a BRICS alternative could be a digital currency, but the proposal has made little progress despite the rhetoric from BRICS leaders. The BRICS nations are still exploring ways to reduce their dependence on the US dollar, and the creation of a new currency is just one of the options being considered.

Trump's 100% tariff threat can be seen as premature, as the BRICS currency proposal is still in its early stages. The President-elect's statement on Truth Social, requiring a commitment from BRICS countries not to create a new currency or back any other currency to replace the US dollar, may be seen as an attempt to exert pressure on the BRICS nations.

US has a history of imposing tariffs on countries that attempt to undermine the US dollar's dominance. The Trump administration's tariffs on China, for example, were imposed in response to China's alleged unfair trade practices. However, such measures can have unintended consequences, such as higher prices for consumers and reduced economic growth.

South Africa's government has come out to deny reports of a planned BRICS currency, saying that “recent misreporting” has spread a false narrative. This denial comes after US President-elect Donald Trump threatened to impose 100% tariffs on BRICS members that support an alternative to the dollar.

According to Chrispin Phiri, spokesman for South Africa's Department of International Relations and Cooperation (DIRCO), discussions within BRICS have focused on using national currencies for trade among member states, rather than creating a new currency. This approach aims to reduce reliance on the US dollar and mitigate foreign exchange risks.

In fact, BRICS has been advocating for reforms to the global financial system, but has not agreed on a shared currency. The bloc's New Development Bank still relies on the dollar, with investments exceeding $30 billion across member states and other developing economies.

Trump's threat to impose 100% tariffs on BRICS nations that attempt to replace the US dollar has sparked concerns about strained ties with the world's fastest-growing economies, which are also key US trading partners. This move could lead to retaliatory measures and further escalate tensions. Moreover, Trump's existing threats to levy additional tariffs on America's rivals, including China, could exacerbate global and domestic inflation, potentially slowing economic growth.

The decision to prioritize the dollar marks a significant policy shift from Trump's first term, where he favored a weakening of the currency to boost US exports. Trump's threat has already caused a strengthening of the dollar, accompanied by a weakening of gold, the yuan, rupee, and rand. This development has sparked concerns among economists, who warn that the consequences of Trump's actions could be far-reaching.

Russian government spokesman Dmitry Peskov has noted that a trend is gathering pace against the dollar as a reserve currency, saying that “more and more countries are switching to the use of national currencies in their trade and foreign economic activities.” This shift could have significant implications for the global monetary system, particularly for the US, which has long relied on the dollar's dominance to maintain its economic influence.