The writer is an economist,
anchor, analyst and
the President of the All Pakistan Private Schools Federation
president@Pakistanprivateschools.com
Trump’s threat has sparked concerns of a global economic war. The US dollar is the most widely used currency in global trade, and any attempt to replace it could have significant implications for the global economy. President-elect Donald Trump issued a stern warning to the nine nations in the BRIC alliance, which includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates. He threatened to impose 100% tariffs if they attempted to undermine the U.S. dollar by creating a new currency or alternative. Trump’s warning was directed at the BRIC nations’ potential move away from the dollar, which he believes would be a direct challenge to the U.S. economy. He emphasized that the U.S. will not stand idly by and watch as these nations attempt to create a new currency or alternative to the dollar. The world could see a second wave of tariff war as Donald Trump takes office this January. His remarks follow a BRICS meeting in October that discussed boosting non-dollar transactions. The BRICS grouping comprises Brazil, Russia, India, China, South Africa, and other countries. The BRICS countries – which now include Egypt, Iran, and UAE as well – discussed boosting non-dollar transactions and strengthening local currencies at a summit held in Russia’s Kazan in October. However, Russia’s President Vladimir Putin indicated at the summit’s end that no alternatives have been made so far to compete with the Belgium-based SWIFT financial messaging system. Instead, Trump demands a commitment from these nations that they will not pursue such actions or face the consequences of 100% tariffs and losing access to the U.S. economy. This move by Trump is seen as a step to maintain the dollar’s dominance in the global economy. However, critics argue that this approach may not be effective in the long run, as the BRIC nations are already exploring alternatives to the dollar. The BRIC nations have been discussing de-dollarization since 2023, and some nations like China have already made significant progress in promoting their currency, the yuan. Despite these challenges, the U.S. dollar remains a dominant force in the global economy, thanks to its robust infrastructure, including the cross-border payment system. However, Trump’s warning to the BRIC nations highlights the ongoing tensions in the global trade and capital system, with the U.S. aiming to maintain its economic influence and the BRIC nations seeking to reduce their dependence on the dollar. In this modern era, the almighty dollar reigns supreme, comprising approximately 58% of the world’s foreign exchange reserves, as decreed by the International Monetary Fund. The dollar’s dominance extends to the realm of commodities, where oil and other vital resources are bought and sold in the aforementioned currency. However, whispers of dissent emerge from the BRICS alliance, a coalition of Brazil, Russia, India, China, and South Africa, which seeks to diminish the dollar’s sway. As their collective share of global GDP grows, so too does their intent to transact in non-dollar currencies, a process known as de-dollarization. The BRICS nations have made strides in creating alternatives to the US-dominated financial system, with Brazil and Argentina proposing a common currency, the “SUR”, to facilitate regional trade and reduce reliance on the dollar. Other members of the alliance have taken measures to bypass the US-centric global trade and finance system. The BRICS bloc, comprising 40% of the global population and a quarter of global GDP, is set to expand with Iran and Saudi Arabia joining the fold. Additional nations, including Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, have expressed interest in joining the alliance. Regional organizations, such as the Association of Southeast Asian Nations (ASEAN), are also exploring alternatives to reduce dollar dependence. The BRICS nations have established the New Development Bank (NDB) as an alternative to the US-dominated Bretton Woods institutions. While the dollar remains dominant in global forex reserves, its share has declined from over 70% in 1999. Geopolitical risks and economic dynamics have accelerated the trend towards de-dollarization. The dollar’s reign is challenged by the growing desire to transact in alternative currencies, as nations seek to reduce their reliance on the greenback. Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period. China is one of the most active players in this push given its dominant position in global trade right now and as the world’s second-largest economy. Russia and China have also been working towards connecting their banking communication systems. However, the US has threatened to expel Chinese banks from SWIFT if this proceeds. Nevertheless, both Russia and China have reaffirmed their commitment to advancing bilateral trade in their national currencies.
Geopolitical risks have also accelerated the trend to move away from the U.S. dollar. Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven the U.S. dollar really is, which accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow attacked Ukraine in February 2022. Based on the calculation of IMF’s data on the 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries. As China’s economy continues to rise, that means that it’ll exert more influence in global financial institutions and trade, etc. But China isn’t the only country calling for a shift away from the U.S. dollar. Brazilian President Lula made a state visit to Beijing in April where he reportedly called for reduced reliance on the U.S. dollar for global trade. Trade between Brazil and China reached $150 billion in 2022, a 10% jump from a year ago, according to S&P Global Market Intelligence. During a recent visit to China, Malaysia’s Prime Minister Anwar Ibrahim was said to have suggested setting up an Asian Monetary Fund (AMF) to reduce reliance on the U.S. dollar. In early April, the Indian Ministry of External Affairs (MEA) announced that India and Malaysia were starting to settle their trade in the Indian rupee. The changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways. Trading in local currencies will allow exporters and importers to balance risks, have more options to invest, and have more certainty about revenues and sales. Another benefit for countries moving away from using the dollar as the middleman in bilateral trade is to help them move up the value chain. Meanwhile, the growth of non-U.S. economic blocs also encourages these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year. U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing, which is going to be a re-internationalization of flows. According to Bloomberg, the yuan has replaced the U.S. dollar as the most traded currency in Russia. So far, the U.S. and its Western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade to other currencies and increase gold in its reserves. In the Middle East, major oil exporter Saudi Arabia has signaled it’s open to trade in other currencies other than the greenback. Although it’s not a complete break away from dollar-denominated oil trade over the short-term, what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan. Despite the slow erosion of its hegemony, the U.S. dollar is not expected to be dethroned in the near future — simply because there aren’t any alternatives right now. Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads. The Chinese yuan also falls short, the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions. That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective. The dollar’s share of international reserves had fallen from 70 per cent to 58.36 per cent, marking its lowest level in 25 years. Data from IMF shows that as of the fourth quarter of 2022, more than 58.36% of global reserves are held in the U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world. The International Reserve system is still a U.S.-reserve-dominated system. So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility, and free-floating and the responsibility of a reserve currency, it’s hard to say the dollar will be displaced over the next 3 to 5 years unless someone steps up.
Trump Threatens US Won’t Allow Dollar to be Replaced with BRICS Currency. Trump’s threat has sparked concerns of a global economic war.
In fact, the de-dollarization trend has already emerged in a number of countries and regions including Russia, China, and 17 other countries. About a quarter of the decline in the dollar’s share can be accounted for by greater use of the Chinese renminbi. However, less than 3 per cent of global central bank reserves are denominated in Beijing’s currency, as IMF data shows. Beijing was also in the process of internationalizing the renminbi before the current crisis and was already ahead of other nations in adopting a central bank digital currency. The war would also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies. The greater use of other currencies in global trade would lead to the further diversification of the reserve assets held by national central banks. Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role in reserve assets. The dominance of the dollar — backed by strong and highly credible institutions, deep markets and the fact that it is freely convertible — was unlikely to be challenged in the medium term. But in the past few years, the trend toward the de-dollarization of economies in the world has become increasingly apparent. The main task is to reduce its dependence on the world’s main reserve currency – the US dollar. Indeed, more and more countries striving to switch to settlements in national currencies, and the already-emerging global de-dollarization push could further accelerate with countries increasingly adopting alternatives to the US dollar. Although Pakistan has not been an enthusiastic advocate for such a de-dollarization partnership but has been exploring a rupee-ruble trade arrangement with Russia. Pakistan must seriously think about diversifying its foreign exchange reserves, increasing investments in other currencies, and switching to settlements in its own national and other international currencies between partner countries. Thus, the tide of de-dollarization hath already commenced in various realms, including Russia, China, and seventeen other nations. The renminbi, China’s currency, hath contributed significantly to this shift, accounting for a quarter of the dollar’s decline. Although the renminbi’s presence in global central bank reserves remains modest, barely exceeding 3%, Beijing hath been proactive in internationalizing its currency and embracing digital finance. The current global tensions shall further accelerate the adoption of digital currencies, stablecoins, and central bank digital currencies. As nations increasingly transact in diverse currencies, their reserve assets shall become more varied. Countries tend to accumulate reserves in currencies used for international trade and borrowing. Whilst the dollar’s dominance, underpinned by robust institutions, deep markets, and convertibility, shall persist in the medium term, the de-dollarization trend has gained momentum. Pakistan, though not a fervent advocate for de-dollarization, hath explored a rupee-ruble trade arrangement with Russia. To mitigate dependence on the dollar, Pakistan must seriously contemplate diversifying its foreign exchange reserves, investing in alternative currencies, and adopting settlements in national and international currencies with partner nations. By doing so, Pakistan shall align itself with the emerging global trend towards de-dollarization.