data/Trump_vs_BRICS/Trump vs BRICS.txt

President-elect Donald Trump continues to send shockwaves with his sometimes premeditated but largely impulsive statements, threatening to upend the rules-based world order that successive US administrations have long supported with blood and money. The latest shockwave came from his statement on 30 November 2024, whereby he threatened to impose a 100% tariff on BRICS countries if they tried to create a new rival common currency or back an alternative currency to replace the US dollar as the world's medium of reserve exchange and trade transactions. Quite understandably, this statement warns of dire consequences for actions that are squarely within the jurisdictions of member countries and has created a firestorm, spurring debate among geostrategic and economic experts regarding whether BRICS is genuinely capable of undermining the US-dominated international financial order.

Before we move ahead to understand the consequences of the President-elect's statement, it would be pertinent to highlight the role of the US dollar in international trade and finance and the factors that are responsible for its well-entrenched status to help understand the broader picture of the global economic landscape.

Since the 1920s, the US dollar has been the world's predominant currency, having replaced the British pound as the primary medium of exchange. Now, the US dollar is primarily used in six areas:

International payments
Trade invoices
Global foreign exchange reserves
The foreign exchange market
International debt
International loans or borrowing

All over the world, governments and central banks worldwide hold dollar-based assets, mainly in US treasury debt, to absorb economic shocks and manage the value of their national currencies. Dollar-dominated assets account for 59% of global foreign currency reserves; Euro: 20%, Chinese Renminbi 2.14%, Pound Sterling 4.9%, Japanese Yen 5.59% (International Monetary Fund). Similarly, governments and corporations borrow from multilateral lenders and countries in US dollars to insure their creditors. Currently, 64% of the world's debt is held in US dollars. In terms of international payments and transactions, the dollar accounts for 58% of global payments in 2024. The greenback remains the preferred medium of exchange for international trade, with 54% of global trade invoices in US dollars (Brookings Institution report, August 2024). Here, the question is: how has the US dollar maintained its undisputed status as the king of currencies for almost a century?

The answer is complicated.

The first major factor is the large and dynamic US economy that accounts for around 25% of the world economy.

Secondly, the United States has robust investor-protection systems and an enviable rule of law, building trust in the US justice system to settle investment-related disputes.

Thirdly, the US is both the largest recipient and source of foreign direct investment (FDI) worldwide.

Fourth, the capital market of the US is open and deep, encouraging investors from across the world to invest in US treasury bills, treasury notes, treasury bonds, properties, and more. 

All these factors make the US dollar a freely convertible currency globally, enabling corporations, governments, and individuals to use it as a medium of exchange for various economic activities. More importantly, on June 8, 1974, the US and the Kingdom of Saudi Arabia struck a petrodollar deal, enabling the United States to purchase Saudi oil in exchange for military aid and equipment Saudis, in return, agreed to invest in US treasuries, providing a steady flow of capital to the US and helping stabilize the dollar. The US oversees a host of global financial institutions and infrastructures, such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and interbank payment messaging platforms. The dominance over international financial systems allows the US to exert its predominance in financial and trade-related matters. However, in spite of enjoying unquestionable dominance, the US dollar has seen a relative, steady decline over the years. For instance, the share of the US dollar in global reserves has fallen from 70% in 2000 to 59% in 2024. Populist backlash, disputes over international trade and finance, and geopolitical fragmentation are but some reasons behind this once-in-a-century transformation. Of all the reasons, the rise of the Global South is the most potent factor that can eventually lead to the downfall of the mighty dollar. The growing importance of BRICS as a counterweight to G7 is one such area that has attracted the attention of US policymakers, including President-elect Donald Trump. In the following paragraphs, we are going to see how Trump’s stance over BRICS can lead to far-reaching consequences for the world economy and accelerate the downfall of the greenback.

First, we see the potential of BRICS to come up with an alternative common currency.

BRICS, a group of nine developing countries including Brazil, Russia, India, China, South Africa, Egypt, Iran, the UAE, and Ethiopia, was founded in 2009 with an almost exclusive aim to counterbalance the West’s overwhelming hold on global governance and finance. Out of many proposed ideas that BRICS member countries have been pondering since 2009 is the development of a common currency to reduce reliance on the US dollar. The debate gained serious momentum after the Russia-Ukraine war when the West attempted to weaponize the US dollar to punish Kremlin for its so-called transgressions, freezing half of Russian forex reserves and removing it from the SWIFT system. Similarly, the US-led restrictions on exports of semiconductor technology to China and crippling sanctions on Iran also led to an increased desire among BRICS member countries to seek alternative currency for trade, investment, reserves, and borrowing. At various BRICS forums, several suggestions were floated to materialize this idea, such as using a basket of currencies from BRICS, using gold as a peg for a new BRICS currency, or even using cryptocurrencies to offset the economic and political advantages the US enjoys due to the primacy of the dollar. In 2023, at the BRICS Summit in Johannesburg, South Africa, Brazilian President Luiz Inacio Lula da Silva suggested creating a new currency. Later on, in October 2024, Russian President Vladimir Putin called for an alternative international payment system, alleging that the greenback was being weaponized for furthering political objectives by the West. In short, calls for a global shift from the greenback are a major theme of BRICS, but member countries have so far avoided putting this idea into action. But can BRICS dethrone the king dollar, or is Trump blowing things out of proportion?

The answer deserves our attention.

Theoretically speaking, BRICS Plus can pose a serious challenge to the hegemony of the greenback. Economically, geographically, and demographically, BRICS Plus carries significant weight.
Accounting for 46% of the world’s population and 35.6% of global GDP on Purchasing Power Parity, the bloc can certainly come up with a new currency to counterbalance the US dollar. However, given the geopolitical and geoeconomic differences among BRICS member countries, developing a new BRICS currency appears politically fraught and technically challenging in many ways.

First, if any group of countries is looking for a new form of common currency, it would need to establish a set of institutions responsible for designing and implementing common standards and underpinning values. BRICS Plus doesn't have any such institutions currently.

Secondly, the development of a new currency warrants the creation of a banking union, a fiscal union, and then a central and common market. All these prerequisites are missing in the case of BRICS Plus.

Thirdly, political differences among the five major economies, in particular between China and India, would be the biggest hurdle in materializing any such bold initiative. Even if BRICS Plus countries were able to come up with a common currency, it would be dominated by the biggest and most stable economy in the group, i.e., China. All smaller countries would have to link their monetary policy with China, which would lead to another problem of the dominance of a single national currency.

Moreover, investors and trading partners need confidence in the economic strength and integrity of the issuer of currency. Though China can meet this criterion, investors lack confidence in the internal dispute mechanisms and rule of law within the country, placing more hurdles in the way of creating a new and common currency.

Having said that, developing a new currency acceptable for a group of countries is, if not impossible, a technically complex journey. Take the example of the euro, which is used in 20 countries. However, EU member states took more than 50 years to implement this idea. BRICS Plus countries can adopt this path, but it would require an internal cohesion and unanimous stance, which is rare to be found within this loosely-organized informal grouping.

So, if developing a BRICS currency in the short and medium terms is not plausible, why is Donald Trump taking pains to preempt this move?
Let's explore the answer to this question.
First, US policymakers are more concerned with the growing use of local currencies in the Global South for settling trade transactions than with the development of new currencies. For instance, Al Jazeera noted back is working hard to come up with alternative payment mechanisms to rival SWIFT and CHIPS that will help countries such as Iran, Russia, and North Korea bypass sanctions and continue carrying out international trade.

The primacy of the US dollar gives the United States many advantages: it reduces the cost of borrowing for both the US government and consumers; the cost of imports is also reduced, and the global reserve status of the US dollar means that the US government will never have to experience a currency crisis.

More importantly, Trump's statement allows the West to undertake punitive measures such as economic sanctions worldwide, providing exorbitant privilege to Uncle Sam.

These are some reasons that explain why Trump is threatening BRICS Plus members. But does his statement have any impact on the development of alternative currency? The answer is yes, but it could lead to unintended consequences for the United States in many ways.

One such unintended consequence is that it would lead to a greater use of bilateral currencies for trade, if not a rival common currency. In response to Trump's statement, the Kremlin stated that if the US resorted to economic force to compel countries, it would backfire.
Experts also share the same stance, noting that such statements elevate non-threats and reflect the lack of confidence in the dollar. Trying to coerce countries to use the dollar is itself a long-term threat to its hegemony. Furthermore, imposing a 100% tariff on imports would also translate into higher import prices, forcing US consumers to buy more expensive goods, and it will fuel inflation in the United States, which could deal a serious blow to its economy, starkly opposite to what Trump has promised to deliver during his election campaign.

In conclusion, developing an alternative currency rivaling the US dollar in international finance and trade would be an uphill task, requiring extensive diplomatic and political investment within the bloc, which, at this stage, seems hard to reach. Furthermore, member countries, particularly India, have made it clear that they are not interested in de-dollarization, dealing a further blow to any prospect of a BRICS currency. Therefore, Donald Trump is just turning a molehill into a mountain, as there is no serious threat to the dollar's hegemony. Nonetheless, the Global South needs to find ways to reduce the overarching presence of the greenback; they should start by exploring the option of conducting trade in local currencies so that the developing world can be shielded from the political abuse of the dollar. The international financial and trade institutions should also reflect the ground realities, particularly the rise of the Global South, allowing emerging economies to share their grievances and presenting effective conflict-resolution mechanisms to avoid fragmentation of the global economy on the pattern of the Cold War.