Explained: What is de-dollarisation and why Trump warned Brics nations?

Donald Trump has threatened to impose 100 per cent tariffs on Brics nations if they push for de-dollarisation and introduce a currency that could challenge the US dollar

In recent years, the global financial landscape has been evolving, with the US dollar’s dominant role increasingly under scrutiny. Central to this shift is the process of de-dollarisation—a move by the Brics group (Brazil, Russia, India, China, and South Africa) and member countries, to explore alternatives. This push has drawn warnings from US President-elect Donald Trump, who threatened heavy tariffs against countries challenging the dollar’s primacy, framing the issue as a potential economic battle with far-reaching consequences.

How US dollar dominates world trade

After World War II, the Bretton Woods Agreement (1944) established the US dollar as the cornerstone of the global financial system. This system pegged the dollar to gold and other currencies to the dollar, ensuring stability and making the dollar central to international trade. Although the gold standard ended in 1971, the dollar retained its global dominance due to its entrenched role in the financial system and reliability.

 

 

The US dollar is the world’s primary reserve currency, held by central banks globally for its stability and liquidity. Over 58 per cent of global foreign exchange reserves are in dollars. In the 1970s, the US negotiated agreements with oil-exporting countries, notably Saudi Arabia, to price and trade oil exclusively in US dollars. This "petrodollar" system created consistent global demand for dollars, as nations needed them to purchase oil.

 

The US dollar dominates the global financial infrastructure, with key systems like the SWIFT network facilitating cross-border payments primarily in dollars. Institutions like the International Monetary Fund (IMF) and World Bank conduct most operations in dollars, and US Treasury bonds are widely considered the safest and most liquid investment.

 

What is de-dollarisation?

De-dollarisation refers to the process by which countries reduce their reliance on the US dollar as a medium of exchange, reserve currency, or standard for international trade. It involves shifting away from the dollar in favour of other currencies or alternative systems, such as national and regional currencies, or even digital currencies like cryptocurrencies.

 

Key aspects of de-dollarisation:

Reduced Dollar Usage in Trade: Countries engage in bilateral or multilateral trade agreements to settle transactions in their currencies instead of the US dollar.

 

Diversification of Reserves: Central banks and financial institutions diversify their foreign exchange reserves, moving away from holding primarily US dollars to include other currencies like the euro, yuan, yen, or gold.

 

Alternative Payment Systems: Nations develop or join payment systems that bypass traditional dollar-dominated mechanisms like SWIFT. Examples include China's Cross-Border Interbank Payment System (CIPS) or regional mechanisms like Brics countries' initiatives.

 

Economic Sovereignty: De-dollarisation aims to reduce dependence on the US financial system, shielding economies from potential sanctions, economic coercion, or dollar volatility.

 

Brics nations’ push for de-dollarisation

At the recent Brics summit in Russia's Kazan, a symbolic banknote displaying the flags Brics nations was also introduced, sparking conversations about the future of global finance. However, Russian President Vladimir Putin clarified that the bloc is not currently considering a unified Brics currency or developing an alternative to the SWIFT payment system.

 

The Brics nations have been exploring strategies to reduce reliance on the US dollar, including the potential creation of a shared currency to facilitate trade within the bloc. Supporters of the idea argue that such a currency could shield their economies from the instability caused by US sanctions and monetary policies.

Trump's warning to Brics an economic war against developing nations?

Donald Trump has issued a strong warning to the Brics member countries and their allies, threatening to impose 100 per cent tariffs if they introduce or support a currency that could challenge the US dollar.

 

“We demand a commitment from these countries that they will neither create a new Brics currency nor support any alternative currency to replace the mighty US Dollar, or they will face 100 per cent tariffs,” he said in a post on Truth Social.

 

Trump further cautioned that any attempt to challenge the dollar's dominance would lead to the nations losing access to the US market.

 

Reports suggest that the financial platforms of the Brics group, including the New Development Bank and the Contingent Reserve Arrangement, are currently prioritising sustainable development and financial stability over the introduction of a unified currency.

 

In this debate, economist Sharad Kohli views US President-elect Donald Trump's warning to Brics nations as an act of economic warfare against developing countries.

 

"In other words, this will almost put an embargo on imports being done from these countries. If we look at it from the other side, the Brics countries will find it impossible to export their products to the US because 100 per cent tariffs would make exports unviable for the Americans to buy," Kohli told news agency ANI.

 

Kohli further explained that the global reliance on the dollar is a power that America holds. "With this threat coming in, Brics countries may have to rethink. And I think this is also a declaration of an economic war on the developing countries by America. This is completely unfair because this is checking the economic independence of the countries in their respective countries. This is literally an economic war," he asserted.