Argentina and Brazil recently announced preliminary plans to form a common currency known as the ‘sur’, meaning south, to be used in bilateral trade-related transactions in Latin America.
For the time being, it would not replace each sovereign nation’s currency, but would be used alongside their domestic money in an effort to reduce dependence on the US dollar. Forming a currency union à la the Eurozone in Latin America is not feasible for now but, in my view, this is not the real story.
Efforts to reduce dependence on the US dollar through dedollarization is not associated with deglobalization by coincidence. Rather, it is a central feature of this fragmenting phenomenon.
The end of a US Dollar-Led World
We are leaving behind a US-led, unipolar world with the US dollar at the centre and entering into a multipolar, deglobalized world where the dollar may not hold as much influence. While this process will be gradual, it carries profound economic, financial and geopolitical implications.
Following World War II, the economic/financial system that was born thereafter put the US dollar at the centre of everything. Even after the dollar-to-gold conversation framework in the Bretton Woods System collapsed, the US dollar’s centre of gravity continued to have the global economy orbit it.
In large part, this is still true. According to the Bank of International Settlements, trading in foreign exchange markets in April 2022 reached $7.5 trillion per day, almost 90% of which involved the greenback.
Furthermore, most global debt, central bank reserves and international reserve assets – such as the International Monetary Fund’s (IMF) special drawing rights – primarily use the US dollar.
However, the tectonic plates of finance are now shifting as geopolitical rumblings give way to a new, economic/financial landscape. According to the IMF, the share of US dollar reserves held by central banks fell to 59%, the lowest level in 25 years, during the fourth quarter of 2020.
The intellectual consensus – along with data – suggests the catalyst of the US dollar exodus was the 2008 financial crash and subsequent Great Recession.
The origin of the crisis rippling out of the US – specifically, the alchemic eruption of mortgage-backed securities and credit default swaps – undermined confidence in US leadership; thereby inspiring a reassessment of the risks of participating in a dollar-centric global economy.
Demand for dollars by central banks, according to IMF data. Efforts to reduce dependence on the US dollar through dedollarization is not associated with deglobalization by coincidence. Image: IMF
The ripple effects of the economic meltdown also created fertile soil for nationalist and populist movements across the world to blossom, further tearing the seams of globalization.
The erosion of trust and alliances weakened the US’s global position while simultaneously strengthening its rivals’ ideological and economic positions as an alternative to the American-led system.
The share of other currencies, such as China’s renminbi, have risen alongside the country’s economic expansion and increased role in the global economy. China’s financial heft has supported its ability to influence global politics, thereby posing a threat to US hegemony.
China and US Tensions on the Rise
It is therefore not surprising that tension between Beijing and Washington is rising as both countries attempt to realize their respective visions of an international order. Consequently, China, along with a host of developing nations are leading multilateral efforts to dedollarize their respective economies and strengthen inter-organizational cooperation.
One such example is the alliance of Brazil, Russia, India, China and South Africa, aka BRICS. It is not an accident that relations between all these countries – whether out of convenience or necessity – have warmed, while their relationships with the US have cooled. Or at the very least, not warmed up to a temperature ideal for US foreign policy.
According to a study conducted at Harvard, the BRICS countries collectively represent almost a quarter of global GDP and 16% of world trade. The organization’s dedollarizing activities would therefore not only impact inter-BRICS financial relations but also create a ripple effect globally.
Specifically, it would weaken US foreign policy by limiting the impact that US sanctions would have in a dollar-centric global paradigm. This will likely, in turn, alter the geopolitical landscape to a multipolar world where security alliances and supply chains will shift with great magnitude.
Bilateral relations within BRICS are also strengthening. As recently as 2019, China upgraded its ties with Russia to a “comprehensive strategic partnership of coordination for a new era”, the highest level of China’s bilateral relations.
President Xi Jinping also recently met Saudi Arabia’s Crown Prince Mohammed bin Salman and discussed strengthening their partnership. The key takeaway from this meeting was talks about the Kingdom pricing some of its oil sales in the Chinese yuan, rather than the US dollar which most commodities – especially oil – are priced in.
Scaling up these kinds of dedollarizing efforts go hand-in-hand with also reorganizing the globalized economy – and the US’s place in it. As previously noted, this carries significant security implications.
Domestic Security Part of Deglobalization
It is therefore not surprising that part of the deglobalizing phenomenon is the prioritization of domestic security over global economic efficiency/integration.
The US CHIPS and Science Act, while a domestic victory, does signal a more protectionist modus operandi as tension with China rises, particularly around areas of sensitive, strategic technology.
Beijing’s sentiment is no different. During the 2022 Chinese Communist Party Congress, in the full text of Xi Jinping’s speech, the terms “security” or “safety” appeared 89 times – up from 55 times in 2017, according to Reuters.
Source : World Economic Forum
