DE-DOLLARIZATION OF INTERNATIONAL TRADE; IS A NEW BRICS CURRENCY THE NEW SOLUTION?

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This article examines the need for a new BRICS currency and whether it will lead to significant de-dollarization of international trade. The BRICS bloc is an intergovernmental organization consisting of Brazil, Russia, India, China, and South Africa. Formed in 2006, the group was formed to bring together the world's most important developing countries, to challenge the political and economic power of the wealthier nations of North America and Western Europe. One of its main goals is to develop a new currency to coincide with the local currencies for cross-border trade. This is towards an effort to ditch the US Dollar in international trade. In the most recent BRICS convention, the organization laid out some options under consideration for the currency, including using gold as a peg for a new potential currency or using a basket of local currencies or cryptocurrency.

The U.S. Dollar dominated international trade. It is estimated that more than 80 percent of international trade is transacted using the dollar. Most of the global commodities of trade are priced and settled in dollars. The frequent use of the dollar in trade reinforces its use in finance. Many economies use the dollar as a reserve currency, due to its ease of liquidation. However, there have been concerns about the dollar's domination by many countries.

Concerns have risen about the weaponization of the dollar, that is the U.S. using its currency cutting off access to the dollar to malign actors and punishing those who act contrary to U.S. national security interests. Recently, the U.S and European economic sanctions on Russia, due to the Russian-Ukrainian war, froze half of the Russian central bank’s gold and foreign exchange reserves and cut off Russian banks from the world’s dominant financial messaging system, the Society for Worldwide Interbank Financial Telecommunications (SWIFT).

Due to the dominance of the dollar, any inflation, however slight, in the U.S. economy greatly affects other economies. This makes other economies vulnerable to the dollar. Further, it makes little sense for countries, apart from the U.S., to do bilateral trade to be using the dollar for their trade. Thus, some countries now trade bilaterally through their local currencies for example, Russia and China trade using the Chinese Yuan.

A BRICS currency will fill the gaps experienced by the use of the local currencies in trade. Russia switched to the Chinese Yuan as a reserve currency since the outbreak of the Russian-Ukrainian war, however, the Yuan is not easily be convertible as the Dollar. The Yuan as a reserve currency is not optimal because permission has to be sought from the Chinese government for any cash-outs. It is a controlled currency which the BRICS currency may solve, in terms of reserve currency.

Some economists argue that the economic chasms between the countries of the BRICS organisation is a major hinderance from the achievement of this goal. China, which has the strongest economy in this organisation, cannot compare with the South Africa’s economy, which is the weakest. Other scholars argue that South Africa’s currency is not strong enough to be enjoined in the currency unless it is a proxy of Africa. There is also a huge disparity between the development in these countries.

The technicalities of having a unified currency may due to the diversities of the fiscal policies, macroeconomic environment and trade imbalance is another challenge for the BRICS currency. Where would the central bank be located? Which fiscal union and banking union will be in use? Even as the organisation comes up with these policies, there may be instances where the stronger economies will have an upper hand. Arguably, there may be power imbalances with Russia and China dominating the other countries when it comes to decision making.

The geopolitics between these countries may be detrimental to the creation of the BRICS currency. For example, the skirmishes between the Chinese and Indian border at the Himalayas that have remained unsolved for a long time. The disparity in how the government is run in these countries cannot be ignored that is the socialist policies in Russia and China and the democratic ideals followed in South Africa and India. What principles will be followed in the unification of these economies?

Hypothetically, in a future where the BRICS currency has become widely adopted, it could lead to revisions of existing international trade laws and potentially new legal frameworks to govern trade conducted in the BRICS currency. Many international trade disputes settled through arbitration tribunals have established procedures for handling dollar-based transactions. The introduction of a BRICS currency could necessitate adaptations to these procedures, potentially requiring new expertise in handling disputes involving the new currency. The legal implications of the BRICS currency would lead to a new age in the legal landscape for international trade. 

While the BRICS currency has the potential for the de-dollarization of international trade, it will be a difficult fete to achieve, although not impossible. The expansion of the BRICS bloc has enabled more countries to come together and create an economy that is greater than the U.S. economy, therefore great effort has to be put into the creation of this currency. In my opinion, the BRICS currency should aim at giving the world more choices and not replacing the dollar in international trade.

By Lucy Cheruto.