After the fall of the Silicon Valley Bank, another crisis could bring down the American economy (and not only that)

Emerging Economies: China and Brazil have signed a new trade agreement allowing the two countries to trade in their currencies, abandoning the US dollar as the intermediary for bilateral trade. The Brazilian government announced the agreement would enable the nations directly conduct massive trade and financial transactions, exchanging the Chinese Yuan for Brazilian Real and vice versa. This move is the latest in a series of actions by China against the US dollar as the country seeks to establish itself as the main rival to US economic hegemony.

For Brazil, the agreement represents a significant departure from its traditional dependence on the dollar as its main currency. The agreement should reduce costs and promote even greater bilateral trade, according to Brazil’s trade and investment promotion agency, ApexBrasil. The country’s main trading partner is China, with a record bilateral trade volume of $150.5 billion last year. China itself already has similar currency agreements with Russia, Pakistan and many other countries. The move away from the US dollar as an intermediary in international trade could have significant implications for the global economy. It could lead, for example, other countries to follow suit and conduct trade and financial transactions in their own currencies, potentially undermining the dollar’s position as the world’s leading currency.

The BRICS move

And, in a way, this is already happening. As the Coin Telegraph website reports, the countries part of the BRICS alliance are reportedly working on the creation of a new currency. BRICS stands for five major emerging economies: Brazil, Russia, India, China and South Africa. According to reports in the Russian press, therefore, all to be taken with the necessary precautions of truth, the deputy chairman of the State Duma, Alexander Babakov, is said to have announced the news at the St. Petersburg International Economic Forum event in New Delhi, India. Babakov stressed the importance of these nations working towards a new means of payment, adding that digital payments could be the most promising and profitable. He also said the currency could benefit China and other BRICS members and disadvantage the West.

This week, Jim O’Neill, former chief economist at Goldman Sachs, urged the BRICS bloc to expand and challenge the dollar’s dominance. In an article published in Global Policy magazine, he argued that ‘the US dollar plays too dominant a role in global finance’. A BRICS currency is not a novel topic. In 2019, Cointelegraph reported how bloc members were discussing the creation of a new digital currency for a unified payments system. China is pushing ahead with its central bank-issued digital currency project in this scenario.

Yes, because India is also taking many steps against the dollar. And that is not the end of the story. New Delhi has been careful not to align itself between the sides established by the war in Ukraine. It already has an agreement with Moscow to trade in roubles and rupees. A few days ago, it announced an initiative to offer its currency for trade to countries that are short of dollars and fear the fallout from the Fed’s monetary tightening. An option that could be attractive to countries such as Sri Lanka, Bangladesh and Egypt at the moment. India’s central bank also recently gave the green light to an agreement to settle trade with Tanzania in their respective currencies.

Changing balances

In short, on a global level, things could change soon, with the dollar losing much of its power and the entire Western economy connected to it. Suffice it to say that, even today, 66% of global trade is handled with this currency, and 60% of the foreign exchange reserves of the world’s central banks remain in dollars, compared to 20% for the euro and 6% for the Japanese yen. The US currency also dominates in private and financial markets. Developing countries and local companies often choose to issue their bonds in dollars to make them more attractive in the market. This is also the main reason why the decisions of the Federal Reserve, and the US central bank, have immediate repercussions not only on the US but on countries halfway around the world.

From a global perspective, also looking at the market for semiconductors and technology supply, a recovery of the yen, to the detriment of the dollar, would reshape a world picture very different from the current one. Where the US currency still holds sway, in exchanges between suppliers and supply chains, we would find ourselves in a world where, at the very least, the economic power of the US and China would be on par. At that point, not only would there be a major revolution in sectoral but global markets, such as the electronics supply but also the assembly and sale of hi-tech products, but also a change of gear for domestic companies that do not base their strength on the dollar but on different currencies, such as the yen.

Think of China’s Huawei, perhaps the number one enemy of the United States, technology-wise, but also other brands marginalized by Trump and Biden, such as ZTE and Co. If the dollar falls, at least 3/4 of the world’s current economic system would collapse. Not a joke but a big problem. A bit like waking up tomorrow morning and no longer having Google on your computer or smartphone, but only Baidu.