Possible BRICS Currency looks to Take on US Dollar
What a Weak Dollar Means for Trade
While the U.S. is no longer relying on the gold standard, the U.S. dollar (USD) is still very much the gold standard in international trade. The dollar is used in 75% of all international trade and nearly 100% of all oil trades. However, the emerging strength of BRICS (Brazil, Russia, India, China and South Africa) has been a looming economic specter since their alignment in 2006. These five nations are home to 41% of the world population and just south of 24% of the global GDP. For comparison, the U.S. represents 4% of the global population and just north of 15% of the global GDP.
While the BRICS are culturally and geographically disparate, their economic interests are linked as rising global powers. Earlier this spring, Russia, currently engaged in a flailing invasion of Ukraine, indicated they are spearheading a charge to create a BRICS currency that would rival the dominance of the dollar. A new currency could certainly be appealing to countries eager to wean themselves off of reliance on the U.S., but South Africa, for one, cautions careful debate before any decisions are made.
What is the impact a BRICS currency would have on the US Dollar and what would that mean for international trade?
Exports Could Rise with a Weak Dollar
Since 1946, the U.S. has held a privileged spot as the undisputed leader of global capitalism. American industry, established during World War II to produce airplanes, weapons and other items for the war effort, was perfectly positioned to mass produce everything needed for a peacetime economy to build homes and then fill those homes with state of the art appliances. The stability of the dollar coupled with the output of American factories kept the economy humming and exports from the U.S. zipping around the globe.
Starting in the 1970s, China began encroaching on that territory. Their exports grew at unprecedented rates and, as of 2021, China is exporting $3.34 trillion worth of goods annually. The U.S. is the second largest exporter with a yearly total of $1.63 trillion worth of goods.
All of that being said, a weak dollar can actually benefit exporters. It’s simple math, a weaker dollar makes U.S. goods and services less expensive and, therefore more appealing, to foreign purchases. The strong dollar, combined with the cheap labor found in China’s large population, has had an adverse effect on American exports over the last several decades.
Imports Harmed by Potential BRICS Currency
On the other side, a dollar weakened by this new potential BRICS currency could damage the imports market for people in the U.S. Since USD is the common currency used in global markets, a weak dollar is not necessarily indicative of an economic downtown. However, importers feel the brunt of these economic forces more acutely with a weak dollar.
The introduction of a BRICS currency would raise the cost of imports from China, the U.S.’s largest trading partner. In turn, there would be certain products that become more feasible to produce domestically. The global economy is a perpetual balancing act.
How the Debt Ceiling Can Impact the Dollar
As of this writing, the biggest factor concerning the strength of the dollar is coming from within the U.S. government. Secretary of the Treasury Janet Yellen has made it clear that there will be the first ever U.S. default on June 1, 2023 if the debt ceiling is not raised. President Joe Biden and Speaker Kevin McCarthy feel positive that a bi-partisan agreement will be reached before the deadline.
Even if the default is avoided in June, it is likely the U.S. will face the same fiscal cliff this time next year. The conservative majority in the House of Representatives has made it clear they will not push the new debt ceiling deadline beyond the 2024 election, unless Biden agrees to significant cuts to his signature legislation.
A U.S. default could spur BRICS to fast track their plans for a unified currency, depowering the dollar, potentially forever.
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