BRICS currency: Is Trump's tariff threat justified?

Why does BRICS want to challenge the US dollar?

The BRICS nations — named after original members Brazil, Russia, India, China and South Africa — are among the fast-growing economies in the 21st century. They are keen to reduce their dependence on the US dollar, the world's reserve currency, used for nearly 80% of global trade.

Most economists agree that the dollar-dominated financial system gives the United States major economic advantages, including lower borrowing costs, the ability to sustain larger fiscal deficits and exchange-rate stability, among others. 

The dollar is the main currency used to price commodities like oil and gold, and its stability means investors often flock to the dollar during uncertain times.

Washington also benefits from enormous geopolitical influence from so-called dollarization, including the ability to impose sanctions on other nations and restrict their access to trade and capital.

BRICS nations, which expanded recently to include Iran, Egypt, Ethiopia, and the United Arab Emirates, have accused Washington of "weaponizing" the dollar, leveraging the currency so that rivals must operate within a framework defined by US interests.

Discussions about a new joint currency gained traction after the US and European Union imposed sanctions on Russia over its 2022 full-scale invasion of Ukraine, amid concerns other BRICS nations could be targeted if they fell out with the West.

How has the BRICS currency plan developed?

The creation of a BRICS currency was first mooted shortly after the 2008/9 financial crisis, when a US real estate boom and poor regulations nearly collapsed the entire global banking system.

At last year's BRICS summit in South Africa, the bloc agreed to study the possibility of creating a common currency to minimize exposure to dollar-related risks, although BRICS leaders noted it would likely take many years to come to fruition.

Russian President Vladimir Putin went further during the most recent BRICS summit in Kasan in October, proposing a blockchain-based international payments system, designed to circumvent Western sanctions.

There was little enthusiasm for Putin's plan, but BRICS leaders did agree to facilitate more trade in local currencies, cutting their reliance on the dollar.

Putin and his Brazilian counterpart Luiz Inacio Lula da Silva are the strongest proponents of the new currency. While China has not explicitly expressed a view, Beijing has supported initiatives to reduce reliance on the dollar. India, meanwhile, is a lot more cautious about the idea.

How feasible is a common currency?

A new joint currency would be a huge undertaking for BRICS nations, fraught with many complexities due to the differing political and economic systems within the nine current members. The BRICS states are at varied stages of economic development and have vastly different growth rates.

China, for example, is an authoritarian state but is responsible for about 70% of the bloc's total gross domestic product (GDP) at $17.8 trillion (€17 trillion). China runs a trade surplus and maintains a large holding of dollars to support its competitiveness as a major exporter. India, on the other hand, runs a trade deficit, is the world's largest democracy and its economy is worth $3.7 trillion.

China's dominance in BRICS would create a huge imbalance that would make it tricky for New Dehli to agree on a framework for the new currency that wouldn't overshadow its national interests. Disparities between other BRICS members are also likely to spur resistance to a shared currency.

It is also unlikely that the BRICS members want to eventually move towards a fully-traded currency like the dollar or euro. The euro took more than 40 years from 1959, when it was first mooted, till 2002 when its notes and coins became legal currency in 12 EU countries, later 20 states.

The most likely option would be the creation of a joint currency used purely for trade, valued based on a basket of currencies and/or commodities like gold or oil.

The BRICS currency could work in a similar way to the International Monetary Fund's (IMF) Special Drawing Rights (SDR). The SDR is an international financial asset, valued on the daily exchange rates of the dollar, euro, yuan, yen and pound. Some proponents have suggested a BRICS alternative could be a digital currency.

Is Trump's 100% tariff threat too premature?

Trump wrote on Truth Social Saturday that when he returns to the White House in January, he would "require a commitment" from BRICS countries that they "neither create a new BRICS Currency nor back any other Currency to replace the mighty US Dollar."

The President-elect could, however, be jumping the gun somewhat because the currency proposal has made little progress, despite the rhetoric from BRICS leaders.

Indeed on Monday (December 2), the South African government insisted there were no plans to create a BRICS currency, blaming "recent misreporting" for spreading a false narrative. Chrispin Phiri, spokesman for the country's Department of International Relations and Cooperation (DIRCO), said in a statement posted on X (formerly Twitter) that discussions have until now focused on boosting trade within the bloc using national currencies.

Trump's threat could now strain ties with the world's fastest-growing economies, which are some of the US's key trading partners. It could also spark the threat of retaliatory measures.

Added to Trump's existing threats to levy additional tariffs on America's rivals, including China, any move by his administration could further spike inflation both globally and domestically, potentially slowing economic growth.

The decision to prioritize the dollar also marks a policy shift from Trump's first term, where he favored a weakening of the currency to boost US exports. His threat caused a strengthening in the dollar on Monday, and a weakening of gold along with the yuan, rupee and rand.

Russian government spokesman Dmitry Peskov said a trend was gathering pace against the dollar as a reserve currency, saying that "more and more countries are switching to the use of national currencies in their trade and foreign economic activities."

Edited by: Uwe Hessler