The Global Economy’s lifeblood is in US Dollars, as this currency carries the global trade, despite losing a part of its powers recently. The widespread usage of the US currency brought two immense powers to the USA: First, the possibility of controlling internal inflation by using the considerable global demand for US Dollars for trade. Second, the possibility of applying devastating economic sanctions on targeted countries. A long time ago, Woodrow Wilson stated the case for economic sanctions. He pointed rightly, when defending measures for countries against the League of Nations, that “No, not war but something more tremendous than war. Apply this economic, peaceful, silent, deadly remedy and there will be no need for force. The boycott is what is substituted for war. A nation that is boycotted is a nation that is in sight of surrender” (Woodrow Wilson, in a 1919 speech).
The devastating effect of broad sanctions (instead of targeted “smart sanctions from Interlaken-Bonn-Berlin) was felt, for instance, during the conflict in Iraq. When asked about the deaths of over 500.000 Iraqi children as a result of the sanctions, and if such a high price was acceptable in order to topple Hussein, former US Secretary of State Albright said, infamously, “the price is worth it” (CBS News 12 May 1996). There are examples all over the world of the power from Economic Sanctions, either unilateral or multilateral (Cuba, Venezuela, North Korea) However, as Elon Musk recently tweeted on April 25th “If you weaponize currency enough times, other countries will stop using it.”
That might be the main reason why the trend of de-dollarisation is taking steam. After Russia invaded Ukraine, Western nations decided to adopt wide and strong sanctions against Moscow. However, many countries that did not apply sanctions seem to have realized the power of global dollar dependency and have started to look into alternatives for global trade. Mercosur Countries are discussing the creation of a “international trade currency” that would apply for intra bloc trade. Brazil also discussed with China the possibility of adopting Brazilian Real and Chinese Yuan as the currencies for bilateral commercial transactions, as the Brazilian Treasury Minister stated while visiting China on April 2023, “in order to escape the straitjacket of having international trade set on a third country’s currency”. A possible BRICS common currency (at least for intra-bloc trade) has been discussed also as an alternative to a dollar dependent international trade. Eurizon data from 2023 shows a rise in the use of Euro (25% up Q4-2022) and a decrease in the usage of US Dollar (47% down Q4-2022), while Turkey, Russia, China (currently buying Russian oil with Chinese Yuan), Brazil and India (currently buying Russian oil with UAE Dirhams and Russian Rubles) are clearly looking for alternative currencies for their international trade.
Another final point that needs to be made. The USD strength is the power of the US Economy, including the US Treasury Bonds, considered a safe investment opportunity. This is interconnected with the dollar power. If the dollar performs well, US Treasury bonds perform better, if US T-Bonds fall, the dollar becomes a riskier investment. Recently the US has reached its debt ceiling and the political clash in Washington DC over the possibility of another raise to the borrowing limits and the potential economic apocalypse of a US Default have revealed the risks of a global trade focused exclusively on USD. What the future may bring us? There are two possible paths for alternative currencies in global trade. On one side, there are currencies considered stable, safe, such as the Euro, Swiss Franc, British Pound and Japanese Yen. At the same time, there is the possibility of emerging market currencies and new currencies being created inside BRICS and others becoming international trade currencies. In any of these scenarios, what is clear is that the impact will go beyond economic consequences and will reach all aspects of International Relations.
Author: Cássio Eduardo Zen is a Professor of International Law, Legal History and Human Rights in Faculdade de Pinhais, Pinhais (Brazil).