Dollar Alternatives Are Becoming Technically and Politically Feasible

Dr Ivanovitch - MSI Global
Dr. Michael Ivanovitch

The increasing fragmentation of global trade and finance -- along the lines of interventionist liberal democracies and the rest of the world -- is impairing the role of the dollar as a unit of account, means of payment and a store of value.

At the core of this rapidly unfolding process of economic realignments is the West’s struggle to preserve and strengthen its existing world order against challenges presented by Russia and China. The fiercely adversarial instrument the West uses in this confrontation is an open ended “systemic and strategic competition.”

The dollar, and a widely dollarized world economy, serve as a key vector for exclusion, suppression and containment of countries whose behavior and socio-political systems are deemed incompatible with the “rules-based” international order.

Those are uncompromising divisions affecting global flows of commerce and finance.

Russia, it seems, has been irrevocably cast out from the dollar world, but with last year’s record-breaking foreign trade of $6.1 trillion China is still deeply involved in dollar-denominated transactions.

China finally sees the writing on the wall

China, therefore, has some very difficult decisions to make. For the time being, Beijing keeps advocating a multilateral trading system and its controversial mantra of a “win-win cooperation,” while bristling about the “destructive systemic and strategic competition.”

Predictably, China finds it difficult to part with $1.4 trillion of its U.S. and E.U. trades – nearly one-fourth of its total foreign trade – but Beijing also knows, and fully understands, that Washington and Brussels have other ideas.

With that in mind, Beijing is now vigorously supporting the project of BRICS Plus, or a new G8 group of developing nations.

BRICS members are Brazil, Russia, India, China and South Africa. The three new countries for a fast-track membership will be picked from a list of candidates consisting of Egypt, Indonesia, Iran, Turkyie (Turkey’s new official name), Argentina and Mexico.

The BRICS expansion has been discussed in great detail by the group’s foreign ministers meeting on May 19, 2022. Consultations on that issue were also held among senior officials last Wednesday (June 15) during the St. Petersburg International Economic Forum.

All that was a preparation of the BRICS’s summit under China’s presidency on June 22, 2022, where the heads of state and government are expected to set the principles and conditions of an expanding membership, with a short list of first member country candidates.

The question is: How important is this BRICS Plus initiative, and would that new trading group have a possibility of setting up its own currency area?

BRICS is home to 3.2 billion people, accounting for 41% of world population. The group’s GDP came in last year at $26 trillion, or 27% of the global demand and output, with foreign exchange reserves estimated at $5.3 trillion.

The BRICS trade and currency area

There is plenty there to qualify BRICS as the world’s largest trade and currency bloc.

One of the first and most essential steps BRICS needs to make in that direction is a decision to “internalize” more of its $8.2 trillion in total foreign trade transactions. On last year’s data, that was 29% of world trade.

To start with, such an arrangement could take the form of a voluntary “trade diversion” of goods and services toward the BRICS partners – a long-standing trade practice followed by the E.U. in the form of “préférence communautaire.” That could be an interim step on the way to more structured trade and financial relations.

Internalizing the BRICS business of commerce and finance would lead to coordinated economic policies, closer, and firmer, intra-area currency linkages, with more unified banking and payments clearing systems. In time, such an administrative infrastructure could allow the creation of a customs union and reference currency units.

A powerful BRICS platform of developing nations could offer the possibility to negotiate a new system of global trade and finance with the U.S. and the E.U. – if a political decision is made to replace the “systemic and strategic competition” with a more open and cooperative modus vivendi.

Sadly, it does not look like the world is moving in that direction.

The trans-Atlantic community, with Japan as an associate member, will declare, during the summit of its military and political alliance (NATO) in Madrid on June 29-30, 2022, that Russia is “a threat to our security, peace and stability,” and “China is a challenge to our interests, our values ​​and our security.”

That reaffirms a collision course for a deeply divided world community.

And that also provides a strong incentive for the BRICS summit next week to rapidly expand its membership with more integrated flows of trade and finance.