Dollar diplomacy threatened, Trump challenged to take measures
By Anjan Roy
Much to the chagrin of US president, Donald Trump, China and Russia are expelling the use of US dollars in their trade. The Russian prime minister, Mikhail Mishustin, dramatically observed that the share of dollar denominated trade between the two countries has already reached levels of some “statistical error”.
The Russian prime minister is leading a high-level delegation to China for forging stronger economic links between Russia and China. According to the visiting Russian leader, the relations are multifarious and include trade, scientific research and joint development projects to defence development. Above all, the Russian prime minister emphasised promoting people to people contact between the two countries. These two people should be able to visit visa free between their countries.
But what concerns the US president most for the time being is their challenge to banish use of the all-powerful US dollar in their trade for settlement. Earlier, Trump had threatened to slap additional tariffs on countries which were trying to move away from the use of dollar in their international dealings.
He had specifically warned the BRICS countries which had mooted the idea of non-dollar trade. Trump clearly saw the attempt to eliminate dollar from the international economic exchange of a bloc of countries as a threat to the predominance of the US and its currency.
BRICS had formally proposed to move away from dollar denominated trade. In response, Trump threatened measure against them. This had created a flutter among the ranks of already expanding membership base of the BRICS (that is, Brazil, Russia, India, China and South Africa).
Although BRCS was to begin with a loose club of five nations, who were identified as the future economic giants of the world win a study by Goldman Sachs, as American investment bank. Later it was joined by a host of other emerging nations. Their expanding numbers were acting as a pressure group in international economic affairs. Trump had already put several trade tariffs on China and the fresh threat had created a scare.
However, now that the second largest economy had already openly offered to conclude deals with Russia in roubles and renminbi (Chinese currency), it is to be seen how Trump reacts to this open revolt. As always, Trump might silently forget about his threat and settle down to seeing a larger share of trade transacted on other currencies.
However, the move of the two countries would surely create an environment for the rest of the world to get more familiar with non-dollar trade. The Russian prime minister met China’s PM for state council, Li Qiang, at the picturesque city of Hangzou.
Paying glowing tributes to China, the Russian prime miner quoted Chinese proverb about the beauty of the host city much to the glee of the Chinese participants. It was clear that Russia was playing the second fiddle in the interactions as the junior members parent from the tone of the visiting Russian prime minister.
The move towards eliminating the US dollar had been gaining strength between the two countries for at least since they announced their limitless friendship on the eve of Russia’s invasion of Ukraine. Presumably kicked off by the threat of European Union to confiscate the overseas dollar holdings of Russia after the latter’s invasion of Ukraine, the two countries had been seeking to promote the idea of an alternative at a multilateral level.
At the Shanghai Co-operation Organisation —SCO— meeting earlier this year, held under the aegis of China, the two countries had proposed some concrete steps to push ahead with de-dollarisation of trade among its members and thereafter among the BRICS nations. However, in the face of additional tariff threats from Trump, most other countries had backed out of the de-dollarisation moves.
India had also developed cold feet over this proposal as move away from dollar would push the Chinese currency —renminbi— into the role of global reserve currency. This would eventually be at the cost of the Indian rupee which will lose far more in international trading. An increasing ole of a national currency as a global reserve currency can offer unique advantages, apart from the prestige it confers.
China had been pushing its currency for a long time now. It had made a strong pitch for including the Chinese currency in the basket for own basket of currencies in which it lends. However, because of the market manipulations of exchange rate by the Chinese central bank.
Additionally, for gaining the status of a global reserve currency, a currency must have free capital account convertibility. However, Chinese monetary authorities clamp control measures without much of a concern for international users. Hence, the Chinese currency is not reliable enough to act as a reserve currency.
From the point of view of financial history, a nation’s currency predominance has shown close link to its overall weight in international affairs. Current projects a country’s economic heft. It is here also that the well-known concept of Thucydides Trap applies. A rising country’s currency tends to push out that of the existing predominant country.
Thus, for example, while prior to the First World War, the pound sterling was globally recognised international reserve currency, following the Second War, it was the US dollar which emerged as the global legal tender. Today, global transactions are almost universally dollar-denominated. A rising power, China, is now threatening to dethrone dollar from its pride of place.
Some academic enthusiasts had written about it even a decade back. Arvind Subramaniam of Peterson Institute for International Economics, had made a super-abundantly confident treatise on the demise of the US dollar and emergence of the new order around the Chinese currency renminbi.
Even after ten years, that predicted eclipse is yet to happen. But this does not look likely in the near future. (IPA Service)
