Introduction to Trump’s tariff threat

In the changing landscape of global finance, while BRIC nations are puttering toward finalizing a new reserve currency, the issue of whether it can usurp the dollar from its perch is critical. Donald Trump, now back for a second run as President, is angrily warning, among other threats, the BRICS with 100% tariffs should they undertake the task of unseating the dollar.

These geopolitical and economic tensions prompt a few fundamental questions: Will BRICS partially define a new currency? What sort of insight can be drawn from Trump’s trade war threats against BRICS? Is there, in fact, in the air the potential risk to the dominance of the dollar?

BRICS Push for a New Reserve Currency

In recent years, the BRICS alliance that originally consisted of Brazil, Russia, India, China, and South Africa has grown with the inclusion of Egypt, UAE, Ethiopia, Iran, and Indonesia. Collectively, they account for nearly half of the world’s population and increasing global economic share.

Since 2022, BRICS leaders have been exploring the idea of a gold-backed reserve currency, provisionally called the “Unit.” The aim? To reduce dependence on the US dollar in international trade and financial transactions. Although no official currency has yet been launched, progress has been made with the development of alternative payment systems that do not use the dollar-based SWIFT network.

Why Are the BRICS Nations in Favor of a New Currency?

• Reducing dependence on the US dollar: Close to 90% of global currency trading takes place in US dollars, which puts many countries in hot water with US monetary policy and economic sanctions.
• Shield against US sanctions: Major sanction-heavy economies like Russia and Iran are encouraged to investigate non-dollar means of trading.
• Boosting financial independence: The creation of a BRICS currency will strengthen economic integration within the bloc and avoid relying on Western financial systems.

Trump’s Tariff Threat — Will They Work?

Trump has been vocal about his America First economic policies, warning that any country that supports a BRICS currency could face 100% in tariffs on exports to the US.

He stated in a post on his Truth Social platform:

“There is no chance that BRICS would replace the US dollar in international trade. Any country that tries should say hi to tariffs and bye-bye to America!”

Tariffs on Canada and Mexico

Apart from BRICS, Trump also has imparted a 25% tariff on imports from Canada and Mexico. These included consultations about applying the same tariffs on oil. This more appropriately fits into his wider strategy for reducing illegal immigration and fighting fentanyl smuggling. But the question remains, will it hurt trade relations among North America?

How Would a BRICS Currency Affect the US Dollar?

If BRICS managed to create a gold-backed reserve currency, it could promote de-dollarization worldwide—an act where countries would lessen their reliance on the US dollar. Some of the impacts include

• A decline of US sanction power: Because of the dollar’s global position, the US government has the ability to place financial restrictions on its adversaries. An alternative to the BRICS would make sanctions less effective.
• Potential impacts on oil markets: In 2023, almost 20% of global oil trades were conducted in currencies other than the dollar, a trend that could be bolstered in the event a new currency were adopted by BRICS nations.
• Potentially greater market volatility: Increases in currency fluctuation could potentially disturb sustained investment and trade stability across the global economy.

Even so, a June 2024 report prepared by the Atlantic Council shows that, despite ongoing debates regarding alternatives, the US dollar still serves as the world’s reserve currency, with 59% of global foreign exchange reserves still held in dollars.

Will BRICS Use a Digital Currency?

While BRICS does not yet have a common digital currency, there are efforts to build a blockchain-based payment system.

•             The BRICS Bridge Payment Platform will enable member states to settle transactions denominated in their national currencies rather than rely on SWIFT.

•             Project mBridge is a central bank digital currency (CBDC), involving China, UAE, Thailand, and Saudi Arabia, which enables cheap cross-border transactions without involving the dollar.

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Implications for investors

A changing world economy will require anticipating currency shifts and trade policy ramifications.

The most significant examples include the following:

• Diversification to lessen dependence on real dollar holdings.
• Investing in gold and commodities, statistically known to outperform during uncertain economic times.
• Investment in emerging market funds based on BRICS economies.

Conclusion

While the BRICS currency is not exactly around the corner, the trajectory of de-dollarization is set to challenge the hegemony of the US in the coming future. Trump’s threats of tariff impositions could put the whole stage of global trading into jeopardy, especially for BRICS nations considering economic alternatives.

With geopolitical tensions rising, the battle for currency dominance is just beginning. The key question remains: Can BRICS successfully take on the US dollar, or will US economic policy continue to keep it at the very top?

References:

https://www.aa.com.tr/en/world/russia-says-brics-not-discussing-common-currency/3467953

https://www.cfr.org/backgrounder/what-brics-group-and-why-it-expanding

https://www.dw.com/en/trump-threatens-brics-with-tariffs-if-they-replace-us-dollar/a-71464802

https://investingnews.com/brics-currency