December 20, 2024 — In 2023, the leaders of Brazil and other BRICS countries – Russia, India, China, and South Africa – began to discuss the creation of a new common currency. At a BRICS summit meeting two months ago, they continued to talk up the currency proposal. New members as of this year, Egypt, Ethiopia, Iran and the United Arab Emirates would presumably also be included.
The idea is to encourage a shift in the global monetary system away from dominance of the dollar, which has held sway the last 75 years. This has provoked President-elect Donald Trump. On November 30, 2024, he reiterated a warning to the BRICS that he required “a commitment from these Countries that they will neither create a new BRICS Currency nor back any other Currency to replace the mighty US Dollar, or they will face 100% Tariffs.”
It is interesting that Trump accepted at face-value the proposition that the BRICs might indeed create a new currency, if not stopped by him. Such a development does not stand the ghost of a chance of happening, regardless of what Trump says or does. (Below we will consider a more general increase in the use of other currencies in place of the dollar to invoice trade, denote financial transactions, and so forth, which is indeed already underway, albeit at a very slow speed so far.)
- The tariff weapon
The threat of 100% tariffs comes on top of Trump threats of 25% tariffs against Mexico and Canada, if they don’t stop the smuggling of fentanyl into the US, which in turn follows his threats of 60% tariffs against China and 10 % or 20% for all other trading partners, whether the US has signed a free trade agreement with them or not. Trump’s tariff threats begin to look like a madman wildly brandishing of a gun in the street. It persuades passersby to make wide circles around him but does not lead to one of Trump’s self-described successful “transactions.”
Trump is widely said to be transactions-focused. But it is not always clear what is the transaction. Trading partners do not have it in their power to eliminate the US trade deficit with them. Mexico does not have it in its power to stop the smuggling of fentanyl into the US. Trump has used the tariff threat to demand both of those impossible concessions.
- The BRICs currency is a chimera
Why is there not the ghost of a chance of the BRICs creating their own currency? If the new unit is meant to exist alongside their national currencies, it will not gain traction. For an international currency to be successful, it must have a home base. That is why the English language is the world’s lingua franca and Esperanto is not. It is why the special drawing right (SDR) – the International Monetary Fund’s reserve asset, whose value is based on a basket of major currencies – has not been successful as an international currency.
To offer a successful international unit, then, the BRICs would need to form a currency union, where each gives up its own currency and they establish a pan-BRICS central bank to manage the new currency, especially to agree on how they should be issued.
Most members of successful monetary unions, even if they are sovereign countries, tend to be small economies that are open to trade among themselves, and that share common goals, geographic proximity, correlated business cycles, and a relatively integrated labor market. If their economies are very different from each other, there will be times when one goes into recession while another overheats. In a monetary union, each has given up the ability to set its own monetary supply, interest rates and currency value in response to such cyclical fluctuations. In that case, they had better possess alternate ways of adjusting, such as the movement of labor (from high unemployment countries to low-unemployment), and have sufficient political commitment to the monetary union to withstand fluctuations.
Examples include the CFA zones in Africa, which mostly include the French-speaking countries, and the Eastern Caribbean currency union, English-speaking islands. These are very small neighboring countries that share a common language and colonial history. Probably the largest member is Cote d’Ivoire, with a GDP of $ 87 billion, smaller in economic size than Buffalo, NY.
The exception is of course the twenty members of the euro zone. But, while many of them have relatively big GDPs, they share common borders and an integrated economy. Also, they share a common commitment to the idea of a Europe that is unified, integrated and peaceful. Even so, the economies of the UK, Sweden and Norway are sufficiently removed from the continent that these three countries have no interest in joining the euro. And when a country like Greece does join, it has had a hard time fitting into the monetary straitjacket of the euro.
Some regional groupings of countries have long discussed the possibility of adopting a common currency. The Arab oil states of the Persian Gulf got the furthest. In 2001, the six members of the Gulf Cooperation Council decided to form a currency union by 2010. But 2010 came and went, with no progress toward a currency union. Even such small, culturally aligned, and cyclically correlated countries as the GCC members are not in fact willing to give up their individual monetary sovereignty.
The five BRICS countries are large and geographically dispersed, let alone the expanded membership. They speak different languages. Even where they share a common border, it has been the source of military conflict rather than economic integration. (Soldiers of China and India fought each other on the border in Ladakh in June 2020.) The correlation of the business cycle across the economies is relatively low. For example, when global oil prices are high, Russia, Brazil, Iran and the UAE are boosted, while China and India are held back. And vice versa. The BRICS are far less well-suited to a monetary union than are the GCC countries.
- The threat could backfire
To be sure, a gradual movement among international currencies away from the dollar is already discernible. It has been very slow. But it has been given extra impetus in recent years by the more frequent American use of financial sanctions (including, since 2018, against Iran even though it had been abiding by the 2015 nuclear agreement). For example, some central banks have shifted part of their international reserves out of dollars, most notably Russia after it seized Crimea in 2014.
But if the US were to attack the BRICS countries in a Trumpian temper tantrum of 100% tariffs, it could backfire. It could accelerate decisions to shift out of dollars, into the yuan and smaller currencies, and (in the case of international reserves), into gold.
Another respect in which clumsy efforts to promote international use of the dollar could be at cross-purposes with other Trump goals is his oft-repeated desire to help improve the US trade balance by seeing the dollar depreciate against the renminbi and currencies of other countries that run bilateral surpluses with the US. Talking down the dollar would be consistent with Trump’s threats to the independence of the Federal Reserve and the other inflationary policies that he proposes. But currencies that are known to suffer from inflation and depreciation are not attractive as international currencies.
It seems that Trump views tariffs as the solution to every problem in international relations. But he is in danger of applying the threat so indiscriminately that it loses effectiveness.
[An earlier version appeared at Project Syndicate. Comments can be posted at Econbrowser.]