Yves here. This post gives a brief discussion of yet more Trump brandishing of his favorite new toy weapon: big, across the board tariffs. The Trump noise-making is consistent with the tendency to treat efforts to get wriggle room in the dollar hegemony and most important for countries outside the Collective West, to be able to work around sanctions threats.
All it takes to get around sanctions is bi-lateral trade with top trade partners. That is cumbersome but aside from a hassle factor, not all that difficult to implement. However, a problem over time is when big trade imbalances persist between trade partners. The country running the surplus winds up accumulating financial assets of the deficit country. This happens even when dealing with the same currency. Witness in the Eurozone, for instance, how Germany actively pursued a policy of running trade surpluses, then would bitch and moan about accumulating financial assets from the likes of Greece.
The only way to stop this sort of thing from happening is policies like the bancor, which encourage balanced trade by imposing various restrictions on debtor and even more so on surplus countries. But for starters, China would never accept that, since they regard their surpluses as solely the result of investment and innovation, as opposed to also many subsidies and intellectual property poaching (exaggerated by the West now but important in China’s earlier phases of development).
Since there is no ready solution in our current system of imbalances, some countries resort to dollar use more than is understood. For instance, in Southeast Asia, countries have been trading with each other in their currencies for some time. However, they settle their imbalances through the dollar on a monthly basis. So the dollar role looks small relative to the value of routine trade transactions but is essential to the current process.
If you read the final statement from the Kazan BRICS summit, there is no undertaking to move to a new currency. Here are the only relevant references. They calls for more use of present currencies:
49. We reiterate our commitment to preventing and combating illicit financial flows, money laundering, terrorism financing, drug trafficking, corruption and the misuse of new technologies, including cryptocurrencies, for illegal and terrorist purposes….
62…. We support the NDB [New Development Bank] in continuously expanding local currency financing and strengthening innovation in investment and financing tools.
63. We welcome the BRICS Interbank Cooperation Mechanism (ICM) focus on facilitating and expanding innovative financial practices and approaches for projects and programmes, including finding acceptable mechanisms of financing in local currencies…
65. We reiterate our commitment to enhancing financial cooperation within BRICS….We welcome the use of local currencies in financial transactions between BRICS countries and their trading partners. We encourage strengthening of correspondent banking networks within BRICS and enabling settlements in local currencies in line with BRICS Cross-Border Payments Initiative (BCBPI), which is voluntary and non-binding, and look forward to further discussions in this area, including in the BRICS Payment Task Force….
67. We task our Finance Ministers and Central Bank Governors, as appropriate, to continue consideration of the issue of local currencies, payment instruments and platforms and report back to us by the next Presidency.
68. We recognise the BRICS Contingent Reserve Arrangement (CRA) being an important mechanism to forestall short-term balance of payments pressures and further strengthen financial stability. We express our strong support for the CRA mechanism improvement via envisaging alternative eligible currencies and welcome finalization of the amendments to the CRA documents.
I can’t imagine what the drafters envisage with the CRA, since that is a short-term currency swap facility to be used in crises. Perhaps they are thinking of implementing something SDR-like. But despite the SDR being well-established, it has not been as much used of late. Afflicted states did draw down from SDR commitments in the 1997 Asian crisis. But it played no role in the currency swaps in the 2007-2008 Global Financial Crisis. For the Greece rolling bailouts, EU member states and the ECB were much bigger lenders, but the IMF played a role much bigger than its financial contribution due to it being the designated minder of Greece via its “programs” as in hairshirt required economic reforms. The IMF loans were denominated as SDRs but I believe Greece paid them in Euros. Expert input here welcomed.
Regardless, SDRs are used internally to IMF and member states and not in general commerce.
And the document validates the role of current Western institutions like the IMF and World Bank, albeit calling for a greater role for Global Majority countries in governance.
We have also pointed out a big impediment to forming any sort of a BRICS currency, which is that it would require participating states to compromise their sovereignity, when the multipolarity push has the opposite impulse.
In other words, the Trump dedollarization tariff threat looks to be barking at a straw man, unless the US down the road decides to engage in very strained interpretations of what a dedollarization initiative consists of to make trouble for uppity Global Majority countries.
By Alex Kimani, a veteran finance writer, investor, engineer and researcher for Safehaven.com. Originally published at OilPrice
- The global de-dollarization drive has been going on for years with BRICS countries trying to ditch the American dollar in favor of other currencies.
- U.S. President-elect Donald Trump has threatened BRICS nations with 100% tariffs if they decide to challenge the U.S. dollar’s dominance.
- So far, global de-dollarization efforts have borne little fruit with the vast majority of cross-border transactions involving BRICS members continuing to be invoiced in dollars.
U.S. president-elect Donald Trump has threatened BRICS nations with 100% tariffs if they decide to challenge the U.S. dollar’s dominance in the global economy. BRICS is an acronym denoting the emerging national economies of Brazil, Russia, India, China and South Africa.
“The idea that the BRICS countries are trying to move away from the dollar while we stand by and watch is OVER.,” Trump wrote in a social media post early Sunday.
“We require a commitment from these countries that they will neither create a new BRICS currency nor back any other currency to replace the mighty U.S. dollar, or they will face 100 per cent tariffs and should expect to say goodbye to selling into the wonderful U.S. economy. They can go find another ‘sucker!’ There is no chance that the BRICS will replace the US dollar in international trade, and any country that tries should wave goodbye to America,” the president-elect said.
The global de-dollarization drive has been going on for years with BRICS countries and the so-called pariah states trying to ditch the American dollar in favor of other currencies. Back in 2019, Putin declared that time was ripe toreview the dollar’s role in trade. At that time, Russia and China considered switching to the euro, the world’s second most dominant currency, as an acceptable stalemate, with the ultimate goal being to use their own currencies. Last year, Russia and Iran took a bold move after declaring they will be trading in their local currencies instead of the U.S dollar, Iran’s state media reported.
“Banks and economic actors can now use infrastructures including non-SWIFT interbank systems to deal in local currencies,” Iran’s state media declared.
Also last year, Russia paid dividends from the Sakhalin 1 and 2 oil projects in Chinese yuan instead of the dollar. Last year, Russia was cut off from the US dollar-dominated global payments systems following sweeping sanctions off the Ukraine war. Russia declared it will no longer accept the American currency as payment for its energy commodities but will instead switch to Chinese and Emirati currencies.
However, global de-dollarization efforts have borne little fruit with the vast majority of cross-border transactions involving BRICS members continuing to be invoiced in dollars. Indeed, exchanging BRICS members’ local currencies with each other and with other emerging market currencies frequently requires using the dollar as an intermediary. Further, a large share of public and private debt in these economies is dollar-denominated. The relative stability of the dollar compared to many local currencies makes it more attractive as a medium of payment in cross-border trade. The dollar’s widespread use in these cases has become self-reinforcing, thus preserving its dominant global role and impeding efforts to de-dollarize.
Canada Tariffs
But it’s not just BRICS that Trump has beef with. He has also threatened to impose 25% tariffs on all imports from Canada and Mexico for failure to clamp down on drugs and migrants crossing the border, with Canadian oil imports not exempt. However, analysts have pointed out that imposing tariffs on Canada would drive up fuel prices for Americans, throwing into turmoil the biggest supplier of crude to the U.S. According to GasBuddy analyst Patrick De Haan, more than 20% of the oil processed by U.S. refiners is imported from Canada. According to De Haan, consumers in the Midwest, where refineries process 70% of the 4M-plus bbl/day of Canadian crude imports, could end up paying ~10% for their gas if Trump goes ahead with his tariffs
Canada and PADD 2 refiners are inextricably linked, with few options to divert and substitute,” Rapidan Energypresident Bob McNally told Bloomberg, referring to the market in the upper Midwest.
Refiners like Marathon Petroleum (NYSE:MPC) and Phillips 66 (NYSE:PSX) would be forced to either pay a higher price to import oil from Canada or to find alternative–and more expensive– suppliers. According to commodity analyst Rory Johnston, in either scenario, “tariffs on Canadian oil [would] increase pump prices given the dependence of much of the U.S. refining industry on Canadian crude,” adding that the cost of crude feedstock carries the biggest weight in determining retail gasoline prices.
BP Plc (NYSE:BP) would also be impacted thanks to its Whiting refinery in Indiana, the largest fuel supplier in the Midwest. Last year, the refinery imported more than 250K bbl/day of Canadian heavy oil, or 57% of its 440K bbl/day refining capacity, according to RBN Energy.
BRICS never planned to build a common currency..This is a rumour that was spread by someones… The way to get rid off dollar is to do it slowly with a mix of national currencies and resources, with also barter. It can’t be done overnight.
Then Trump is funny in this that it is USA than has dedollarized some countries and most spectaculary Russia. So now what? Americans will sanction Russia because it doesn’t use much dollar, which is due to totalitarian … American sanctions ? Russia, Iran, China, North Korea do part of their mutual trades in barter, and this how you boot an economy from scratch.
Agreed !
What noone seems to mention is that Tariffs depend on Elasticity and function as a domestic Sales Tax. seen in terms of VAT – it would cascade through US industry and economy until End Consumers were hit with very high retail prices similar to imposition of a Federal VAT
Thank you, both.
That’s correct about the BRICS and their common currency. There are some X feeds that often cite this and give the impression of being an official BRICS mouthpiece or observer.
Kathleen Tyson, who I may bump into in the City this evening, often rebuts these rumours, announcements etc. on X.
That is not true. There were some BRICS officials who were most assuredly talking up a BRICS currency. This is why India, Russia and others has to talk this down. You can look at InfoBRICS and see many quotes along these lines. And people like Pepe Escobar, who depicts himself as super plugged in, has been aggressively hawking specific schemes like The Unit.
True enough. The more serious ones recognize that many of the the key requirements of an Optimum Currency Area are not fulfilled by the BRICS countries, whether it is a large, dominant share of intra-bloc trade vis a vis trade with the rest of the world for each member country, business cycle coordination etc. Could it be that the recent formation of BricsPay a couple of weeks ago (https://www.brics-pay.com/) was seen as the thin end of the wedge by the always-on-the-edge Trump?
Trump also offered Canada an easy way out of the tariffs.
https://www.rt.com/news/608604-trump-canada-us-state-trudeau/
And all Trudeau could do was laugh nervously.
That is an old and silly joke. I must say I am displeased that Trudeau did not spit in Trump,s face but Canadians are known for being polite.
Geez, Don, just introduce a VAT already, OK?
RT came out with their own analysis for those that can read them. It is at-
https://www.rt.com/news/608609-trump-threatens-brics-high-tariff/
In short, it will get messy and I suspect that Americans will pay more for anything imported. Last time that Trump want the tariffs rout, about 93% of the increased cost were paid by Americans and very little by the Chinese.
Back in the days of “The Snake” bringing various EEC currencies into a discrete band of fluctuation against each other the intervention currency was the US dollar. It became a major issue of using exchange rates against US dollar to align European currencies for intra-European trade.
The UK proposed at a later stage having competing currencies in circulation – Lamont.
Yet the Euro itself was only an Accounting Currency in 1999 and not until 3 years later were physical notes and coins introduced.
There is a view that it should have remained an Accounting Currency as TARGET2 Balances are in reality the main reference for intra-EuroZone trade not physical movement of gold. It is particularly problematic in that 1957 when the D-Mark became convertible it was at a ludicrously low value to lock in the trade surpluses UK and US agreed for West Germany at the 1952 London Conference together with Debt Writedowns…………in 1999 the same undervalued D-Mark/Euro exchange rate was somehow slipped through to preserve German trade surpluses while preventing French or Italian devaluation.
In 1990 with Anschluss with GDR Berlin again had a Debt Writedown on historic debt obligations.
So, it is not really a problem for BRICS to have floating parities so long as they do not have unlimited debt capacity or free-riding privileges as USA does on Rest of World by issuing a valueless reserve currency.
The global volume of trade is propped up by unlimited expansion of US dollars which have no repository of value and sustain the ludicrous proposal to pay Elon Musk $54 billion – a sum in excess of the combined C-Suite salaries of any trade surplus countries, if not all combined.
BRICS can operate a floating currencies pool if no country gets to free-ride, but if say Ghana can peg cocoa exports to a gold-backed currency it does not need to deal with Swiss cocoa traders at a disadvantage since it produces cocoa and gold
Yes indeed, and the snake (or ‘snake in the tunnel’) was also needed because – as the Bretton Woods System disintegrated – exchange rate fluctuations within the Six (or Nine) played havoc with CAP finance.
In 1952-53 the US effectively bludgeoned other creditors into accepting the huge writedown on accumulated war and other debts, including those which Germany had repudiated in 1934. The US could do so easily as the dominant creditor: Germany owed it $3.2bn, compared to $342m owed to the UK, the next largest creditor.
Granted that West Germany, led by Hermann Abs, played its hand very well (including against such hardened veterans as George Rendel and Otto Niemeyer – the latter perhaps wanting to atone for his harsh treatment of Australia and other debtors in the 1930s), it has to be asked why the US repeatedly indulged West Germany in this fashion. After all, West German production had galloped forward since the establishment of the European Payments Union in 1950, and the trajectory was already clear. It does seem that the State Department allied with the Senate Committee on Foreign Relations (under Alexander Wiley) against the Treasury Department. Indeed, Morgenthau’s oft-spoken desire to reduce Germany to a Balkanised agrarian society may have played into the hands of those who wished to give it as good a deal as possible. This, plus a desire not to repeat Versailles and to prevent West Germany from falling into the hands of the SPD (which was still an openly Marxist party until the Godesburg Programme of 1959, the party having won the largest number of seats in the 1949 elections under Schumacher) must have played a large part. This strategy seems to have become an idée fixe within the State Department, which persistently won successive bureaucratic battles with the Treasury, Commerce, Agriculture, etc., departments, because it gained the ear of the White House, even as West Germany piled up ever greater claims against the US, and the US surplus metamorphosed into permanent deficits. The sunk cost fallacy quickly prevailed, and by the 1960s Dillon and Fowler were left remonstrating with Dahlgrün and Strauss, with the Germans aiding the US in patching the decaying BWS, all the better to divert attention from its accumulating surpluses. There have been several fine articles on this subject, but this is the best open source item I have found which also notes the differences between US treatment of Germany and German treatment of Greece (a point Tspiras played upon a decade ago): https://library.fes.de/pdf-files/iez/10137.pdf
I suspect BRICS concluded that they did not want a single currency given the divergent characteristics of their respective economies and the unhappy experiences of the EZ. Alternative payment systems to SWIFT would be far more effective at diluting dollar supremacy over time, perhaps ultimately arriving at the destination of some bancor equivalent based on a basket of widely traded goods and commodities. However, I daresay that moves towards bancor will get nowhere so long as China feels that it needs a permanent surplus as a financial bulwark against US predation, and as the US is set upon upping the strategic ante.
Is there a migrant and drug problem across Canada’s southern border of which I am simply unaware?
And secondly, I am amused by the widespread lack of understanding that fossil fuel types are NOT universally fungible — US energy “independence” is real in terms of total joules produced (primarily in the forms of natural gas and light, sweet crude), but it does not produce sufficient heavy crude (in particular) to meet its own needs.
Tariffs might help increase domestic productivity. And devaluing the dollar would make American products more competitive abroad. So why not do both?
I thought that money printing machine have been working tirelessly on devaluing the dollar.
Everything is credit cycles and QTM is rubbish … all that matters is weather or not its productive in the long term and its distribution vectors. FIRE sector econ just has it all folding in on its self for the benefit of elites.
This line of thinking is exactly what Musk and the DOGE people want – get government out of everything and let the market decide. The McCrazzypants part is whilst Elon bags big gov et al he worships econ people like Milton Friedman and Thomas Sowell. These are the very people that helped create the currant neoliberal reality. Completely ignoring how Ordoliberalism was forwarded by none other than Hayek as a ends to a means in arriving at a conclusion – utopia as it was ordained via deductive rationalizations and cough… funded by elites.
Whatever demise the USD might experience will not be related to quantity, it would only be when a significant amount of people/businesses stop using it to satisfy contracts en fin. Hence why Trump is threatening others if they stop using it. That is the real value of the USD and not some hard money/currency projection on it.
I see you like to have your cake and eat it.
My logic problem is this:
Imposing an Ad Valorem Tariff on exports from Country X priced in US Dollars which are then devalued tends to counter the policy
I wondered which American companies/industries would be impacted in a tariff war with Canada, so with the help of ChatGPT…
Lumber: Canada supplies 25-30% of America’s lumber.
Automobile: GM, Ford, Toyota, Honda, production and assembly plants all over Canada. Mind, it’s all the garbage cars such as Honda Civic, Toyota Corolla, Ford Edge, Toyota RAV4, Chevrolet Equinox).
Aerospace: Boeing (Boeing parts manufacturing is located in Quebec), Lockheed (parts manufacturing in Quebec, supplies defense), Bombardier (parts manufacturing, supplies all North American commercial airline fleets).
Exxon-Mobil: Significant Imperial Oil (25% stake) tar sands investments and operations.
Chevron: Significant (20% sstake) tar sands investments and operations.
Pfizer: Has two major production plants in Quebec, one of which manufactures its COVID19 vaccine.
Johnson&Johnson: Has production plants based in Ontario.
Tyson Foods: 6 plants
Cargill: 30 facilities in Canada, livestock and grain processing, main source of canola oil for the US, fertiliser and agri-chemicals source, livestock nutrition source.
The Cargill angle got me wondering about agriculture, specifically:
90% of US canola oil comes from Canada
10-15% of dairy
10% beef
30% pork
10-20% wheat
70-80% of maple syrup
Again, this is ChatGPT so take with a barrel of salt, it would all need to be properly sourced.
The problem as I see it is that there is no coherent Government industrial Mfg policy, its just using Tariffs in the hope that orthodox econ thinking [rational agent thingy] will result in preferred Market[tm] outcomes. With a side of throwing money to the savvy and well-heeled smart people and more[tm] tax relief. You know all the things that got us here in the first place.
Meanwhile China and Russia are sailing off into the future regardless of all these antics, worse that these antics resulted in just the opposite effect intended.
Its like the whole world has changed and yet these people are trapped in some ideological bubble that started off as a means to gaslight the population for elite preferences in social engineering – then it got a life of its own …