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.