Replacement of the dollar in global trade aims to circumvent US sanctions

During a summit meeting of Brics leaders, held in Johannesburg, South Africa, at the end of August, President Luiz Inácio Lula da Silva (PT) said that the dollar’s dominance as a universal currency is numbered. With this conviction, the government strives to replace the American currency with the Chinese currency, the yuan, in commercial transactions in Brazil, starting with Argentina, with the aim of helping the neighboring country manage the very low level of foreign exchange reserves. Other initiatives in this direction will come within and outside the Brics – which includes Russia, India, China and South Africa, but has already approved the accession of new members.

However, analysts note that Brazil faces substantial challenges in carrying out the plan to “de-dollarize” its trade balance due to its heavy dependence on the dollar, which represents around 90% of export and import transactions.

In practice, attempts to operate outside the reference currency may only serve to assist countries that have already suffered trade and financial sanctions or those that are at risk of facing them. Furthermore, the strategy could create tensions in the bilateral relationship with the United States, causing potential political and economic damage.

Ismar Becker, a business consultant and speaker, argues that although it is possible that the dollar will lose its position as the global reference currency, this will likely happen in the distant future. He highlights that, throughout history, several currencies have occupied this position, including those of Spain, the Netherlands, the United Kingdom and, more recently, the United States. “However, the dollar’s main competitors, such as the Japanese yen and the euro, have failed in their attempts to replace it,” he stressed.

Becker also notes that the debate over options for the US currency advanced among developing countries after the US froze Russia’s dollar reserves in response to the invasion of Ukraine. This event would have raised an alarm among those who could be the next targets of similar measures. He highlights that China has been increasing gold reserves as part of this strategic precaution.

However, the expert questions the reason why Brazil, “which has no intention of invading its neighbors”, is so committed to replacing the dollar in transactions.

The consultant highlights that for a currency to become a widely accepted store of value, it needs to meet four requirements: high circulation volume, low dependence on the external market to avoid exchange rate manipulation by the government, free and unlimited convertibility for exchanges and transfers, and issuance in a country whose financial market is free from state intervention.

Among the four most circulated currencies, according to the International Monetary Fund (IMF) – dollar (58%), euro (20%), yen (5.5%) and pound (5%) – only the dollar corresponds to the profile. The euro, despite its wide circulation, was already manipulated during the banking crisis of the early 2000s.

Furthermore, the interest of some countries in replacing the dollar in their commercial transactions may be linked to their internal political issues, such as legal arbitrariness, restrictions on freedom of expression, one-party rule, corruption and social crises. This is evident both in current BRICS members and in countries planning to join in 2024, such as Argentina, Saudi Arabia, United Arab Emirates, Ethiopia, Egypt and Iran.

In search of an option to the dollar, in January, presidents Luiz Inácio Lula da Silva and Alberto Fernández, from Argentina, discussed the creation of a common currency to facilitate commercial transactions between Mercosur members, but negotiations did not progress at that time. .

American currency dominates 90% of the country’s trade balance

A significant challenge to implementing this project of using other currencies in commercial transactions is the broad dominance of the dollar. The currency represents almost all currencies used in exports, with a share of 95% in the last five years, according to data from the Ministry of Development, Industry, Commerce and Services (MDIC). In relation to imports, this percentage is slightly lower, at 82.5%.

Although the dollar lost some share in exports between 1997 and 2017, falling from 97.9% to 92.5%, it subsequently regained its dominant position. The euro and the real gained some share during this period, representing 9.2% in import and export operations in the last five years.

The use of other currencies is much greater in imports, which totaled US$ 179.1 billion in the last five years. The euro (US$92.4 billion), the real (US$58.7 billion), the yen (US$8 billion) and the Chinese yuan (US$3.2 billion) are the most used currencies in this context.

The increase in import contracts in Chinese currency, from US$240 million in 2018 to US$1 billion in 2022, signals the strengthening of the yuan in commercial relations. “The numbers are still low in our trade flow as a whole, but the growth of this denomination is notable”, said MDIC Foreign Trade Secretary, Tatiana Prazeres, to Brazil Agency.

Alexandre Ramos Coelho, researcher at Fundação Getúlio Vargas (FGV) and member of the Observa China network, argues that the introduction of the Chinese currency in Brazil’s external transactions must be considered in light of the current global geopolitical turmoil. For him, the trade conflict between the United States and China, the increase in American interest rates, the Chinese economic slowdown, the global impacts of the Covid-19 pandemic, tensions in the Taiwan Strait and the war between Russia and Ukraine have direct implications for Brazil. Such instability factors result in considerable volatility in exchange rates, especially in relation to the dollar, euro and yuan.

In response to the challenging scenario, Coelho highlights the adoption of a strategy that includes the creation of markets and financial instruments to mitigate exchange rate risks associated with these currencies. He emphasizes that the development of financial assets linked to the yuan could be of crucial importance in this context, meeting the risk management needs of the private sector and, at the same time, generating confidence in the possible use of the Chinese currency.

Brazil accepts receiving yuan on exports to Argentina

China has sought to promote the use of the yuan in partnership with its trading countries, entering into currency swap agreements with around 30 nations, including Brazil, Chile, Russia and Switzerland. This strategy aims to reduce dependence on the dollar in international transactions and allow each country to trade with its own currencies.

“De-dollarization” is generating political debate in the United States, with leaders of the Republican Party (opposition) warning of the risk that the largest economy in the world could lose a powerful instrument of international sanctions.

As part of its assistance to Argentina, which is facing a shortage of dollars and a serious economic crisis, Brazil proposed that purchases of Brazilian products would also be paid in yuan, the Chinese currency. Currently, bilateral trade between Brazil and Argentina is denominated in dollars. Finance Minister Fernando Haddad announced this offer during the Brics meeting. The proposal involves the conversion of yuan into reais through the Banco do Brasil branch in London, before being passed on to Brazilian exporters. The operation would aim to increase the security of exporters, who are concerned about the possibility of default by Argentine companies.

“It could be good news, if Argentina agrees, because they can have some sales flow for their products with a 100% guarantee. And for Brazil there would be no problems because there is a guarantee that the exchange rate will be from the yuan to the real”, said the minister.