Since winning the presidential election, Donald Trump has indicated his plans to extensively employ tariffs to revive the United States’ economic power. The question is: will such threats work for the US when Washington’s extensive use of financial sanctions seems to be failing?

On Dec 1, he threatened to punish the Brics (Brazil, Russia, India, China and South Africa) countries with a 100 per cent tariff and shut them out of the US markets if the group tried to undermine the dollar and create their own currency. Writing on a social media platform, Mr Trump said he would also act if the bloc supported another currency to replace the dollar.

The Guardian wrote that fears of a global trade war had risen after Mr Trump threatened to impose tariffs on countries in the Brics group. If implemented, the paper said, a 100pc tariff would sharply drive up the cost of goods from Brics members, fueling US inflation and destabilising global trade flows.

Indeed, Brics countries have discussed in recent years ways to reduce their reliance on the dollar through potential alternative currencies or new trade mechanisms, an initiative primarily driven by Russia facing harsh sanctions from the US and the West.

US tariff threats to Brics renew interest in de-dollarising

Even though some members have shown interest in de-dollarising the world economy, the idea of a Brics currency is fraught with challenges.

At the October Brics summit in Kazan, Russian President Vladimir Putin called for an alternative international payment system — the Brics Bridge. “The dollar is being used as a weapon,” he argued, “I think that this is a big mistake by those who do this.” But he stated, “As for a unified currency, we are not considering that question at the moment.”

He added the group was studying “the possibilities to make wider use of national currencies” and enhancing coordination between their central banks to support trade.

Since the start of the Russia-Ukraine war in February 2022, the US removed Russia from the Belgium-based messaging system, SWIFT, which banks use to settle international payments. This action was seen in Moscow and elsewhere as a “nuclear-level” financial sanction.

Furthermore, banks from any country facilitating trade with Russia face sanctions, making Moscow the most eager major power for an alternate payment system.

Mr Putin is not the only world leader who has supported the exploration of alternative currencies beyond the US dollar. In 2023, Brazilian President Luiz Inácio Lula da Silva proposed creating a new, common currency in South America to reduce its reliance on the dollar in international trade.

In the last few years, many countries, from and outside the Brics block, have increased their use of non-dollar currencies for the settlement of bilateral trade transactions to break the dollar’s dominance. Pakistan (not a member of Brics), too, had bought Russian oil last year using Chinese yuan. Pakistan and China also conduct a portion of their trade in the yuan.

Since January, the United Arab Emirates and India have used their local currencies for direct trade. Malaysian Prime Minister Anwar Ibrahim also voiced support for bilateral trade between Malaysia and India in their local currencies. Malaysia’s central bank agreed to expand the use of the two nations’ currencies.

Therefore, it is not surprising that Brics countries remain unfazed by the threat of Trump tariffs. Russian Deputy Foreign Minister Alexander Pankin was quoted as saying that Brics was, in fact, working on a settlement system rather than a new international currency. “Of course, it will continue,” he said, referring to the work on the planned system.

Chinese state media argued that tariff wars have proven to have a counterproductive effect on the initiating party. Despite the strength of the “dollar-centred” or “dollar hegemony system,” without solid domestic industries and a favourable external trade environment, the US will eventually face greater economic challenges, even as it enjoys the benefits of dollar dominance, an article in The Global Times predicted.

Most countries are turning away from the dollar due to the extensive use of economic sanctions by Washington as a foreign policy tool and a weapon of war, forcing nations across the world to create alternative financial systems and pursue de-dollarisation.

The US government currently imposes sanctions on a third of all nations in a situation that disproportionately affects low-income countries — 60pc of which are under US sanctions of some kind, according to an analysis of the White House’s long-standing policy of economic warfare by The Washington Post.

“This trend spiked during the last four US governments and reached a fever pitch under President Joe Biden, who imposed over 6,000 sanctions in just two years,” it said. “And yet”, Bill Reinsch, a former Commerce Department official and now the Scholl chair in international business at the Centre for Strategic and International Studies, was quoted by the American media, “nobody in government is sure this whole strategy is even working.”

Mr Trump’s threats aside, the dollar’s global dominance depends on America’s willingness to maintain trade deficits. In other words, the dollar’s role as a global reserve and settlement currency is inherently tied to the US’s openness to imports and trade deficits.

On the same day, Mr Trump issued his warning to Brics, Michael Pettis, a senior fellow at the Carnegie Endowment for International Peace, remarked that this illustrated “how confused the new administration is about global trade and capital systems. The US cannot simultaneously reduce its trade deficit and enhance the global dominance of the dollar, as these two objectives impose fundamentally opposing conditions”.

Published in Dawn, The Business and Finance Weekly, December 9th, 2024