The Dollar’s Supremacy
Since the Bretton Woods Agreement in 1944, the US dollar has, in many ways, become the world currency. Tying the US dollar to the universally acceptable gold standard and the creation of international financial institutions (IFIs) based on the supply of funds to developing countries in dollars made the American a currency like none other. Cooperation between the United States and the Middle East in the oil trade also further increased the prominence of the dollar, propping it up with the power of oil, the phenomenon now known as the Petrodollar.
With almost all global trade, foreign exchange, and financial investment denominated in the American currency, it seemed that there was no possible threat to the dominance of the US dollar in the world economy. Similarly, it also seemed for much of recent history that there was no real economic competitor for the United States; its position as the financial and industrial giant of the world was cemented. However, we know that this latter fact has been proven untrue.
Challengers to US Economic Hegemony
The rise of China as an economic titan in the 21st century has caused heads to turn with alarm all over the world. The United States has tailored much of its economic and foreign policy in the last decade to deal with this threat. It has pursued strategies such as economic decoupling and more coercive measures such as the deployment of US armed forces and aid to contested territories such as the South China Sea and Taiwan. This has done little to deter China or slow its growth. Most of China’s economic troubles have come from domestic issues, such as its zero-case policy to counter the COVID-19 pandemic.
Competition for the United States’ position is not only coming from rivals but from countries it has long considered friendly as well. India’s economic growth within the past decade has been phenomenal, and today, it is one of the hottest destinations for investment in manufacturing as part of the Western strategy to reduce dependency on Chinese production for political insulation. While the US and the Western bloc have long been unable to exert political pressure on China, it could rely on support and cooperation from India in its vision.
However, the Russia-Ukraine war has exposed the changes in this balance. Due to its economic power, India is now able to choose its own path when it comes to politically contentious matters. In line with its historical legacy of non-alignment, India has refrained from extensive comment on the conflict and also maintained economic ties with Russia in the light of Western sanctions. Most notably, it agreed to trade in currencies other than the dollar, such as the Chinese yuan and the UAE dirham, though negotiations to trade in rupees and roubles have failed.
It is this last point and the larger geopolitical trend around it that are the focus of this article. The position of the United States as a global hegemon does not seem as strong as it did at the turn of the century. While skeptics might say that China alone still lacks the requisite power to turn the tide, there are greater agglomerations of states such as the BRICS, which includes several huge economies, that together amount to a GDP several trillion dollars larger than that of the United States. These countries have become more and more immune to external pressure, choosing to conduct trade relations with each other and other countries on their own terms.
As to the position of the dollar as the world’s reserve currency and medium of exchange, the BRICS countries are attempting to change that as well. While Brazil is currently alone amongst them in explicit calls for the creation of a common currency for these countries to trade in, Russia, India, China, and South Africa have promoted trade in their own national currencies, none of which is obviously the US dollar – much to American dismay. The introduction of trade between the BRICS states, which together account for much of global trade and hold trillions of dollars in foreign reserves, in their own currencies spells a significant threat to the dominance of the dollar.
Even if this is not a single common currency, the flow of goods and services in exchange for a growing number of currencies will increase global openness to trading in other currencies. Furthermore, the BRICS states have invited more countries to join them in their group, including Iran, the UAE, and Saudi Arabia. The introduction of these major oil-producing states would allow the BRICS to quite literally put their money where their mouth is, allowing the backing up of any future common currency the same way the petrodollar exists today.
Notably, China has shown its ability to balance and deal with international tensions that would undoubtedly be an issue in any such endeavor, having brokered historic negotiations between Iran and Saudi Arabia just this year. Additionally, the creation of the New Development Bank by BRICS acts as a response to IFIs like the IMF and the World Bank, which for decades have represented Western (or American) financial power and ensured the dominance of the US dollar in international development.
In short, we are living in times that are changing faster than most could have foreseen. The creation of entire financial systems by the BRICS states, that intend to rival entrenched Western-led ones, is a landmark moment. However, the road to a world where these systems actually become global alternatives to the financial order that has hitherto existed seems bumpy. Currently, most of the BRICS states are undergoing economic trouble, whilst the US economy has largely managed to deal with its recessionary trends and expects a “soft landing.” Furthermore, while the BRICS states may outsize the US in the cumulative size of their economies, trade volume, and population, the fact is that BRICS is not a formal union.
The United States, for all its internal troubles, is still a singular economy that can bring the full force of its economic might to bear in the same direction, while the BRICS states each have their own agendas that may or may not align with the others. China and India, for example, despite having one of the largest bilateral trade volumes in the world, also have significant geographical disputes that have persisted for decades and seem no closer to a solution. Therefore, BRICS cooperation will always be susceptible to political differences and instability between and within its member states, barring significant changes in geopolitical circumstances for the better in the next few years.
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