The notion of the BRIC economies—Brazil, Russia, India and China—putting together an alternative to the U.S. dollar is neither new nor has it been effective.
The idea was floated over the weekend in a threat by President-elect Donald Trump to place 100% tariffs on the BRIC economies if they move to replace the dollar as the world’s reserve currency.
Consider the world’s currency reserves. Of about $12.5 trillion in total global currency reserves, China accounts for but a fraction with $245 billion. The United States, by contrast, accounts for $6.67 trillion.
The only substantial achievement of the BRIC economies has been the pooling of $100 billion of foreign currency reserves that is the foundation of a New Development Bank, which has provided $33 billion for water, transportation and other infrastructure projects over the past decade.
The World Bank, by contrast, put forward $73 billion for its member countries in fiscal 2023 alone.
The truth of the matter is that approximately 88% of all foreign exchange transactions involve the dollar and 70% of foreign currency debt is issued in the dollar, which is greater than three times that issued in euros and 30 times that issued in the Chinese yuan.
The idea of the BRIC economies providing an alternative to the U.S. dollar is premature at best and an overstatement at worst.
The U.S., BRIC economies and economic populism
What was behind the threat by President-elect Donald Trumps over this past weekend to place 100% tariffs on the BRIC economies?
It is a perfect illustration of the internal inconsistencies that are at the heart of the populist economic agenda.
To begin with, compelling countries to use the dollar is counterproductive. That type of policy will result in a loss of credibility and is more likely to drive emerging-market countries away than cause them to increase the use of the dollar as a means of transaction.
Read more of RSM’s insights on the global economy and the middle market.
Second, if the incoming administration wants to rebalance the global economy, it would have to adopt policies that result in a weaker dollar driven by fiscal consolidation—higher taxes and lower spending—which is the opposite of the expansionary fiscal policy of the first Trump administration.
In an economy that is growing at just under 3%, tax cuts and increased spending will result in wider trade and current account deficits, the opposite of the rebalancing that a second Trump administration seeks to achieve.
A stronger dollar works directly against the goal of global economic rebalancing that seeks to increase investment and spending in countries with large current account surpluses that redirects demand toward those that carry large annual deficits.
The takeaway
The slick bromide against the BRIC economies put forward over the weekend is bereft of any real connection to how the global economy and finance work.
If anything, statements such as that are likely to increase economic uncertainty and lead to outcomes that are diametrically opposed to the stated goals that they seek to achieve.
