Talk of de-dollarisation is divorced from reality
The end of the dollar is all the rage. In a piece yesterday for UnHerd, macroeconomic analyst Philip Pilkington argued for the acceleration of the de-dollarisation of international trade based on the recent news that Brazil and China will trade in their own currencies.
There’s one problem: the two countries have announced this arrangement multiple times — in 2009, in 2013 and now again in 2023. If history is any indicator, this is a routine talking point by the Brazilian and Chinese leadership that has so far lacked any substantial financial follow-through. Another example was an LNG trade in yuan between the China National Offshore Oil Corporation (CNOOC) and the French company TotalEnergies. But, as energy expert Anas Alhaji points out, the actual source of the LNG is the United Arab Emirates, which was paid neither in euros nor yuan but in USD, making the French-Chinese transaction symbolic at best.
In similar fashion, the claims that OPEC will de-dollarise have been around since 1975, and while the dollar has lost some ground, there is no alternative in sight. The USD share of the world’s official foreign exchange reserves is 60%; the Yuan’s is 2.76%. The dollar has been around the 60% mark since 1995, and — even more telling — a comparison of data from the Bank for International Settlements compiled by Brent Donnelly shows that since 1989 the USD share in international transactions has been steadily around 90%.
The spectre of a disappearing dollar even made it onto the cover page of the Economist in 2004, but if the last 19 years have shown anything, it is the resilience of the currency. While China certainly enjoys the media frenzy around the allegedly imminent decline of the US (think of it as a kind of diplomatic trolling), it is not clear if it or any other country would be willing to provide the world’s reserve currency even if they could.
Michael Pettis, a senior fellow at the Carnegie Endowment, has pointed out that China’s growth model benefits from the USD’s status as the global reserve currency. Replacing it would require the Chinese Government to give up control of its capital and trade account, while the People’s Bank of China would have to take over from the Federal Reserve.
This would also mean, however, that Chinese financial institutions need the same degree of transparency and global trust as their US counterparts. None of this seems likely, and it is not even clear if China trusts its own currency. A majority of its Belt and Road Initiative projects are funded and denominated in USD, demonstrating the unbroken dominance of Washington in the world of finance.
Another idea floated involves a BRICS+ currency backed by gold or commodities. Yet this assumes a level of political and institutional integration among BRICS member states that simply does not exist. Besides, the idea that India — both a regional & global competitor of China’s — will allow Beijing and Moscow to have a say in its fiscal and monetary policy is at this point political fiction.
For all the troubles of the West, the US and the EU are coherent actors with deeply embedded institutional structures that are difficult to replicate. The costs associated with the introduction of the euro were unequally distributed among member states, but the vision of a common currency as a unifying symbol was seen to be worth the sacrifice. There is no similar shared vision between India, Brazil, China, Iran, Russia, and those other states that would allow for the replication of a common currency. For now, and for some time to come, the dollar is here to stay.