Trump’s tariff threats to Brics set to increase demand for alternative reserve currency

It may accelerate the group’s efforts to create alternative financial systems but they might struggle to replace the greenback, experts say

US president-elect Donald Trump has threatened the Brics nations with 100 per cent tariffs if they avoid using the US dollar. AP

US president-elect Donald Trump’s threat to the Brics nations of imposing 100 per cent tariffs if they avoid using the US dollar could possibly increase demand for an alternative reserve currency, according to experts.

On Saturday, Mr Trump warned the group that he would require commitments that they would not move to create a new currency.

“The idea that the Brics countries are trying to move away from the dollar while we stand by and watch is over,” Mr Trump said in a post to his Truth Social network.

“We require a commitment from these countries that they will neither create a new Brics currency, nor back any other currency to replace the mighty US dollar or, they will face 100 per cent tariffs, and should expect to say goodbye to selling into the wonderful US economy.”

The Brics group is made up primarily of Brazil, Russia, India, China and South Africa, but has recently expanded to include Iran, Saudi Arabia, the UAE, Argentina, Egypt and Ethiopia. This year, Russia assumed the rotating chairmanship of the group.

Thirty-four countries have submitted an expression of interest in joining the bloc of major emerging economies, South African Foreign Minister Naledi Pandor said in February.

Imposing tariffs on Brics nations for pursuing de-dollarisation might accelerate those countries’ efforts to create alternative financial systems, reducing reliance on the US dollar and potentially weakening its global dominance while fostering closer economic ties among Brics nations, says Dhruv Tanna, head of compliance and money laundering reporting officer at PhillipCapital, an integrated financial institution based in Dubai’s DIFC.

“It could also escalate trade tensions, disrupt global supply chains, raise consumer prices in the US, and harm US exporters through retaliatory measures,” Mr Tanna says.

On his campaign trail, Mr Trump pledged to make it costly for countries to move away from the US dollar, threatening to use tariffs to ensure compliance.

“You leave the dollar and you’re not doing business with the United States because we are going to put a 100 per cent tariff on your goods,” Mr Trump said at a rally in Wisconsin in September.

The president-elect, who has long embraced protectionist trade policies, has been discussing with his economic advisers ways to penalise countries that engage in bilateral trade using currencies other than the dollar.

Mr Trump has long stressed that he wants the US dollar to remain the world’s reserve currency. He said in a March interview with CNBC that he “would not allow countries to go off the dollar” because it would be “a hit to our country”.

“There is no chance that the Brics will replace the US dollar in international trade, and any country that tries should wave goodbye to America,” Mr Trump said on Saturday.

While dollar dominance has declined in recent decades, the US currency still accounted for 59 per cent of official foreign exchange reserves in the first quarter of 2024, with the euro following at almost 20 per cent, according to the International Monetary Fund.

The dollar has also been the world’s principal reserve currency since the end of the Second World War and is estimated to be used in more than 80 per cent of international trade.

Resistance against the US dollar was popular at a Brics summit of emerging and developing nations in Johannesburg last year.

Former Nigerian president Olusegun Obasanjo told the gathering: “I want to buy from India. Why should I use dollars?”

However, this is not a new idea. In 2009, China’s central bank governor of the time, Zhou Xiaochuan, called for a “super sovereign reserve currency” that would be “disconnected from individual nations”.

Last year, Brazilian President Luiz Inacio Lula da Silva proposed creating a common currency in South America to reduce reliance on the US dollar.

In October, Russian President Vladimir Putin accused western powers of “weaponising” the dollar, saying at a Brics summit in Kazan that sanctions against Russia since its invasion of Ukraine “undermine the trust in this currency and diminish its powers”.

The process of de-dollarisation is “irreversible” and “gaining pace”, Mr Putin said last year in a virtual address to the Brics summit in Johannesburg.

“Tariff threats already appear central to the next Trump administration’s trade and foreign policies,” says Hasnain Malik, head of emerging and frontier markets investment strategy at Dubai-based independent research and data provider Tellimer.

“Weaponising trade with the US and the use of the US dollar likely only increase the demand from other countries for an alternative dominant reserve and trade currency. Part of the rise in the price of gold is a reflection of this.”

However, because rival currencies lack the combination of full convertibility, market-determined pricing, and the backing of a tested legal system, they will struggle to replace the US dollar as a reserve currency in any event, with or without Mr Trump's threats, Mr Malik explains.

Similarly, Shigeto Kondo, a senior researcher at the Japanese Institute of Middle Eastern Economies Centre of the Institute of Energy Economics, Japan, says threatening to raise tariffs is a tactic to pressure the Brics countries.

Since it is not realistic for the Brics countries to create a common currency with substance, the possibility of such a threat being carried out is also low, he reckons.

“In the US, there is a bipartisan call for a tough stance to be taken against China. Several hardliners have also been named to join the next Trump administration. The US is prepared to take countermeasures against any moves led by China that could threaten US hegemony, even if they are unlikely to materialise,” Mr Kondo says.

“Although China is the largest economy in the Brics bloc, its currency, the renminbi is strictly controlled by the government, causing the lack of ample share in the world’s foreign reserves. The US dollar is by far the most widely used currency in international trade and finance.”

Mr Trump has already rattled world markets ahead of his second term with threats to levy an additional 10 per cent tariffs on goods from China and 25 per cent tariffs on all products from Mexico and Canada if those countries do not do more to stem the flow of illegal drugs and undocumented migrants across US borders.

Canadian Prime Minister Justin Trudeau met Mr Trump on Friday to discuss trade and border issues, aiming to ease tensions between the two nations after the tariff threat.

Some members of Brics are among the US’s largest trading partners, including India and China.

The US’s goods and services trade with China totalled an estimated $758.4 billion in 2022 and the goods-and-services trade between the US and India totalled an estimated $191.8 billion in 2022, according to the Office of the US Trade Representative.

Calls for a global shift away from dollar dominance are not new, but experts say recent geopolitical shifts and growing tension between the West and Russia and China have brought them to the fore.

In early 2022, Western sanctions over Russian’s invasion of Ukraine froze nearly half of Russia’s foreign currency reserves and removed major Russian banks from Swift, a messaging network banks use to enable international payments.