Avoiding the Dollar

The issue of exchange rates related to international trade payments is high on the agenda. On March 27 -28, there was a symposium at the WTO devoted to it. Last week there was a conclave in New Delhi by the so called BRICS (Brazil, Russia, India, China and South Africa) where they agreed that mutual trade be paid in their respective currencies. The U.S. pressure to universalize unilateral sanctions against Iran by excluding it from financial markets, intensified the need to operate commercially and financially with other currencies.

The dollar was for six decades the predominant currency in international trade. This gave great benefits to Wall Street financiers, great influence to U.S. government and made it possible to avoid consequences from a chronically unfavorable trade balance. Even today, despite the financial crisis originated in Wall Street and the creation of "quantitative easing" for much more than a trillion, 60 percent of all currency reserves are in dollars. But there are big changes coming.

The U.S. economy deteriorated for decades and the financial effort to save the banks has diverted and sterilized resources that could have stimulated it. Rising unemployment, U.S. de-industrialization and a chronic trade balance deficit recommend a departure from the dollar.

The mainstream press tends to invent or ignore matters, as seems convenient to Wall Street, so there is little mention of agreements to stop using the dollar on international trade. Some nations are already selling oil in other currencies and are distancing themselves from petrodollars, which was the name given to dollars printed without backing to pay higher oil prices, in 1973. Major exporting economies and international institutions, like the UN, have requested talks for a new global reserve currency.

One of them, China, is accused by the U.S. and its satellites of undervaluing its currency - the renminbi (RMB) -and Beijing is being asked to make it convertible. There is a paradox. China is the largest external customer of U.S. Treasury Bonds, so it loses more with devaluation of the dollar; for this reason, the percentage of dollars in its reserves has shrunk from 74% to 54%. The dilemma is that if the RMB is made convertible, as requested, the Dollar fall would accelerate because of high demand for RMBs. If the present level is sustained, it is expected that by 2016 China’s economy size will match that of the U.S.’s, but growing faster. By 2020, when Chinese living standards rise, China’s economy will be the largest in the world. That would be a political reason to allow greater convertibility to the RMB.


Recent symptoms

Since 2004, Russia and China advocate a new global reserve currency to replace the Dollar. They avoid the Dollar in their bilateral trade and, since a year ago, they trade only in their own currencies. China and Japan, the second and third world economies, recently reached an agreement to trade in their own currencies. The BRICS (Brazil, Russia, India, China, South Africa) have just announced that they will boost trade between themselves and will use their own currencies. Trade between BRICS is 230 billion but increasing at a 28% rate.

Africa has one billion inhabitants and its largest trading partner now is not Europe, but China. Trade between them grew by 31% annually and increased from $ 10.6 billion in 2001 to $ 127 billion in 2010 and $ 166 billion in 2011. The trade balance is favorable to Africa, because African exports were 93 billion. Chinese engineering contracts in Africa in 2010 exceeded $132 billion. More than a third of these transactions were with South Africa and after the BRICS agreement, that trade will be made in Rands and RMB, which are already reserve currencies in other African countries. The largest bank in Africa, Standard Bank, said that by 2015 over 100 billion of African trade will be paid in RMBs.

Trade between India and Africa is also growing. On March 17, New Delhi held the second summit between India and African trade ministers, which set the goal of increasing bilateral trade from $ 62 billion in 2011 to $ 90 billion by 2015. It can be assumed that the $8 billion trade between India and South Africa, will be paid in Rupees and Rands, according to the BRICS new agreement.

China seems determined to impose the RMB as a strong currency for investment and trade. Some 70,000 Chinese enterprises used the RMB in their Asian operations. In January, China and the UAE agreed to leave the U.S. dollar and use their own currencies in oil transactions. There was a currency swap for 35 billion RMB ($ 5.5 billion). This agreement with the UAE together with Iran’s exclusion from the Dollar area are a threat to the petrodollar system.

U.S. has ceased to be the main customer of Saudi oil, now it is China, which imported 1.39 million barrels in February. They are about to begin the construction of a large joint refinery and trade between both countries is growing at galloping pace. It is likely that the discreet agreement between them contemplate oil payments in RMBs.

The need to replace the dollar as the main currency for trade and finance is becoming very clear and urgent. A currency of unstable value, which is issued relentlessly by the Federal Reserve and is at the root of a global financial mess cannot be trusted as a world reserve.

The recipe

A UN report provides "a new global reserve system" ... "no longer based in the United States dollar as the main reserve currency". There are also IMF reports that recognize this need. There is one entitled "Reserve accumulation and international monetary stability" that rescues the recipe that John Maynard Keynes proposed at Bretton Woods, the "Bancor", issued by a World Central Bank. In these conditions of absolute political dominance of the financial sector over the rest of society, that option – which was the right one at that time- seems now quite unwise. Surely it would end up in a global spread of the corruption and complicity with Wall Street and the City that characterize the Federal Reserve and the Bank of England.

The answer must start with the obvious, as Deutsche Bank’s Yaroslav Lissovolik said: “The monopoly of the Euro and the Dollar as reserve currencies is now questionable. The world needs other reserve currencies." The financial aggression against Iran because of its mastering of nuclear technology, the "money tsunami" caused by quantitative easing to reward banksters or the ridiculous freezing of Mrs. Assad's accounts because of alleged, but totally legal, shopping, are proof of irrational bias. Those acts show the world the abuses large and petty of the present financial system and the urgent need for change.

In Delhi there was also agreement to create a Development Bank sponsored by the BRICS that should work mainly with the currencies of those countries, which also have solid economies. That would be a good starting point to substitute the Bretton Woods legacy that left the World Bank, the IMF and the dollar as arbiters of international finances.



Umberto Mazzei has a PhD in political science from the University of Florence. He has taught international economics at universities in Colombia, Venezuela and Guatemala. He is Director of the Institute of International Economic Relations in Geneva.
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