In 2021, China derived 43% of its GDP from investment, which is twice as much as the US and other Western countries. If China shifts some of its GDP to consumption, it could reduce its trade surplus by encouraging consumers to buy more imported goods. This could potentially position China and its trading allies to challenge the dominance of the US dollar.
Change is good, but dollars are better, a US author of romance novels once wrote. A similarly light-hearted sentiment often inspires discussions about the future role of the US dollar as the world’s leading currency. The consensus view is that the dollar is safe. I think the consensus is wrong.
The dollar is the foundation of US global leadership, and the future of the dollar is therefore intricately linked to the debate about geopolitical fragmentation. Brazil’s president, Luiz Inácio Lula da Silva, asked during his recent visit to China: “Why should every country have to be tied to the dollar for trade?… Who decided the dollar would be the [world’s] currency?”
These are good questions. The perhaps surprising answer is that he himself made that decision, together with the former leaders of the other “Brics” group of nations: Brazil, Russia, India, China and South Africa. Their economic-development models have succeeded but have also critically depended on the US dollar. During the period of hyperglobalisation – which I date from 1990 to 2020 – the US became the global importer of last resort, and let its trade deficit against the rest of the world increase. China and many other fast-developing economies built up savings in the currency they were paid in – the US dollar. They invested those savings into US bonds and other assets. The willingness of the US to absorb the world’s savings surpluses was the engine of globalisation. It ensured that the dollar would maintain its status as the world’s leading currency.
This mechanism explains what happened in the last 20 years, but it won’t tell us what will happen in the next 20. Yet the dollar fans assume that the geopolitical and geo-economic environment will stay broadly the same.
If the five Brics countries wanted to end their dependence on the dollar, they would have to do more than just choose another currency to trade in. It is not a menu choice, as Lula suggested during the same speech. He and his fellow Brics leaders would have to change how they interact with the rest of the world, and with one another.
Russian Foreign Minister Sergei Lavrov told reporters on the sidelines of the Shanghai Cooperation Organization meeting in India’s western state of Goa that it has billions of Indian rupees that it can’t use.
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