Why China and Brazil Abandon the Dollar for Trade
The US dollar has long been the dominant currency in international trade, serving as a medium of exchange, a store of value and a unit of account for many countries. However, in recent years, some countries have sought to reduce their reliance on the dollar and diversify their reserves and trade settlements. One of the most notable examples of this trend is the deal between China and Brazil, two of the largest economies and trading partners in the world.
What is the deal between China and Brazil?
According to media reports, China and Brazil have signed an agreement on mutual currency trade, ditching the US dollar as an intermediary, and plan to expand cooperation in food and minerals. The deal will allow the two BRICS members to conduct their massive trade and financial transactions directly, exchanging renminbi for real and vice versa, instead of using the US dollar for settlements.
The countries also reportedly announced the creation of a clearinghouse that will provide settlements without the US dollar, as well as lending in national currencies. The move is aimed at facilitating and reducing the cost of transactions between the sides, and getting rid of dollar dependence in bilateral relations.
Why did China and Brazil abandon the dollar?
There are several possible reasons why China and Brazil decided to abandon the dollar for trade. Some of them are:
- Political: China and Brazil may want to challenge the US hegemony and influence in global affairs, especially in light of the recent tensions and conflicts between Washington and Beijing over issues such as trade, human rights, technology, security and climate change. By ditching the dollar, they may signal their dissatisfaction with the US policies and assert their autonomy and sovereignty.
- Economic: China and Brazil may want to boost their trade and investment ties, which have been growing steadily over the past decade. China has been Brazil’s largest trading partner for more than a decade, with bilateral trade hitting a record $150 billion last year. By using their own currencies, they may reduce transaction costs, exchange rate risks, exposure to US sanctions and interference, and enhance their financial stability and resilience.
- Strategic: China and Brazil may want to promote their own currencies as alternatives to the dollar in regional and global markets. By increasing the use and acceptance of their currencies, they may increase their bargaining power, influence and attractiveness to other countries. They may also seek to diversify their foreign exchange reserves, which are largely denominated in dollars, to hedge against inflation, depreciation or devaluation of the greenback.
What are the implications of this deal for both countries and the world economy?
The deal between China and Brazil may have significant implications for both countries and the world economy. Some of them are:
- For China: The deal may help China advance its goal of internationalizing its currency, which has been gaining momentum in recent years. According to the Secretary for International Affairs at the Ministry of Finance of Brazil, Tatiana Rosito, 25 countries are already making settlements with China in yuan. The deal may also help China secure its access to Brazil’s abundant natural resources, such as soybeans, iron ore, oil and gas, which are vital for its economic growth and development.
- For Brazil: The deal may help Brazil diversify its trade partners and markets, which have been heavily dependent on China. The deal may also help Brazil access cheaper financing from China, which has been a major source of investment and loans for the Latin American country. The deal may also help Brazil strengthen its position in regional and global forums, such as BRICS, G20 and UN.
- For the world economy: The deal may have mixed effects on the world economy. On one hand, it may foster greater trade integration and cooperation between two major emerging markets, which may boost global growth and demand. On the other hand, it may undermine the role and status of the US dollar as the global reserve currency, which may create instability and uncertainty in financial markets. It may also increase geopolitical rivalry and competition between the US and China-led blocs.
FAQs
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Q: When was this deal signed?
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A: The deal was reportedly signed on March 30th 2023 during a high-level meeting between Chinese President Xi Jinping and Brazilian President Luiz da Silva in Beijing.
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Q: How much trade is conducted between China and Brazil?
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A: According to official statistics, trade between the countries in 2022 hit a record high of $150.5 billion. In 2021, Brazil’s exports to China exceeded its imports by roughly $34 billion.
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Q: How will this deal affect the exchange rates of the yuan and the real?
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A: The deal may have some impact on the exchange rates of the yuan and the real, depending on the supply and demand of the currencies in the market. The deal may increase the demand for the yuan and the real, as more traders and investors use them for transactions, which may appreciate their values. However, other factors, such as inflation, interest rates, economic growth and external shocks, may also affect the exchange rates.
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Q: Are there any risks or challenges associated with this deal?
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A: The deal may also entail some risks or challenges for both countries. For example, they may face technical difficulties in implementing and operating the clearinghouse and the lending mechanism. They may also encounter political opposition or resistance from some domestic or foreign stakeholders who may perceive the deal as a threat or a loss of opportunity. They may also have to deal with potential disputes or conflicts that may arise from trade imbalances, currency fluctuations or policy divergences.
How will this deal affect the US and other countries?
The deal between China and Brazil may also have some impacts on the US and other countries that are involved in trade with either or both of them. Some of them are:
- For the US: The deal may pose a challenge to the US dollar’s dominance and influence in global trade and finance, as well as to the US strategic interests and alliances in Latin America and Asia. The US may face increased competition and pressure from China and Brazil in terms of trade, investment, technology, security and diplomacy. The US may also lose some leverage and bargaining power over China and Brazil on issues such as human rights, democracy, climate change and regional stability.
- For other countries: The deal may create opportunities and challenges for other countries that trade with China and Brazil. On one hand, they may benefit from lower transaction costs, increased market access, enhanced cooperation and integration with two major economies. On the other hand, they may face more competition, uncertainty, volatility and complexity in their trade relations with China and Brazil. They may also have to adjust their policies and strategies to cope with the changing dynamics and balance of power in the global economy.
Conclusion
The deal between China and Brazil to abandon the dollar for trade is a significant development that reflects the shifting patterns and trends of global trade and finance. The deal may have various reasons and implications for both countries and the world economy, as well as for the US and other countries that are involved in trade with either or both of them. The deal may also indicate a growing desire and willingness among some countries to challenge the US hegemony and influence in global affairs, especially in light of the recent tensions and conflicts between Washington and Beijing. The deal may also signal a new era of multipolarity and diversity in global trade and finance, where different currencies and systems coexist and compete with each other.
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