By Qamar Bashir
Efforts to challenge the U.S. dollar’s global dominance have historically been hindered by disparities among nations in economic strength, foreign reserves, human resource development, infrastructure, productivity, innovation, and wealth creation. However, recent advancements have enabled international and regional organizations to make
significant progress in reducing reliance on the dollar for investment, trade, and reserves.
Emerging economies have achieved substantial growth, enhancing their economic resilience and reducing dependence on the U.S. dollar. For instance, China’s GDP has grown significantly, positioning it as a major global economic player. Countries are developing financial infrastructures that facilitate transactions in local currencies. The BRICS nations (Brazil, Russia, India, China, and South Africa) are exploring the creation
of a new reserve currency to challenge the dollar's dominance. Nations are entering
agreements to conduct trade in their own currencies. For example, Russia and China have
increased the use of the ruble and yuan in bilateral trade, reducing reliance on the dollar.
The development of digital currencies and blockchain technology offers alternatives to
traditional dollar-based transactions. China's digital yuan is a notable example, aiming to
facilitate international trade without the dollar. These initiatives reflect a strategic move
by various countries and blocs to enhance economic sovereignty and reduce exposure to
dollar-centric financial systems.
The notable example the BRICS nations—Brazil, Russia, India, China, and South
Africa—have increasingly utilized local currencies in their intra-group trade. In 2012,
BRICS countries signed agreements to promote trade in local currencies, aiming to
replace the U.S. dollar as the primary unit of trade among them. Between 2017 and 2022,
intra-BRICS trade increased by 56%, reaching $614.8 billion in 2022. At the 2023
BRICS Summit, member countries agreed to promote the accelerated use of local
currencies in cross-border payments. Institutional mechanisms like the BRICS Interbank
Cooperation Mechanism and BRICS Pay have been developed to facilitate these
transactions. The trade among BRICS nations and local currency settlements rose to 85%,
up from 26% two years prior.
The Shanghai Cooperation Organisation (SCO) has been actively promoting the use of
national currencies in trade and investment among its member states. In September 2022,
during the Samarkand Summit, the SCO Heads of State Council approved a roadmap
aimed at gradually increasing the share of national currencies in mutual settlements. For
instance, on February 21, 2023, representatives from finance ministries, central banks,
and financial organizations of member states met to share experiences and discuss the
development of payment and clearing systems for mutual trade in national currencies. For
example, over 70% of commercial transactions between China and Russia are conducted
in the Russian Ruble and the Chinese Yuan.
In the European Union (EU), trade and investment are dominated by the euro followed by
the U.S. dollar, with the euro being the primary currency for exports (49%) and the dollar
leading in imports (50%) as of 2022. The EU’s foreign direct investment (FDI) inflows
increased by $12.3 billion in August 2024, with inward FDI stock valued at
approximately $3 trillion and outward stock at $4.5 trillion in 2022. Additionally, foreign
portfolio investments rose by $281.4 billion in June 2024. These figures underscore the
euro’s prominence in EU exports and investments.
Trade and investment volumes between Russia, its allies, and Eastern countries have
significantly shifted toward local currencies in recent years. In 2023, Russia's total trade
volume reached approximately $844 billion, with over 80% of its trade with China settled
in Rubles and Yuan. A Eastern Europe and Central Asia primarily use national currencies
for regional trade, though the U.S. dollar and Euro remain prevalent for international
transactions. Investment flows, including Russia's $38 billion inward FDI and $64 billion
outward FDI in 2021, are also increasingly shifting to local currencies, reflecting a
broader strategy to enhance regional economic resilience and sovereignty.
African nations are actively working to reduce their reliance on the U.S. dollar in trade
and investment to enhance economic sovereignty and mitigate vulnerabilities associated
with currency fluctuations. A significant initiative in this direction is the Pan-African
Payment and Settlement System (PAPSS), launched by the African Union, which
facilitates cross-border trade using local currencies, eliminating the need for U.S. dollar
conversions. This system is projected to save the continent approximately $5 billion
annually in currency conversion costs. Additionally, countries like Nigeria and Tanzania
have implemented policies to promote the use of their national currencies in international
transactions. For instance, Tanzania has banned pricing in foreign currencies to
strengthen the Tanzanian shilling's role in trade. Furthermore, the African Continental
Free Trade Area (AfCFTA) agreement encourages member states to conduct trade in
local currencies, fostering intra-African commerce and reducing dependence on external
currencies.
ASEAN member states are actively reducing their reliance on the U.S. dollar by
promoting the use of local currencies in trade and investment. Initiatives include
establishing Local Currency Settlement (LCS) frameworks among countries like
Indonesia, Malaysia, and Thailand to facilitate direct currency exchanges without
involving the U.S. dollar. Efforts are also underway to enhance regional payment
systems, integrating digital platforms and standardizing QR code payments across
member nations. ASEAN finance ministers and central bank governors have expressed
commitment to advancing local currency usage to strengthen financial resilience and
reduce exposure to external economic shocks.
Middle Eastern nations are actively reducing their reliance on the U.S. dollar by
diversifying currency usage in trade, strengthening regional financial cooperation, and
developing alternative payment systems. For instance, in January 2023, Saudi Arabia's
Finance Minister, Mohammed Al-Jadaan, announced the kingdom's openness to trading
in currencies other than the U.S. dollar, marking a significant shift in its economic policy.
Additionally, countries like Saudi Arabia, Egypt, and the United Arab Emirates have
joined or expressed interest in joining the BRICS group, which advocates for reducing
reliance on the U.S. dollar by promoting trade in local currencies among member states.
Efforts are also underway to establish payment systems that facilitate transactions in local
currencies, reducing the need for dollar-based settlements.
In a hypothetical world where countries have developed mechanisms to conduct trade and
investment exclusively in their local currencies, the U.S. dollar would lose its status as
the global reserve and trade currency, leading to a sharp decline in demand and
devaluation. This would result in inflation, higher borrowing costs for the U.S.
government, and reduced purchasing power for American consumers. The U.S.’s ability
to impose financial sanctions and influence global financial institutions would diminish,
eroding its soft power and strategic leverage. Globally, the financial system would
become multipolar, with regional currencies like the euro, yuan, and rupee gaining
prominence. This shift would challenge U.S. economic dominance, forcing it to diversify
its economy and foster innovation.
