In a significant development, Brazil and China have recently struck a deal to use the Yuan, China’s currency, instead of the US Dollar for their trade transactions. The move is intended to address the disproportionate use of the US Dollar in global trade, which has long been a contentious issue.

The Imbalance in Global Trade

Despite accounting for only 15% of the world’s trade which is 17% by trade volume, almost 58% of transactions are conducted in US Dollars, creating an economic imbalance that favours the United States. The recent decision by Brazil and China to use the Yuan is a step towards addressing this imbalance and promoting a more level playing field in global trade.

Interestingly, China accounts for a sizable portion of global trade, with 19.2% (21.6% including Hong Kong) of the world’s trade and 41% by trade volume. However, only 2.87% of transactions use the Yuan, creating a disparity that has been in place for decades. This move by Brazil and China to use the Yuan is a signal to the rest of the world that it is time for a change in the way global trade is conducted.

The decision to use the Yuan is a bold move by Brazil and China, and it is expected to have a significant impact on the global economy. It is also possible that other countries may follow suit and use their own currencies for trade transactions, further reducing the dominance of the US Dollar in global trade.

It’s no secret that the global economy is constantly evolving, and with that comes a shift in the way countries conduct business. One of the biggest changes we’ve seen in recent years is the move towards using the Yuan as a currency for international trade and investment, rather than relying solely on the US Dollar. But why is this shift happening, and what are the benefits?

The Problem with the Dominance of the US Dollar in Global Trade
First and foremost, using the Yuan makes sense from an economic standpoint. With the US Dollar’s value fluctuating wildly in response to market performance, keeping large amounts of it in US accounts can be a risky proposition. The US government also has the power to freeze accounts at any time, which can cause significant disruptions to international trade. The account freezing and sanctions imposed on Russia, Iran and many others is a testament to it. By contrast, the Chinese Yuan is backed by a more stable economy, and confidence in regulators is higher. This can make using the Yuan for trade transactions and investments a more secure option.

Additionally, investing in US bonds may not always be a wise decision. As we’ve seen in recent years, countries that invested heavily in US bonds have lost a significant amount of their value, from 2018 to 2021 US bonds have lost 43% of their value, which can have serious consequences for their economies. The US has a Currency Debt of 106.80% against 27.22% of China. By using the Yuan for investments, countries can mitigate some of this risk and enjoy more stable returns.

Of course, it’s not just about economics. There’s also a sense of fairness and balance at play. For too long, the US Dollar has been the dominant currency in international trade, giving the US a disproportionate amount of power and influence. By embracing the Yuan, countries can level the playing field and reduce their reliance on the US Dollar.

The Indian Rupee and Russian Ruble
It’s not just the Yuan that is gaining traction in international trade – we’ve also seen the rise of other currencies in recent years. One notable example is the Indian Rupee, which has become an increasingly popular currency for trade between India and Russia, as well as India and Iran.

In the case of India and Russia, the two countries have been exploring ways to reduce their dependence on the US Dollar in their bilateral trade. This has led to the increased use of the Rupee and the Russian Ruble in their transactions. India has also been exploring the possibility of using the Rupee for trade with other countries, including Iran, which has been facing economic sanctions that have made it difficult for them to conduct international trade using traditional currencies. Russia, on the other hand, is trading its petroleum resources and wheat in the Rubles and in Rubles and Yuan both, with China.

The use of the Rupee for international trade has been beneficial for both India and its trading partners. For India, it reduces its reliance on the US Dollar and gives the country more control over its own currency. For Russia and Iran, it provides them with an alternative to traditional currencies that may be subject to economic sanctions or political instability.

Trending Towards Financial Independence
This shift towards using alternative currencies in international trade has not gone unnoticed, and other countries have followed suit. For example, China and Russia have been increasing their use of their own currencies in their bilateral trade, and many other countries are exploring similar options. This trend towards using alternative currencies reflects a growing desire for greater financial independence and stability in the global economy.

The recent decision by Brazil and China to use the Yuan instead of the US Dollar for their trade transactions is a significant step towards reducing the disproportionate use of the US Dollar in global trade. It reflects a growing trend towards using alternative currencies in international trade, which provides countries with more financial independence and stability. The use of the Yuan and other currencies such as the Indian Rupee, and the Russian Ruble is expected to continue to increase as countries seek to reduce their dependence on the US Dollar and promote a more level playing field in global trade. The evolution of the global economy is ongoing, and this shift towards using alternative currencies is just one of many changes we can expect to see in the years to come.

Ashwin Deshmukh
New Delhi
April 09, 2023.