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Friday, March 31, 2023

March 31, 2023

In what is another blow to the hegemony of the US dollar, Brazil announced an agreement with China to facilitate transactions in their respective local currencies, the reais and yuan. This latest dollar-avoiding scheme shows how the largest economies of Asia and Latin America are once again cooperating to boost their sovereignty.

The Brazilian Agency for the Promotion of Exports and Investments (ApexBrasil) announced on March 29 that the two countries had signed the establishment of bilateral trade in local currencies.

“The expectation is to reduce costs, (...) further promote bilateral trade and facilitate investments [in Brazil],” the state body said in a statement when confirming a key point of an initial agreement signed at the end of January.

The agreement, which implies the exclusion of the dollar as a method of payment, was signed during the Brazil-China Economic Seminar held in Beijing in the presence of representatives from Brazil and China and some 500 businesspeople from the largest companies of both countries.

Officials from both countries specifically signed two agreements.

The first agreement decrees that the Brazilian bank BBM, controlled by the Chinese Bank of Communications (Bocom), enters China’s interbank payment system, known as CIPS, which is increasingly being accepted as an alternative to the Western-controlled SWIFT system. The second agreement establishes the creation of a Clearing House financial institution where the US dollar will again be excluded.

For her part, the Secretary of International Relations of the Ministry of Finance of Brazil, Tatiana Rosito, said at the end of the seminar that as an “initial step” this decision, which is optional, allows “greater predictability of exchange rates” and “reduces the costs of transaction.”

In addition, she pointed out that the elimination of an intermediary currency, in reference to the US dollar, “will be of interest” to companies because “it represents less cost.”

The Chinese Vice Minister of Commerce, Guo Tingting, stressed that Brazil is a strategic partner and celebrated the progress achieved with the agreement.

Of course, this rapid advancement in relations is in complete opposition to the initial desires of former President Jair Bolsonaro, who closely followed the foreign policy of then US President Donald Trump. However, despite the position of Bolsonaro, it did not hinder economic relations in a major way.

The ApexBrasil agency pointed out that since 2009, China has been Brazil's largest trading partner and one of the main sources of investment in the Latin American giant.

“In 2022, trade flow reached a record of $150.5 billion, with Brazilian exports of $89.7 billion and imports of $60.7 billion,” the announcement said.

This new commercial strategy of trading in local currencies has long been promoted by Russian President Vladimir Putin, including as recently as his meeting with Xi on March 20–22.

“We are in favour of the use of the Chinese yuan in settlements between Russia and the countries of Asia, Africa and Latin America,” said the Russian president. He also expressed confidence that such “forms of settlement will develop between Russian partners and their third-country counterparts.”

It is recalled that Nouriel Roubini, an economist with the moniker ‘Doctor Doom’ for correctly predicting the 2008 global financial crisis, said in February that the dollar’s status as the world’s main reserve currency is in jeopardy. This is becoming more apparent as the world’s largest non-Western economies, such as China, Russia, India, Egypt, and Brazil, are agreeing to trade in their respective local currencies and not the US dollar.

The truth is that the dollar’s dominance is likely to remain in the near future because it still is the principal currency of international trade and transactions. However, its stranglehold on the global financial system is weakening, especially as more countries are trading in other local currencies, which in turn reduces their exposure to the dollar.

This is why de-dollarization is not a rapid process, but a long one. Ironically though, it is the US that accelerated this process even faster by falsely believing that the weaponization of the dollar through sanctions would make Russia capitulate to its demands in regards to Ukraine. Instead, Russia rebounded the sanctions by establishing new payment mechanisms with friendly trading partners.

The current deal between China and Brazil is massive towards securing their own sovereignty and weakening US hegemony, and one that Washington would not have anticipated when it began its economic hostilities against Russia. But it was this very weaponization of the dollar that made the non-Western world weary of being caught up in a difficult position like Russia initially was. In this way, non-Western trust in the dollar was broken, something that Washington still does not fully appreciate yet, or feel the full effects of.