When you catch Donald Trump’s attention, it is either because he wants to do business with you, or because he sees you as a competitor or threat.
When Trump threatened Mexico and Canada with 25% tariffs on imports from those countries, it was because he saw both America’s neighbors as business partners. The tariff threats served the purpose of moving business negotiations in a direction that benefited America—and of course President Trump.
By contrast, when Trump now threatens 100% tariffs on the BRICS group of countries, it is because he sees the BRICS bloc as first and foremost an economic threat to the United States:
President-elect Donald Trump threatened BRICS countries with a 100 percent tariff if they tried to “create a new BRICS Currency” or to support another currency to “replace” the U.S. dollar.
In Trump’s own words, from Truth Social,
The incoming 47th U.S. president would never pay this much attention to the BRICS group’s efforts at de-dollarizing international trade if their efforts were feeble and would amount to nothing. The fact that he is speaking up about the matter tells us that
- If BRICS really does dump the dollar, it will have a major negative impact on the U.S. economy, and
- The BRICS group has made substantive progress toward the point where de-dollarization is a real option.
That is not to say it will happen in the next few months, or even next year. All we can say about the de-dollarization process is that when it gets going, it will unfold gradually and incrementally. It will also happen completely beyond the control of the United States government. First, the BRICS nations would remove the dollar entirely from intra-BRICS trade; then they would gradually expand the de-dollarization to trade with other countries.
As a result, global demand for the dollar would decline radically. However, the decline would not be limited to a shift in the default currency for international trade; central banks within the BRICS community would reduce their holdings of dollars for another reason as well.
Generally speaking, central banks hold foreign currency for two reasons. First, they can buy and sell foreign currency to change the exchange rate of their own currency, or to keep it unchanged. Suppose, e.g., that there is downward pressure on the Argentinian peso, such that the peso becomes weaker against the U.S. dollar. The central bank of Argentina wants to defend the value of the peso, so they sell some of the dollars they have in their currency reserve and use it to buy their own currency.
This operation increases demand for the peso, which means that it strengthens the peso’s value.
To do this, the Argentinian central bank needs to have a reserve of dollars on hand. They also need to have it for another reason, namely foreign trade. When exporters receive sales revenue in foreign currency, they (or their banks) bring it to the central bank and exchange it for domestic currency; conversely, importing companies come to the central bank to acquire foreign currency so they can buy products from another country.
Central banks are responsible for helping import and export businesses buy and sell the foreign currency they need (imports) or receive and want to get rid of (exports). For this reason, the currencies used the most in foreign trade are also the currencies that central banks normally keep in large amounts in their currency reserves.
When we combine these two reasons for central banks to keep foreign currency, we get an impressive amount of money held in reserve by the world’s monetary authorities. This also means that there are a lot of dollars out there that the central banks of the BRICS countries and their allies could dump onto the global currency market.
To get an estimate of just how big of a currency-market shift we are talking about, I noted in 2022 that if a BRICS group of ten countries sold off all their dollar reserves, it would be equivalent to an 8.8% expansion of the U.S. money supply. That estimate is slightly on the high side today, but it is not an exaggeration to say that a full BRICS flight from the dollar would have the same effect on the dollar as if the Federal Reserve suddenly increased the money supply by 8%.
This is a substantial expansion of the money supply, especially today when we have not yet gotten back to pre-pandemic levels of money supply and monetary velocity. It means that if the BRICS dollar dump happens—even at smaller proportions than a full de-dollarization—the ‘inflation fuse’ is shorter. There would not be much of a time lag before inflation returned to the U.S. economy.
Investors in the market for U.S. debt can no longer see this scenario and simply dismiss it. When they make their risk assessments while taking the BRICS plans into account, they conclude that they cannot commit any more money to buying U.S. debt without also demanding higher yields.
This is the situation that Trump and his designated Secretary of the Treasury Scott Bessent find themselves in. When Trump reacts the way he does to the BRICS countries, it is because he realizes just how serious and how impactful their de-dollarization threat is.
