Dedollarisation attempts Trump-ed

Incoming US President Donald Trump has made a significant declaration regarding global trade. He has expressed his intention to resist any efforts aimed at diminishing the dollar's dominance in international trade via dedollarisation. His statement particularly targets the BRICS nations — Brazil, Russia, India, China and South Africa.

Trump has warned of imposing a 100% tariff on BRICS countries should they pursue a common currency to rival the dollar. However, BRICS is still in the early stages of developing a unified currency system.

This declaration, made even before Trump assumes office, has further devalued the rupee against the dollar and is complicating India's strategic initiatives to bolster its currency.

Countries such as India, the UAE, and Indonesia have been striving to lessen their reliance on the dollar. However, their bilateral agreements to conduct trade in local currencies now face uncertainty.

Indian attempt

A committee appointed by the Reserve Bank of India (RBI) has proposed strategies to enhance the rupee's international presence. Recommendations include allowing Indian banks to provide rupee-based services abroad and eliminating the withholding tax on masala bonds.

Progress has been observed, with Bangladesh and India initiating trade transactions in rupees on July 11, 2023. Shortly thereafter, on July 15, the RBI and the Central Bank of the UAE formalized agreements to facilitate rupee-dirham trade and connect their payment systems.

India is also strengthening its international relationships. On July 16, Finance Ministers from India and Indonesia announced the establishment of a new Economic and Financial Dialogue.

This approach indicates a clear strategy. India is utilizing bilateral trade agreements to promote the rupee's internationalization and decrease its dependency on the dollar.

Currently, India has free trade agreements with seven countries on a bilateral basis and 18 countries multilaterally. Ongoing discussions are taking place with Australia, the UK, the US, Canada, the EU, and the Russia-led EAEU.

Furthermore, the Gulf Cooperation Council, which includes Saudi Arabia and the UAE, has reached out to India for trade negotiations.

Additionally, India is engaged in the Indo-Pacific Economic Framework, which encompasses nations representing over 40% of global GDP.

Dedollarisation not going to be easy

Reducing dependence on the dollar presents significant challenges. The dollar is the primary currency in global trade, particularly in the energy sector. For instance, India relies on imports for 75% of its crude oil, all of which is priced in dollars. An increase in the dollar's value leads to higher fuel prices, contributing to inflation.

Moreover, the United States has utilised the dollar as a tool in geopolitical disputes. A notable example is the freezing of dollar accounts during the Ukraine-Russia conflict, which served as a strategic measure.

These factors are prompting nations to consider a multipolar financial system. The objective is to establish a more inclusive trade and payment framework that is not dominated by a single currency.

Nevertheless, its strong defence of the dollar by Trump complicates this aspiration. His position may pose significant obstacles for emerging economies seeking financial autonomy.