What is the news editorial?

 

• • The United States, under the leadership of President-elect Donald Trump, has issued a stark warning to the BRICS nations about imposing 100% tariffs if they proceed with initiatives to introduce a new global currency or alternatives to the US dollar (USD) in international trade.

 

Historical Background

 

1. Formation and Evolution of BRICS

 

• • Origins: Formed in 2006, BRICS initially included Brazil, Russia, India, and China. South Africa joined in 2010.

• • Expansion in 2023: Egypt, Ethiopia, Iran, and the UAE were added, increasing BRICS’s global representation to half the world’s population and nearly 25% of the global GDP.

• • Purpose: To promote economic cooperation, challenge Western dominance in global finance, and support a multipolar world order.

 

2. Dominance of the US Dollar

 

• • Global Transactions: Over 90% of global trade is conducted using the USD, making it the primary reserve currency.

 

Historical Context:

 

• • The USD became the global standard following the Bretton Woods Agreement (1944), pegging currencies to the dollar, which was linked to gold.

• • Even after the Nixon Shock (1971), which ended gold convertibility, the USD retained its dominance due to the petrodollar system and the trust in the US economy.

 

3. Rise of Alternatives

 

• • Criticism of Dollar Hegemony: Nations like Russia and China have opposed the dollar’s weaponization through sanctions and dominance in trade systems like SWIFT (Society for Worldwide Interbank Financial Telecommunication).

• • BRICS Initiatives: Discussions to create a BRICS currency gained momentum to reduce dependency on the USD and establish a more equitable financial system.

 

Key Issues at Hand

 

1. Declining Role of the US Dollar

 

Global Reserves:

• • According to IMF COFER (Currency Composition of Official Foreign Exchange Reserves) data, the USD’s share in global reserves has been gradually declining.

• • Emerging currencies like the Chinese Renminbi (RMB) are gaining acceptance due to strategic policies such as cross-border payment systems and the piloting of a digital yuan.

 

2. The Challenge of Diversification

 

• • Liquidity and Infrastructure: The USD’s dominance stems from its entrenched infrastructure, liquidity, and trust in US financial institutions.
    Non-Traditional Currencies: Despite increasing reserves in alternatives, currencies like the rupee and RMB lack the infrastructure and liquidity to match the USD.

 

3. Economic Nationalism and Tariff Threats

 

• • The US perceives challenges to the dollar as threats to its economic supremacy, leading to warnings of punitive tariffs against nations supporting alternative systems.

 

4. India’s Cautious Stance

 

• • While participating in BRICS discussions, Indian PM Narendra Modi emphasized caution, highlighting the need for a phased approach in challenging global financial systems.

• • India has taken independent steps, such as allowing trade settlements in rupees in 2022.

 

What Does This Mean for India?

 

Economic Impact:

 

• • If the US imposes tariffs, it could hurt Indian exports.
  • India needs to carefully balance its role in BRICS while maintaining good relations with the US.

 

Rupee in Global Trade:

 

• • India has already allowed trade in rupees to reduce dollar dependency.
  • However, the rupee’s share in global forex markets is currently very low (1.6%).

 

Diplomatic Balancing:

• • India must navigate its BRICS commitments without disrupting its strategic ties with the US.

 

 

Challenges to BRICS Currency Initiative

 

1. Limited Global Acceptance

• • Countries may hesitate to adopt a new currency due to uncertainties around stability and liquidity.

 

2. US Dollar’s Entrenched Role

• • The dollar’s ubiquity in trade and financial markets creates significant barriers for alternatives.

 

3. Geopolitical Ramifications

• • US opposition, including threats of tariffs, could deter nations from aligning with BRICS’s initiatives.

 

4. Internal Divergences within BRICS

• • Member countries like India have shown hesitancy due to their reliance on existing global systems.

 

Mains Questions:

 

Model Answer:

 

• The US dollar (USD) dominates global trade, accounting for over 90% of transactions. BRICS, representing half the world’s population and 25% of the global GDP, has proposed alternatives to reduce dollar dependency. However, the US, perceiving this as a threat to its economic supremacy, has warned of punitive tariffs.

 

Implications on Global Financial Stability

 

Potential Currency Fragmentation:

 

• • A shift from the USD may fragment global financial systems, increasing transaction costs and reducing market predictability.
  • Emerging currencies, like the Renminbi, lack the liquidity and trust required for wide acceptance.

 

Geopolitical Tensions:

 

• • US opposition, including tariff threats, could polarize nations and destabilize global trade networks.
  • Trade wars may ensue, disrupting supply chains.

 

Impact on Financial Systems:

 

• • Dollar-replacement initiatives could stress global institutions like the IMF and World Bank, designed around USD centrality.

 

India’s Strategic Interests

 

Economic Impacts:

 

• • India must balance its BRICS commitments with economic ties to the US, its largest trading partner.
  • A retaliatory tariff by the US could harm India’s exports and foreign investment prospects.

 

Global Influence:

 

• • A BRICS currency might enhance India’s role in shaping an equitable financial system.
  • However, the rupee’s low share in global trade (1.6%) limits its immediate viability as an alternative.

 

Diplomatic Balancing Act:

 

• • India advocates a cautious approach, emphasizing incremental reforms over radical changes, aligning with both BRICS and Western powers.

 

Conclusion

 

• • While BRICS initiatives aim to reduce USD dependency, challenges like geopolitical tensions and currency acceptability persist. India’s balanced stance is crucial to ensuring strategic autonomy without jeopardizing global economic ties.

 

 

Model Answer:

 

• The dominance of the US dollar (USD) in global trade stems from its historical role in the Bretton Woods Agreement (1944), where it became the world’s reserve currency. Despite challenges, the USD remains central to trade, reserves, and global financial stability.

 

Historical Dominance of the USD

 

Bretton Woods System:

 

• • Established the USD as the global anchor currency, pegged to gold.
    Even after the Nixon Shock (1971), which ended gold convertibility, the USD remained dominant.

 

Petrodollar System:

 

• • Global oil trade in USD reinforced its demand, ensuring liquidity and widespread acceptance.

 

Global Institutions:

 

• • Institutions like the IMF and World Bank were designed around USD centrality, further entrenching its role.

 

Challenges Faced by Emerging Economies

 

Liquidity and Infrastructure:

 

• • Alternatives like the Indian rupee or Chinese renminbi lack the liquidity and institutional trust of the USD.
  • The USD accounts for 88% of forex turnover, compared to the rupee’s 1.6%.

 

Economic Dependencies:

 

• • Emerging economies rely heavily on USD-based trade and investments, making a swift transition risky.
  • India’s export-driven sectors may suffer without USD access.

 

Global Resistance:

 

• • US economic influence, including threats like tariffs, deters countries from adopting alternatives.
  • Financial systems, like SWIFT, remain USD-centric.

 

Conclusion

 

• • The US dollar’s dominance is deeply entrenched, making alternatives challenging for emerging economies like India. While initiatives like BRICS seek diversification, achieving significant change requires robust infrastructure, liquidity, and geopolitical alignment.

 

Remember: These are just sample answers. It’s important to further research and refine your responses based on your own understanding and perspective. Read entire UPSC Current Affairs.