The days when the dollar was important seem to be long gone.
Every couple of months, bilateral relations between new global powerhouses seem to confirm what has been long announced: The U.S. dollar is no longer seen as the world’s reserve currency.
This week it was the time for China and Brazil to ditch the once mighty U.S. dollar as the base for their commercial relations. The rising Asian country and the former Portuguese enclave in Latin America will now use their own currencies to trade.
Both countries have signed an agreement to use their own currencies when buying and selling from and to each other. The deal will be valid for the next three years and will amount to what is now worth some 60 billion Brazilian reals. This agreement is the first between the two nations, but not new when it comes to getting rid of a debilitated, less valuable dollar. In the past few months, China and Russia, China and India and other so-called emerging powers closed similar deals.
The kind of agreement to trade in local currencies is supposed to set a new standard in the international dynamics that for many years supported the prevalence of the U.S. dollar as everything all other currencies wanted to be. “Our interest is not to establish new relations with China, but to expand relations to be used in the case of turbulence in financial markets,” said Brazilian Central Bank Governor Alexandre Tombini said.
Mr. Tombini has got it just right. Carefully crafted turbulence in the Western economic landscape mandates new ways to assess risk and more importantly, to prepare for and mitigate unknowns. While the Euro zone and the American economy slowly but surely walk towards financial Armageddon, countries that were once completely dependent on the American and European way of doing business are now looking elsewhere to guarantee their survival. The recent Chinese-Brazilian expansion in their commercial relations is another example of how developing countries are assuring their lifeline in the post-dollar future.
What China and Brazil have in mind with the latest agreement is to buffer their commercial ties should another financial bomb explode somewhere in the world. Many academics and experts agree that solid ties between China and Brazil are very important for the political alliance know as the BRICS. What these two countries along with Russia, South Africa and Indian intend to do, is to limit the impact of economic instability by allying themselves with nations that have equal goals and conditions.
Commercial ties and exchange between China and Brazil grew exponentially in the last few years. It went from about 14 billion to more than 150 billion Brazilian Real between 2003 and 2012. The effects of this commercial partnership has gone so far as to turn China into Brazil’s main trading partner. This fact has further isolated Brazil from the negative effects of a dollar collapse, or an American economic downfall which many experts agree, has been looming for a long time.
The question many people are asking is whether Brazil is closing a deal with the devil or simply changing one devil for another. The only way to know is to observe near future events. Perhaps, the coming of the new Development Bank that the BRICS have agreed to create will further commercial ties among partners and help solidify agreements such as the one signed by the two countries.