Could Europe Benefit From De-dollarisation?
By PHILIP PILKINGTON
This week Brazil and China reached a deal to trade using their own currencies rather than the US dollar. The Chinese are fulfilling their vow from February to open up a clearing house to settle yuan-denominated trades in Brazil, having previously announced similar clearing houses in Pakistan, Kazakhstan, and Laos.
In many ways, this development is inevitable. As of 2021, China accounts for 31.3% of Brazilian exports and 22.8% of their imports, the most of any country. The United States comes a distant second, accounting for only 11.2% of Brazilian exports and 17.7% of imports. China has been Brazil’s largest trade partner for fourteen years. At a certain point, both parties were going to raise the question of why their trade should use a third party currency.
The same day that the Brazilian trade deal was announced, another major story hit global currency markets: China settled its first LNG trade in yuan. This development alone would be important enough to bear scrutiny given that much-vaunted status of the US dollar as an energy currency — the ‘petrodollar’ — but reading beyond the headlines reveals something even more surprising. The trade was not settled with an energy company in some far-off Middle Eastern country, but instead with TotalEnergies, the French supermajor. With revenues of over $182bn and more than 100,000 employees, TotalEnergies is by far the largest company in France.
This energy deal suggests that ‘yuanisation’ will not be confined to the global periphery. Until recently, suggestions that the BRICS+ countries would dump the dollar and move to new currencies was met with derision. The Brazilian trade deal puts that scepticism firmly to bed. But it now appears that the yuan is making inroads into Europe. While the speed of this change is shocking even to those of us paying attention, these developments were presaged by German Chancellor Olaf Scholz’s controversial visit to Beijing last November.
The question that logically follows this is cui bono – to whom does this benefit? Obviously, yuanisation puts wind in the sails of the Chinese. Their goal is clearly to carve out an alternative global trade regime to rival the American-led model that has been in place since 1945. The countries that jump on board the BRICS+ bandwagon are also likely to be beneficiaries.
The most obvious loser is the United States. Currency use in global trade is a zero-sum game. Every yuan that changes hands for goods and services on the global markets is a dollar that did not change hands. America has long relied on the hegemonic status of its currency for both its ability to consume more than it produces and for its soft power projection. America’s geopolitical strategy, largely centred around imposing sanctions regimes, unravels if there are credible alternatives in place.
The situation for Europe is less clear, as recent developments there demonstrate. The Europeans have long been unhappy with playing second fiddle to the Americans in global economic relations, and counteracting this was part of the rationale for launching the euro around the turn of the millennium. Scholz’s Beijing visit signals that Europe could try to position itself between America in the West and China in the East, a potentially useful long-term ploy to benefit from developments in both large economies.
Britain, on the other hand, is in an unusually vulnerable position. Since the 1980s, British manufacturing has declined dramatically, and British living standards have become increasingly reliant on a financial services sector concentrated in the City of London. In reality, the City is an outpost of American financial power. This means that dedollarisation makes the City less important on the global stage — and the process may even trigger an American reaction to onshore their financial services, thereby dealing a punishing blow to Britain.
The City has been under pressure for some time now. Large FTSE-listed firms have been moving to New York, while IPOs have been falling off a cliff. Prior to the American turn against China, the City looked set to be a major player in yuan trading. But this seems unlikely now that Sino-American relations have soured, so joined at the hip are Britain and the US in their foreign policy. In fact, if Britain ever did want to pursue the balancing act being attempted by the Europeans, the country would likely have to re-join the European Union — with all the problems that raises. All the while, China’s influence can only spread, and the European mainland may well be a key part of that.