Gaining currency: Latin America’s move to shift away from US dollar
Experts say that a swift end to dollar dependence may not be possible, but more and more countries are signalling their intent to reduce reliance on the US greenback.
In April, Argentina announced it would pay for Chinese imports in yuan instead of the dollar to maintain its dwindling foreign currency reserves. / Photo: Reuters Archive
In early May, presidents of Argentina and Brazil, Alberto Fernandez and Luiz Inacio Lula da Silva, met to continue their shift away from reliance on the US dollar in trade, with Lula pledging to continue negotiations to establish an alternative financial mechanism.
Brazil’s finance ministry executive secretary Gabriel Galipolo said the initiative centred on a line of credit to finance Brazilian enterprises exporting to Argentina to move away from the dollar.
In the last five years, he explained, Brazil’s lack of mechanisms to finance its exports and imports has resulted in a $6 billion trade loss with Argentina to China - with the Asian superpower adopting other payment mechanisms such as credits and SWAPS, an alternative to the globally-accepted and West-dominated SWIFT.
According to Priscila Palacio of the Faculty of Economic Sciences at the University of Buenos Aires, the catalyst behind Argentina and Brazil’s initiative relates to “political-ideological considerations” by both governments.
She suggests the drive to de-dollarise in Argentina stems from concerns about a “long-standing economic crisis and the shortage of reserves that its economy has been facing since 2019”. Such shortages of reserves and the government’s “trade protectionism,” she explains, have led to a decrease in imports from Brazil and a trade deficit with its top trade partner.
Amid what experts describe as financial barriers to trade caused by the dollar, Felipe Nogueira da Cruz, an Economics professor at the Federal University of Goiás in Brazil, says that “the idea behind de-dollarisation is to create mechanisms that support such commercial operations”.
Historical regional efforts
However, trade barriers imposed by the dollar are not new in Latin America, as the region faced a debilitating foreign debt crisis in the 1980s when trade was hard hit by an extreme shortage of dollars.
“At the time, Latin American countries sought refuge in de-dollarisation by expanding the use of the multilateral compensation mechanism that had been created by them two decades earlier,” says da Cruz.
Still in effect today, the Agreement on Reciprocal Payments and Credits aims “to save foreign exchange and mitigate impacts on regional trade,” he says.
Nevertheless, at different times of regional social and economic instability, the dollar has held significant weight.
Amid the growing cost-of-living crisis in Argentina, the dollar has been the go-to currency for the affluent to move their wealth to tax havens, while for the middle class, the greenback has allowed them to save, explains Mariano D. Perelman, a Social Anthropologist at the Buenos Aires University.
“Today, with inflation of more than 100 percent per year, it (the dollar) is a way of calculating (costs) and saving,” Perelman tells TRT World.
Alongside Mexico, Brazil is also one of the largest holders of dollars in Latin America, and Palacio believes the de-dollarisation initiative relates to Lula’s efforts during previous mandates to position Brazil as a “leading actor” regionally and internationally.
Especially in the context of his previous role in BRICS – an economic grouping that includes Brazil, Russia, India, China and South Africa – and his country’s close economic ties with China.
Among some of Lula’s broader initiatives, da Cruz says, the Brazilian leader is pushing for regional integration and to bolster trade within Mercosur - a Latin American economic bloc – requiring “alternative monetary and financial arrangements that reduce the obstacles to trade generated by the use of the dollar”.
Wider push in Global South
The 2007 global financial crisis led to a wider debate concerning reforms in the international financial architecture that da Cruz says is “so far without practical results on a global scale”.
At a regional and sub-regional level, some monetary and cooperation deals are underway in the Global South that he suggests are “a response to the lack of global solutions”.
Amid such a shift, Palacio argues some “governments aspire to counteract the monetary power of the US internationally, including China, a country that since a few years ago has shown its intention to position the renminbi (Chinese currency) among the main currencies that operate worldwide.”
As some countries pivot towards alternative financial mechanisms, da Cruz describes dissatisfaction among “many countries with the current international monetary order, strongly hierarchical based on the US dollar and which implies high costs for developing economies.”
In April, Argentina announced it would pay for Chinese imports in yuan instead of the dollar to maintain its dwindling foreign currency reserves. In the same month, during Lula’s official visit to China to deepen bilateral and economic ties, he questioned why the world requires trade in dollars.
Lula’s remarks followed his first official trip abroad to Argentina in January since his return as president when the idea to establish a common currency was floated to serve as a financial counterweight to the dollar for trade.
Following Argentina and Brazil’s footsteps, on May 11, Bolivia expressed openness to using the Chinese yuan in international trade, as President Luis Arce suggested it could become a “trend” in the region.
However, analysts believe a shift away from the dollar would more likely benefit Brazil than Argentina, particularly Brazilian companies exporting while allowing small and medium-sized Argentine enterprises dependent on Brazil imports to continue operations.
“There is no doubt that any progress in terms of de-dollarisation of bilateral trade will favour the positioning of the real (Brazilian currency) in the region, considering that the peso (Argentine currency) has suffered a severe crisis of confidence and depreciation for more than a decade,” Palacio tells TRT World, suggesting it could worsen around Argentina’s primary elections (PASO) in August.
A new multi-monetary system
Nevertheless, experts say the dollar is expected to remain the main reference for trade in the future.
Da Cruz argues while new de-dollarisation efforts do not constitute “a challenge to the hegemonic position of the dollar,” he believes “new arrangements aimed at de-dollarisation will be of crucial importance in the face of possible crises that hinder access to international liquidity and the dollar, thus contributing to the very gradual formation of a multi-monetary system worldwide”.
He adds more attention must be paid to “geopolitical” and “geoeconomic factors,” noting how the Ukraine-Russia conflict and the financial sanctions imposed by the US and Western allies on Russia “revealed that the dollar is a powerful weapon at the service of North American geopolitical interests”.
While drawing examples of Russia, the Middle East and China, he says, such events “revived fears regarding dependence on the dollar and on the global financial system centralised in the United States, encouraging de-dollarisation processes.”
“This does not mean that such countries, including China, have effective conditions to face (up to) the dollar, which remains by far the most important currency in the world,” he adds.
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