China’s Brazil Deal Could Topple US Dollar in Region, Create Supply Chain Bottlenecks: Analysts

On March 29, Brazil announced that it would start using local currency and China’s yuan for financial transactions between the two nations. While pragmatic on the surface, some say the move indicates China’s push to end the U.S. dollar’s dominance, particularly in the Americas.

According to analysts, the combined effect of China’s increased demand for commodities from Brazil, including corn and soybean requirements, which are driving Brazil to export record volumes in 2023, as well as the decision to shift towards the yuan, suggests a serious economic threat to the United States.

Analyst Alex King, founder of Generation Money and former vice president of finance in trade and working capital at Barclays Bank, stated, “Countries such as Brazil and China are keen to reduce their reliance on U.S. dollars for trade and, if this trend is sustained, it could lead to a depreciation in the value of the U.S. dollar as a result of lower demand for it.”

As per the International Monetary Fund (IMF), the global amount of U.S. currency reserves declined below 59% in the final quarter of 2021 due to the rising trend of reducing dependency on the dollar for trade. In recent months, countries like Argentina, Brazil, and Bolivia have struggled with depleted U.S. dollar reserves.

China’s establishment of a bank in Chile in 2015 to boost yuan reserves and create a path for distribution and use throughout the region has been followed by the signing of a memorandum to establish a similar arrangement and a yuan clearing facility in Brazil this year. This has positioned China as the dominant trade partner and money lender in the region, giving China influence over the terms of its agreements. Venezuelan media outlet teleSUR claims that China has been negotiating agreements in yuan throughout Latin America since 2021.

Analysts warn that if major suppliers such as Brazil move away from using the dollar, it could mean a price hike in commodities. “This would mean imports into the United States from Brazil and other commodity exporters potentially becoming more expensive over time, which could lead to food price inflation,” said King.

China’s Initiative to End “Dollarization” and Develop Alternative Reserve Currency

Talk of ending dependency on the dollar for trade has been gaining traction over the past year due to inflation and depleted U.S. foreign currency reserves. The push to end “dollarization” is especially prevalent among Brazil, Russia, India, China, and South Africa, known as the trade bloc BRICS.

During the BRICS Business Forum last year, Russian President Vladimir Putin said member states were working toward developing a new global reserve currency as an alternative to the IMF’s Special Drawing Right. In January, Brazilian President Luiz Inácio Lula da Silva announced a joint initiative with Argentina to establish a common trade currency for the two nations as both countries suffer from drastically depleted U.S. dollar reserves and local currency devaluation.

Impact of De-Dollarization

Aaron Alpeter, the founder of Izba and Capabl and with years of experience in supply chain management and logistics, believes that the U.S. dollar’s use as the world’s reserve currency is like a “super weapon,” but it may not be for long. Alpeter stated, “The risk isn’t in a decline in the demand for dollars due to commodities. It’s a potential and sudden loss of countries outside the United States abandoning the dollar.”

If multinational abandonment of the U.S. dollar occurs, there could be a sudden surplus of available currency that could make the U.S. dollar next to worthless and the U.S. debt undesirable. Other countries have faced similar economic consequences due to excessive circulation of currency, resulting in hyperinflation in countries such as Venezuela and Argentina. Analysts argue that the Americas is a critical proving ground for China’s goal of global dominance, considering that the region represents an “agro-industrial superpower” that exports 25% of all its agricultural products, including some of the top minerals.