[COLUMNIST] BRICS: Game changer?

With the accession of the six new members, “BRICS Plus’s” share of the global population will be at 45% (3.7 billion) and its share of the world’s territory at 30%. Share of global gross domestic product (GDP) is expected to rise to 36% and global trade to 21%.

As four out of the six are members of the Organisation of the Petroleum Exporting Countries (OPEC), global oil production will rise to 47.6% (“Expanded BRICS Likely to Dominate International Energy Markets”, Business Today, August 26, 2023) with control of global gas reserves rising to 60%.

The International Monetary Fund (IMF) expects the expanded bloc to increase its share of the world’s GDP to 37.3% next year, 37.7% in 2025 and 38.5% in 2028.

Currently, China contributes 70% of BRICS’ GDP and is expected to continue leading as the world’s top source of economic growth with the US anticipated to be slightly stagnant (“China to Be Top World Growth Source in Next Five Years, IMF Says”, Bloomberg, April 17, 2023).

China’s contribution to the world’s GDP in 2022 was at 18.5% with the US contributing 15.6% (Statistical Appendix, Table A: Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, etc. 2022, IMF’s World Economic Outlook – “A Rocky Recovery”, April 2023, p. 120).

The combined GDP value of “BRICS Plus” would amount to USD30.76 trillion (“Enlarged BRICS and the new world order”, The Edge Markets, September 12, 2023).

The growth of BRICS (which accelerated in the aftermath of the conflict in Ukraine) can be attributed to the paradox of American protectionist tendencies post-Obama which simultaneously seeks to preserve its geopolitical and geo-security hegemony in the face of increasing manifestation of China’s expansionism and aggression (belying the maxim of a “peaceful rise” as originally coined by the venerable Deng Xiaoping who now seems to be a forgotten icon).

BRICS led by China – the anchor member country of the core bloc – represents 21st century’s definitive challenge to US hegemony.

American protectionism – which is particularly aimed at China – and now the rise of the Federal Reserve interest rates meant that de-dollarisation would have to be re-considered “again” and seriously this time.

Firstly, American protectionism (under Trump and now Biden – for the most part) which is a (direct) form of trade war (and, by extension, indirect form of currency war) means higher import costs due to imposition of tariffs. The effective tariff rate (ETR) can be multiple times higher than the nominal tariff rate (NTR) due to multiple production networks otherwise also known as the global value chain (GVC) that’re located in different countries (e.g., under the China plus 1 strategy).

This means that if the NTR is 25% – which represents an indirect and artificial form of CNY/RMB appreciation – but assuming only 25% (i.e., ¼) of the supply chain for a USDXXXX product accrues to final producers in China, the margin implied in the ETR is a staggering 100%. This has a chain or knock-on effect on the rest of the supply chain also – meaning the acceleration of the reconfiguration of the supply chains (i.e., relocation) outside China.

Under the dollarised payment settlements system, using the USD only adds to the transaction costs, i.e., the transaction costs to the transaction costs, when converting back to CNY/RMB. It’s a Catch-22 situation for China. If the People’s Bank of China (PBOC) allows the CNY/RMB to be weakened, it’ll further pile pressures accruing from the ETR on exporters. But if the PBOC strengthens the currency, then it might result in exporters losing competitiveness – on top of the NTR in place.

In other words, the Sino-US trade war precipitated by Trump’s protectionism (that’s preceded by US withdrawal from the then Trans-Pacific Partnership/TPP) “reinvigorated” attention on the multilateralism embodied by BRICS (“Threat from Trump trade wars gives fresh purpose to BRICS bloc”, Reuters, July 24, 2018).

The nett result has been a steady albeit gradual but still uneven decline of Sino-US trade – even as the terms of trade is still surplus in the former’s favour – contributed also by domestic Covid-19 lockdown measures combined with weakening demand from the US.

Hence, it’s only natural for China to seek to strategically shift a part of its export surplus to the balance of payments (BOP) accounts of “BRICS Plus” alongside aspirant members to compensate for and counter-balance the shrinking bilateral surplus with the US in the era of Bidenomics as embodied by the industrial policy strategy of the Inflation Reduction Act (IRA) and CHIPS (CHIPS and Science Act). CHIPS would particularly affect China as simultaneously an industrial containment strategy to stifle geoeconomic competition via restricting exports of capital/input goods in the chips industry.

At the same time, China would want to diversify its import sources towards BRICS, for example, despite/notwithstanding Xi Jinping’s pledge in 2020 to increase imports from the US by USD200 billion over the next two years (“Five years into the trade war, China continues its slow decoupling from US exports”, Peterson Institute for International Economics/PIEE, March 16, 2023) as part of the dual-circulation strategy.

As per Mei Guanqun of the China Centre for International Economic Exchanges, “[There’s] pretty big space for the BRICS nations to work together ... to create economic heft and ease the negative impacts of unilateralism and trade protectionism”.

In this, BRICS will play a crucial role in allowing China (again, as the Middle Kingdom of the bloc) to avoid or be shielded from both geopolitical and geoeconomic stresses – which accompany bilateral relations with hegemon US.

Secondly, with the U-turn by the Federal Reserve on inflation (i.e., abandonment of a realistic understanding of the transitory nature of that phenomenon) and a renewed posture in terms of monetary policy vis-à-vis interest rate setting (embodied by the federal funds rate/FFR) following Russia’s special operations in Ukraine, the dollar has strengthened (as measured by the DXY or dollar index). A stronger dollar adds to the transaction costs for countries suffering from a BOP deficit, e.g., in food imports (like Malaysia) whilst increasing the debt burden of countries which are denominated in the USD (e.g., Argentina). In short, a stronger USD exports inflation to the “rest of the world” (“ROW). For countries like (post-Brexit) UK, it provided the opportunity (“excuse”) for hedge funds (who are paid in USD) to short the GBP as happened late last year in response to the mini-budget debacle in September.

Of course, not forgetting that the geo-politically and, by inclusion, geo-economically motivated sanctions imposed on Russia in response to the special operations which was exclusively to de-nazify the eponymous ”bandera/banderite” elements (nicknamed after the Nazi collaborator Stepan Bandera) who’re also known as “banderovtsy/benderovtsy” entrenched in the security and defence apparatus and overall government structures in Ukraine by targeted strikes and hits prompted demand for oil and gas payments in RUB (that also represented an ingenious form of capital controls – currency portfolio shuffling in the onshore financial system and “repatriation” from offshore sources).

Hence, it’s unsurprising that the move to de-dollarisation under the auspices of BRICS is regarded as timely and promising with the pricing and sale of oil and gas in non-USD currencies. As it is, China and India have been purchasing discounted Russian oil in CNY/RMB and INR (rupees), respectively, whilst Brazil had reached an agreement to carry out trade and financial transactions in CNY/RMB and BRL (real). New member Argentina recently started using CNY/RMB to pay for Chinese imports.

The inclusion of four “energy-centric” members from the Middle East will enhance China’s energy security by expanding the scope of de-dollarisation and promote the internationalisation of the CNY/RMB whilst guaranteeing supply from geopolitically-induced shocks under the “BRICS Plus’s” umbrella.

De-dollarisation is also correlated with the Treasury bond (UST) sell-offs by China (EMIR Research article, “Exploring an alternative payment settlements system”, April 13, 2023). The aggressive interest rate hikes by the Federal Reserve have been a catalyst and impetus too. Monetary tightening which results in strengthening of the USD dampens the need for the PBOC to depreciate the CNY/RMB. In fact, China’s central bank will be under pressure to see off attempts to short the CNY/RMB. Selling off USTs will be a necessary component in the monetary toolkit.

The sell-offs could/would then be repatriated back to China to be reinvested in the Belt and Road Initiative (BRI) projects – with linkages all the way to Africa.

The strategic importance of the BRI land and sea connectivity and transportation infrastructure to BRICS can’t be strongly emphasised enough.

Other than oil and gas (coupled with mineral) security, Africa is vital for food security too with its vast arable land bank of which much of it are still under-utilised.

Putin has promised to supply the Sahel (the “belt” sub-region just below Saharan Africa) countries of Burkina Faso, Mali and the Central African Republic as well the East African nations of Eritrea, Somalia and Zimbabwe with free grain (following the collapse of the Black Sea grain deal). On its part, China has been eyeing the Horn of Africa (Ethiopia, Eritrea, Somalia, Djibouti) to help the sub-region and, by extension, the continent as a whole achieve food security. In turn, this will re-ignite Africa’s overall potential as bread basket for China (““With a little help from my friends”: China turns to Africa to bolster food security”, Mercator Institute for China Studies/Merics, October 7, 2022) and, by extension, “BRICS Plus” together with the wider world where surplus food produce can be exported at low prices.

In terms of geo-strategy, “BRICS Plus” has the potential to morph into an informal security and defence alliance to counterbalance the “expansionism” of NATO and perhaps even displace the latter in terms of combatting terrorism in the Sahel (where neo-colonialist pretensions and mismatched priorities by the West vis-à-vis the US and France pre-dominates). China together with India are already playing a critical role in counter-piracy operations off the Horn of Africa.

Should Malaysia intend to explore the possibility of joining “BRICS Plus”, we can leverage on the food security that comes with de-dollarisation (easing pressure on our BOP denominated mainly in the USD) in addition to forging new markets for our burgeoning food export produce arising/emerging from higher self-sufficiency levels (SSLs) across most of the items especially agricultural (and not forgetting halal processed products from our well-established local industries also).

According to research done by Juwai IQI, Malaysia’s membership in “BRICS Plus” could see our GDP boosted by at least one per cent which would add some RM19 billion to the economy (“BRICS expansion could add RM19 bln to Malaysia's economy: Juwai IQI”, New Straits Times, August 29, 2023).

Our membership would help to rewrite a new narrative in international relations that’s neither “bandwagoning” nor “hedging” but playing our part in pushing for multipolarity in geopolitics and geoeconomics in what’s a shifting and increasingly reconfigured global order/framework (EMIR Research article, “Indo-Pacific Democracy Dynamics – Impacts of Ukrainian War on the Global Democratic Order – Part 2”, 19 August 2022)

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* Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.