BRICS Countries and their Impact on the US Economy
BRICS is an acronym that refers to a group of five countries with the potential for GDP growth and rising influence in the global economic sphere. Economist Jim O’Neill, Director of Asset Management at Goldman Sachs at the time, originally developed the term for a 2001 article in Goldman Sachs’s Global Economic Paper series called Building Better Global Economic BRICs. The focus of the article was to highlight the potential for foreign investment and economic growth in a group of developing countries: Brazil, Russia, India, and China. The BRICS countries were originally selected for the potential for rapid growth within their respective economies due to low labor costs and abundance of natural resources. The 2001 prediction was well founded, as the member countries have all experienced economic growth and expanding political influence. Brazil and Russia are highlighted for their wealth of natural resources and boast the 10th and 11th highest nominal GDPs. India and China are poised to become the world’s largest suppliers of manufactured goods due to their sheer size and development. They have done so over the last two decades with the 5th and 2nd largest nominal GDPs, respectively. The initial BRICS idea grew beyond its original thesis when the countries formed a geopolitical organization with a diplomatic meeting in 2009. South Africa eventually joined BRICS in 2010, with a much smaller economy and population than the other members but still boasting the largest African economy and influence. Their inclusion was seen more as a political move to expand to Africa than a purely economic decision. Today, the BRICS are viewed as economic challengers to the G7 countries (United States, Canada, United Kingdom, Germany, France, Italy, and Japan) who have traditionally carried a larger influence on the global stage.
Despite the value of BRICS countries in the United States economic trade area, the current perception of the countries is more of a threat than an asset. This is especially true in the cases of Russia and China. The real concern to the United States is the desire of the BRICS participants to phase out the USD as the world’s trading currency. Currently, the USD dominates the global economy, with nearly all international trade being conducted in our currency. Russia and China have been vocal about their desires to diminish the United States’ political and economic influence, which starts with moving away from the USD as the baseline global currency. Accordingly, the Chinese Yuan replaced the USD as the most traded currency in Russia for the first time this year. BRICS countries have recently been in the news as Russia announced it was leading the charge in the development of a new BRICS international currency to be used for international trade.
So how threatened should we be with this new ‘dollar-less’ international economy? The potential for the valuable economies of the BRICS countries to move away from the USD is certainly nothing to just brush off. BRICS countries absolutely want to destabilize the US’s economic foothold, and they have the potential economic means to do so. The BRICS operated at a $387 billion trade surplus in 2022 and are certainly capable of funding their own currency. They collectively command enough economic influence that countries would still need to trade with them on a regular and ongoing basis. However, we think the positive aspects from the situation outweigh the potential negatives for the United States. The USD is still firmly entrenched in the world’s economy and will likely remain that way for some time. The USD is still used in 84% of international transactions, with the Yuan second at 5%. There really is no viable alternative currency in today’s environment. The USD has maintained its massive market share of international trade over the last half-century despite a shrinking share of global GDP. Warren Buffet at his recent Berkshire Hathaway annual meeting spoke to this very topic saying, “We are the reserve currency, I see no option for any other currency to be the reserve currency.” The USD may eventually lose influence as our economy slows and our population ages. But that time is not here today. The BRICS countries’ desires are real and something to keep an eye on but the reality of them gaining traction on this topic seems a stretch at this point. When you consider the players involved, the level of trust and willingness to work together toward a common goal may be much more difficult to achieve. The original BRICS author, Jim O’Neil recently wrote again on the topic and had this to say. “The eclipse of the dollar would not necessarily be a bad thing for the US, given all the added responsibilities that come with issuing the world’s main reserve currency. In a global economy where the US already is no longer as dominant as it once was, it is not optimal to have everyone else be so dependent on the American monetary system and the Federal Reserve’s domestically driven priorities. Other economies would much prefer that their own currencies, monetary policies, and trade patterns not be so influenced by those of the US”. I do not believe we can use the term “never” in this case, but I will stand behind the USD and the G7 as the stability this world desires.
- Jack McKinnell / Chris Wasson