Henry Huiyao Wang: A New Compact for China and Europe

CCG President outlines opportunities for China and Europe to deepen cooperation in trade, investment, climate action, and global governance.

[from the Center for China & Globalization, 7 November 2026]

Henry Huiyao Wang [王辉耀], Founder and President of the Center for China & Globalization (CCG), has published an article titled “A New Compact for China and Europe” in the Autumn 2026 issue (No. 36) of Horizons, a journal published by the Center for International Relations and Sustainable Development (CIRSD).

BYD Dolphins on the line at the company’s plant in Rayong, Thailand, a step from “in China, for the world” toward “in the world, for the world”
Wikimedia Commons/iMoD Official

China and Europe possess almost everything needed for a consequential partnership. Their economies are deeply intertwined. They have no fundamental geopolitical disputes. And they share important interests in climate action, global development, and a functioning multilateral system. Yet the bilateral relationship is weaker than it could be. At its core is a commercial dispute over trade, which is turning what should be a fruitful relationship built on shared interests into one increasingly characterized by the language of industrial vulnerability and tariffs.

Trade has thus become a wedge issue that risks souring a mutually beneficial interdependence. And it comes at a poor moment. The international order is moving away from the unipolar era that followed the Cold War and into a new multipolar era, one in which multilateralism, and the defense of our shared global institutions, matter more than ever. Wars, tariff conflicts, technological fragmentation, and pressure on multilateral institutions are producing a world that is more multipolar but no more governable. Now more than ever, we need cooperation on global governance across a wide range of transnational issues, from climate change to artificial intelligence.

Europe in a Multipolar World

For much of the postwar period, the transatlantic alliance provided the central structure of European security. But the era of American hegemony, when diplomatic sleepwalking was permissible, is over. It seems clear that European policymakers have long since realized that formal alliances and shared values are no longer a substitute for independent judgment on geopolitical and economic questions, at a time when American policy is nakedly unilateral, transactional, and protectionist—and thus hostile to European interests.

Unwilling to be a passive participant in American power politics, or to be caught between the United States and China, Europe has already begun charting a course toward strategic autonomy, even if its exact shape is not yet settled. China, for its part, understands that asking Europe to “choose China” over the United States is not a palatable proposition—least of all now, when self-determination and strategic autonomy have become a clear European focus.

Instead, from China’s perspective, a break from “the West versus the rest” is victory enough, because it enables a shift away from alignment based on ideology toward a world of tactical cooperation based on the merits of each issue.

Canadian Prime Minister Mark Carney offered a useful description of this at Davos this year, calling for “variable geometry”: different coalitions for different issues, built around shared interests rather than around values that are not firmly or equally upheld. In this framing, Europe can cooperate as closely as it wishes with the United States on defense, while still finding common cause with China on climate and trade reform, or with India on development. Such flexibility is increasingly the default in our plural world.

A cohesive Europe able to act independently is preferable to a divided continent whose China policy is increasingly shaped elsewhere. But that also means that policymakers in China must address European fears if they are to benefit from engagement and cooperation on shared interests.

The Changing Bargain

The core anxiety facing Europe, and the one undermining a merits-based relationship, is that the old, unspoken economic bargain—European technology and premium manufacturing in exchange for Chinese consumer goods and lower-cost production—is giving way to a more competitive relationship.

China now possesses broad industrial ecosystems, world-class infrastructure, skilled engineering talent, and the capacity for fast commercialization at scale. It no longer competes on wages alone. In electric vehicles, batteries, solar energy, machinery, telecommunications equipment, and, increasingly, advanced digital applications, Chinese firms can combine cost, speed, and technological capability.

But let us not get carried away with catastrophizing. The shared economic foundation between China and the EU remains immense. In 2025, two-way trade in goods and services exceeded €880 billion. Europe imported more than €570 billion in goods from China and exported about €200 billion, producing a large bilateral goods deficit. Yet this figure should be interpreted carefully. The European Union still recorded an overall goods surplus of approximately €128 billion in 2025, as well as a substantial current-account surplus. Nor are all imports finished products: Eurostat data shows that 57 percent of all extra-EU goods imports in 2025 were intermediate products, meaning that much of what Europe imports feeds into value-added production chains from which Europe itself benefits. Europe’s difficulty is that, while its industry remains broadly profitable, certain critical sectors are already under pressure, and the trend seems unlikely to reverse suddenly in favor of European manufacturing.

Europe is not facing this crisis in a vacuum, either. It is compounded by high energy costs, aging populations, fragmented capital markets, and chronic underinvestment. The result is a genuine fear of deindustrialization, with the attendant loss of skilled employment, supplier networks, technological capacity, and social cohesion. This worry is especially potent in the major European economies with large export-oriented manufacturing sectors, such as Germany, France, Italy, and Spain, and it makes the debate over “overcapacity” deeply politically charged.

While the imbalance is a product of industrial excellence, it can also be attributed to weak domestic demand in China. Household consumption there remains around 40 percent of GDP, while families save heavily out of concern over housing, education, health care, and retirement. The 2025 consumption action plan addressed wages, pensions, health care, childcare, paid leave, and benefits for migrant and flexible workers, and China’s first five-year plan devoted specifically to consumption subsequently set a goal of approximately 60 trillion yuan in retail sales by 2030. But it is far too early to call the effort complete. Although per capita disposable income rose by 5 percent and consumption expenditure by 4.4 percent in 2025, the first half of 2026 was weaker, and overall consumption still lags behind where it should be. Stronger pensions, health care, unemployment insurance, childcare, and portable benefits for migrant workers will help reduce precautionary saving, and greater access for foreign goods and services would ensure that stronger Chinese demand creates opportunities for European producers. That transformation, however, is not yet complete.

Europe, for its part, should recognize that competitive success is not in itself an unfair subsidy. The International Energy Agency estimates that producing a battery-electric vehicle costs more than 30 percent less in China than in advanced economies, with only about one-third of the gap attributable to the battery; a similar cost gap exists for conventional vehicles. China’s earlier industrial policies undoubtedly helped establish this ecosystem, but important forms of direct support, including national EV purchase subsidies, have already been phased out.

Rhodium Group estimates that BYD enjoys a cost advantage of approximately $4,700 per vehicle over Tesla’s operations in China, of which grants account for only about $292, while vertical integration and lower research, administrative, and supplier costs explain at least three-quarters of the difference. BYD produces roughly 70 percent of its components in-house, including its batteries. Europe should investigate market-distorting support and is right to insist on transparency, but it should not define the ecosystem, technology, and efficiencies China has built as unfair.

Nor is China’s automobile sector insulated from competition. The number of Chinese electric-vehicle makers was reported at 487 in 2018; by 2025, consolidation had reduced the market to approximately 129 brands produced by about 50 manufacturers, and only 10 to 15 are expected to be profitable by 2030. China exported approximately 5.86 million of the more than 31 million vehicles it sold in 2024, meaning that the large majority were still absorbed at home. By comparison, Volkswagen delivered 9.03 million vehicles worldwide but only 1.12 million in Germany, while Toyota and Lexus sold 10.16 million worldwide and 1.44 million in Japan. Airbus, likewise, sells approximately 68 percent of its aircraft outside Europe. Producing for global markets is accepted as normal when established European or Japanese companies do it; it should not automatically become illegitimate when Chinese firms do the same.

China’s textile industry offers a further precedent. Even as wages rose and some production moved to Vietnam, Bangladesh, and elsewhere, China retained 37 percent of global textile exports and 34 percent of clothing exports in 2017, because supplier clusters, infrastructure, skills, and continual upgrading proved more durable than low labor costs alone.

Beyond economic competition, clearer rules are urgently needed on the securitization of critical industries. The dispute over Nexperia—the Chinese-owned semiconductor company placed under Dutch government control in 2025—rattled supply chains and deepened concern in China about investing abroad. Either the company should not have been sold in the first place, or a clearer regulatory environment might have avoided a quasi-nationalization that rapidly internationalized a corporate dispute, and that still hangs over the mutual investment relationship today.

Likewise, proposals for a European instrument modeled on the United States’ Section 301 powers may offer political reassurance, but Section 301 is a blunt unilateral instrument designed to authorize retaliation. Europe would be better served by an explicitly transitional mechanism. Where an import surge threatens to destabilize domestic markets, temporary safeguards can provide time for adjustment, but they should be evidence-based, reviewable, and subject to firm sunset clauses. Their purpose should be to facilitate adaptation and negotiation, not to turn emergency protection into a permanent wall.

An Industrial Compact for Shared Competitiveness

When I visited Jean Monnet’s house outside Paris this summer, I was reminded of the method that helped build modern Europe: begin with concrete achievements that create the basis for solidarity. That method matters especially now, when trade has become a wedge issue and trust and trade cannot be separated.

We must therefore build a new industrial compact: one that aligns Chinese industrial capacity with Europe’s need for investment, innovation, and employment, and that enables China and Europe to stand together in support of a world of free, fair, and open trade.

First, China should follow through on its ongoing shift from an export– and investment-heavy model toward consumption-led growth. Alongside the social measures described above, this requires reducing the barriers faced by private and foreign businesses, improving market access in services and public procurement, and applying regulation more transparently. European companies should be able to compete in China with confidence that they will receive equal treatment and can protect their intellectual property.

Second, Europe needs to draw a sharper distinction between trade in products that present a genuine security risk and investment that strengthens European productive capacity. Concerns about supply-chain resilience and security in defined strategic sectors are unavoidable, given increasing regionalization. But a presumption against Chinese investment would deprive Europe of capital, technology, competition, and jobs precisely when it needs them most. Instead, Europe could openly welcome investment that meets its requirements on governance, data protection, labor standards, and environmental performance, while increasing the local economic contribution such production provides.

This openness should be anchored by a renewed Comprehensive Agreement on Investment. The agreement reached in principle in 2020 was never implemented and the relationship has changed too much for it simply to be revived unchanged. China and Europe should instead negotiate a new CAI covering market access, national treatment, subsidy transparency, technology transfer, public procurement, and enforceable dispute resolution. It should give European companies more predictable access to China, while establishing clear and consistent conditions for Chinese market access and investment in Europe, with an eye to creating employment and supplier networks there.

China has already demonstrated the value it places on market access by extending tariff-free treatment to goods from 53 African countries, and it could move explicitly to align its standards more closely with Europe’s. Europe, for its part, should reconsider its technology and investment restrictions—especially those implemented specifically to protect U.S. interests, such as the restrictions preventing China from purchasing advanced semiconductor equipment from ASML. Working examples of Chinese investment in Europe already exist. Chinese companies are investing in battery and vehicle production in Hungary, Slovakia, Spain, and Serbia, while European manufacturers—including Volkswagen, BMW, and Mercedes-Benz—continue to deepen their research, production, and partnership networks in China. These investments should not be viewed as isolated commercial transactions. They can become the architecture of a more balanced relationship.

Third, localization must mean more than final assembly. Joint ventures and investment agreements can encourage local supplier development, worker training, research partnerships, and the sharing of production know-how, while respecting intellectual-property rights. Chinese industry was once buoyed by European know-how through joint ventures; in return, European industry can now benefit from Chinese advances. The goal should be a competitive ecosystem in which both Chinese and European firms have a stake.

Fourth, any trade measures should be targeted and temporary. If an import surge threatens serious injury, safeguards can buy time for adaptation. But they should have clear evidentiary thresholds, sunset clauses, and review procedures. Protection without a productivity strategy merely postpones decline and risks marginalization, rather than allowing a dynamic industrial sector to emerge. At the same time, Europe can and should complete its own agenda: lowering energy costs, deepening the single market, mobilizing investment, scaling up innovative companies, and improving infrastructure.

Here, China can become Europe’s “fitness partner.” The phrase may sound counterintuitive at a moment of industrial anxiety, but the underlying idea is important. Healthy competition from China can push European companies and governments to confront long-delayed reforms, reduce costs, and innovate faster. Shelter from competitive pressure does not create health; competition, by contrast, can serve as a yardstick for rebuilding strength. China, meanwhile, gains more from a prosperous and capable Europe than from a weakened market increasingly hostile to Chinese commerce.

Finally, the compact should look beyond the bilateral market. Chinese and European joint ventures could look abroad, toward the product and development needs of the Global South. Joint production for Global South markets could be a starting point, moving in time toward joint financing of development and infrastructure to accelerate green industrialization in Africa, Asia, Latin America, and the Middle East.

This would represent the next stage of globalization: not simply Chinese companies “in China, for the world,” but “in the world, for the world.” It would spread productive capacity more widely, answer concerns about concentrated supply chains, and make development a shared undertaking rather than an arena for geopolitical competition.

From Commercial Trust to Strategic Cooperation

An industrial compact cannot by itself remove all political differences. But it would serve as a springboard, and a trust-building exercise, for deeper commitments and further work on shared interests.

Climate cooperation is the most obvious bridge. China’s manufacturing scale has lowered the global cost of solar panels, batteries, and electric vehicles, in a very real way underwriting the transition away from fossil fuels. At the same time, Europe is suffering under the weight of an energy crisis born of Russia’s invasion of Ukraine and, more recently, of upheavals in the Middle East around the Strait of Hormuz and the Bab al-Mandeb. A natural alignment would be for China and Europe to build a green partnership that helps wean the world off volatile fossil fuels and address the climate crisis. The exact shape of such measures is not yet defined, but using joint ventures, cooperation, and technology exchange to tap Chinese expertise and cost advantages could benefit both sides while buoying the global green transition. A tariff spiral in clean technology, by contrast, would make the energy transition slower and more expensive for everyone.

More broadly, China and Europe share an interest in conflict resolution. China has always been clear that sovereignty and territorial integrity apply universally, that nuclear escalation is unacceptable, and that a negotiated settlement must provide credible security for all parties. But it can do more to ease the concerns of a Europe that feels threatened by a Russia now in its fifth year of fighting in Ukraine. Working together, Europe and China could help provide an off-ramp, each using its leverage to bring the negotiating positions closer together. A truly durable settlement, acceptable to both sides, may eventually require security guarantees involving both European and non-European countries, and China could contribute through reconstruction, nuclear safety, and peacekeeping. The Middle East is another region where common interests are greater than current policy coordination suggests. Continued conflict and volatility around the straits have not only given fresh impetus to the transition away from fossil fuels but also created a new area of shared interest. Together, Europe and China could support a peace architecture with wider international participation.

Artificial intelligence governance is another opportunity. China and Europe approach data, platforms, and regulation differently, but both reject a future in which a handful of private companies set global rules without public accountability. They can work together on safety testing, scientific exchange, interoperable standards, and the application of AI to health, climate, and development. Agreement will be difficult, but building a shared environment for rule-making would help hedge against fragmentation in this rapidly developing field.

Finally, China and the EU have both long advocated restoring the World Trade Organization. A revitalized WTO already contains tools to address subsidies and demonstrable injury. Boeing and Airbus were both found, in WTO disputes, to have benefited from improper support, and those cases were handled through multilateral proceedings rather than through an open-ended campaign against either side’s wider industrial success. The WTO’s dispute-settlement system must now be restored, its rules on subsidies and state enterprises updated, and its development functions strengthened. The United States weakened that system by blocking appointments to the Appellate Body after adverse rulings; but China and Europe are both major beneficiaries of an open trading system, and both can press for reform.

None of this will be sustainable without renewed contact between societies. Direct flights, student exchanges, tourism, university partnerships, city-to-city links, and think-tank dialogue all have their roles to play, for they are the infrastructure of mutual understanding.

China–Europe relations will not always be perfectly aligned, and they will likely continue to contain elements of cooperation, competition, and disagreement. But together, we can put to rest the prospect of weaponized interdependence and move instead toward win-win interdependence.

Europe does not need to become less European in order to cooperate with China, nor does China need to adopt European political mores for cooperation to succeed. Both are now free to cooperate selectively and on the merits of each issue. And a world in which China and Europe cannot find areas of deep mutual interest—despite their deep economic ties and their shared stake in multilateralism—is a world that is measurably poorer for it.

Japan Inc. Now Sells No Yen to Invest Abroad

Earnings on Japan’s foreign direct investment (FDI) reached 103% of new FDI in 2022–25. With dividends and retained earnings counted together, Japan Inc. now needs to sell little yen to invest abroad.

[by OKUBO Takuji]

Key takeaways

  • Foreign affiliates now earn about as much as Japan invests abroad each year. Reinvested earnings, dividends and interest together reached 103% of new outward FDI in 2022–25, against 48% in 1996–2000.
  • Dividends from foreign affiliates account for a growing share of Japanese corporate profit. We estimate that foreign affiliates contributed 13.4% of Japan Inc.’s earnings in FY2025, up from 1.7% in FY1996.
  • Corporate investment abroad now involves little net yen selling. After dividends and interest paid home, the estimated outflow has been close to zero since 2022, down from about ¥5 trillion a year, or about 1% of GDP, on average in the 2010s.

Japan’s FDI stock now earns 103% of new investment

It is often said that Japan’s ageing population and slow growth give its companies too few investment opportunities at home. A Japanese government report in 2024 included the following passages.

“Japan’s ageing and shrinking population depresses expected demand at home. Expected returns remain higher abroad, so Japanese companies have accelerated outward direct investment” (my translation). — MATSUBAYASHI Yōichi [松林 洋一], MOF PRI, chapter 8, p.136.

“Companies invested abroad because they saw no promising investments in Japan; they are unlikely to bring back every return. On a cash-flow basis, the external balance is in deficit and is one factor behind the weak yen” (my translation). — KARAKAMA Daisuke [唐鎌 大輔], MOF PRI, chapter 10, pp.178 and 175.

However, my review of recent data shows that while their premise of low growth prospects in Japan is probably still right, the direct investment Japan has accumulated abroad has reached a level where it earns enough to cover Japan’s new investment abroad. This changes the exchange-rate implication even if Japan keeps investing abroad.

As chart 1 shows, earnings on the accumulated investment stock rose from 48% of new outward FDI in 1996–2000 to 103% in 2022–25.

Chart 1

Overseas affiliates pay interest and dividends to their parent companies in Japan. Those dividends have become a sizable part of corporate Japan’s income: we estimate that they made up 13.4% of Japanese corporate profit in FY2025, up from 1.7% in FY1996.

When foreign affiliates retain their earnings on their balance sheets, Japan’s balance of payments statistics record them as FDI from Japan, even though no money crosses the border. While the companies receiving FDI dividends and the companies paying for new FDI are not necessarily the same, Japan Inc. as a whole is now financing its FDI almost entirely from the earnings of its overseas affiliates. At the current level of FDI, little new yen needs to be converted into foreign currencies as Japan goes about investing abroad.

In the rest of this report, I explain how foreign direct investment by Japanese companies evolved, and its near-term outlook. This report is the third in a series on the yen repatriation theme that I have published over the past few weeks, following “Yen Repatriation Starts with the Whale”, on capital flows through Japan’s national pension funds, and “Mrs Watanabe No More”, on Japanese households’ assets invested abroad.

A strong yen helped drive Japan’s first outward FDI boom

Japan’s outward investment was heavily restricted after WWII, requiring case-by-case permission from the government. Approvals became more and more automatic over the years until outward investment became “free in principle” in 1980. Trade friction with the US-led Japanese carmakers to restrain their exports from 1981, pushing them to build factories abroad. The rapid appreciation of the yen was also a factor. The yen strengthened from ¥242 per dollar before the Plaza Accord in September 1985 to ¥121 by the end of 1987. Japanese producers had to move lower value-added work abroad. The strong yen also gave Japanese financial institutions sizable purchasing power for a while, until the stock and property bubbles burst in 1990 and 1991.

All of these factors contributed to a rapid increase in outward FDI through the 1980s and 1990s (chart 2).

Chart 2

Even after the bubble burst, the strong yen kept pushing manufacturers to move abroad. In 2005, manufacturers accounted for 60% of the FDI stock. As Japanese manufacturers expanded their supply chains abroad, Asia’s share of outward FDI rose from about 12% in FY1986–90 to 19% in FY1995–99, and Asia held 23% of the FDI stock by 2005 (chart 3).

Chart 3

Japan’s outward FDI stock rose to 56% of GDP

The next phase was sustained by a different pressure. With weak growth and low interest rates at home, Japan Inc. kept investing abroad, across a broader range of industries. Between 1995 and 2025, the stock of FDI rose from 9% of Japan’s GDP to 58% (chart 4). In 2025, it is as large as about 38% of the private sector’s domestic fixed capital, on our estimate.

Chart 4

By industry composition and by destination compositions changed over time. Manufacturing’s share of the FDI stock had fallen to 37% by 2025, giving Japan’s FDI more breadth. By destination, we are seeing a revival of FDI toward the United States. It accounted for 34% of the stock in 2025, Europe 29% and Asia 25% (see earlier chart 3).

Thus, after decades of overseas investment, Japan’s FDI stock is now large enough that its earnings are sufficient to finance new investment abroad, at least for now. In the next section, I consider whether this will continue, and in particular whether Japanese companies may bring an even larger share of their overseas earnings back to Japan, given the weak yen, higher borrowing costs in yen and possibly better investment opportunities at home.

The weak yen has slowed offshoring, not reversed it

The real depreciation of the yen over the past 15 years made production in Japan more competitive. There is some evidence that manufacturers are considering bringing production back to Japan. The 2023 manufacturing white paper found more firms shifting production back from China than moving there, and they named the weak yen as one reason. We see some signs of reshoring. Japanese manufacturers’ overseas production ratio rose from 18.0% in FY2011 to 27.2% in FY2023, but it may have started to decline or at least stabilize. The ratio fell to 26.7% in FY2024. A Cabinet Office survey of listed manufacturers puts the ratio at 24.5% in FY2025, and their plan for FY2030 is broadly unchanged at 24.7%. The weak yen seems to have stabilized the wave of offshoring, but I see no firm evidence of a move back onshore yet.

Domestic investment has grown slowly despite the weak yen

There are tentative signs that domestic capital spending is starting to grow again. For three decades it grew at a very low speed. In real terms, private business investment rose only 26% between FY1997 and FY2025, less than 1% a year. In comparison, capital spending grew by about 4% a year on average in the United States. In my view, a weak currency is only one of the factors manufacturers weigh in designing their global production chains. The weak yen makes production in Japan competitive today, but they have also seen the exchange rate swing violently within short periods. Japan also has a shrinking population problem. It started to address it by opening a door to immigration, but the door is only tentatively open. Overall, my view is that the weak yen alone is unlikely to give Japan Inc. sufficient incentive to bring its capital back to Japan and to the yen.

Economic security is bringing some production home

The government is pushing harder than the currency, mostly in the name of economic security, even before the Takaichi government came along. The government currently has a ¥250 trillion domestic investment target for FY2040 and named AI and semiconductors among its 17 strategic fields. Semiconductors are where the money has gone furthest. In November 2024, under the Ishiba government, Japan committed more than ¥10 trillion of public support to AI and semiconductors by FY2030, aiming to draw more than ¥50 trillion of public and private investment over ten years. Japan managed to lure a TSMC plant to Japan, backed by a sizable subsidy. Rapidus, a government-supported Japanese semiconductor maker, has received a sizable subsidy and is building a factory in Hokkaido. Japan’s production of integrated circuits and discrete semiconductors rose from ¥2.7 trillion in 2019 to ¥4.1 trillion in 2025.

Under the name of economic security, the Japanese government is promoting other industries such as batteries, shipbuilding and pharmaceuticals. Defence spending adds to the push. Japan’s defence budget rose from about ¥5 trillion in FY2022 to ¥9.0 trillion in FY2026. Some defence contractors, such as Mitsubishi Heavy Industries, have doubled their defence revenue.

Japan’s industrial-policy record gives reason for caution

The Japanese government and the Ministry of Economy, Trade and Industry (METI), the key agency behind Japan’s industry policy, may claim some expertise in their industrial policies. Empirical studies in the past paint a poor track record, though. Rapidus, the most ambitious semiconductor project, has had no independent cost-benefit assessment (Negrine et al., 2025). While defence and economic security-driven policies have a different logic, I doubt that these industrial policies will succeed in bringing large-scale manufacturing investment back to Japan so long as macro factors such as Japan’s demography remain unfavourable.

FDI no longer appears to drive yen weakness

The weak yen and non-economic geopolitical factors do point to a halt in Japan’s four-decade offshoring trend, although it is a stabilization, rather than an economy-wide reversal of past offshoring. Japan Inc. will continue to invest more abroad, rather than within its borders. Given the sizable growth in the stock of cumulative FDI, Japan Inc. no longer needs to convert yen into overseas currency to keep investing abroad though. Net of dividends and interest paid home, Japan’s FDI sold about ¥5 trillion of yen a year, or about 1% of GDP, on average in the 2010s; since 2022 the net flow has been close to zero. There is also an interesting development in an effort to allow more share-exchange based M&A for cross-border deals that will further reduce the need for Japanese companies to spend their yen to purchase overseas assets. In my view, Japan Inc.’s FDI is no longer a factor to drive the yen weaker.

References

Economics-Watching: BRICS Currency Creates Dilemma for the Dollar

by Christopher Whalen, from China Daily

The term “BRICS currency” typically refers to a hypothetical or proposed unified currency for the BRICS grouping. It’s not a single, physical currency currently in use, but rather a concept for a potential future monetary system that some suggest will reduce the dominance of the U.S. dollar in international trade and finance.

Is BRICS currency cooperation about immediate de-dollarization or long-term financial sovereignty? The answer is that BRICS cooperation may include reducing long-term dependence on the dollar as a means of exchange. The dollar is involved in more than half of all trade and 80 percent of all foreign exchange transactions. BRICS currency cooperation aims to gradually reduce the group’s dollar dependency, but challenges remain.

The BRICS concept came about not because the dollar is unsuitable as a means of exchange or unit of account, but rather because of the use of the dollar by Washington as a weapon. As I note in my book, Inflated: Money, Debt and the American Dream, the special role of the dollar in U.S. finance allows the U.S. government to impose harsh compliance and reporting requirements on foreign nationals and institutions. The U.S. is an arbitrary hegemon and does not follow reciprocity with other countries.

The global role of the dollar is an anomaly, the byproduct of two world wars had left the other antagonists broke by the time the Bretton Woods Agreement was signed in July 1944.

Choosing the fiat paper dollar as the default global reserve currency more than seven decades ago reflected the fact that the United States was one of the victors and possessed the wealth that gave Washington unchallenged economic leadership. Prior to World War I, the United Kingdom’s pound sterling was the global standard, but importantly, this paper currency was backed by gold — the only money that is not debt. The dollar, too, was backed by gold — until 1933, when the Franklin Roosevelt administration confiscated gold in private hands to prevent his government from collapsing.

Pound notes started to circulate in England in 1694, shortly after the establishment of the Bank of England. The paper pound helped to fuel the expansion of the British Empire, in large part because the only competing form of money was physical gold. When Britain and other nations left the gold standard in the 1930s, it was due to the deflation caused by the Great Depression rather than a deliberate choice.

The 19th-century rule attributed to English journalist and businessman Walter Bagehot says that in times of crisis, lend freely at a high rate against good collateral. Yet since the currency devaluation and gold seizures of 1933, fiat currencies and below-market interest rates have been the rule. In a global scheme in which the government occupies the prime position, the operative term remains “financial repression”, whereby governments control markets and artificially suppress rates of return on debt. For this reason, the dollar is losing its role as a store of value to gold.

The fact that the dollar continues to trade strongly versus other currencies reflects the reality that as the main means of exchange globally, the dollar cannot be easily replaced. One reason for this continued support for the dollar is that the trade in petroleum and other commodities is so large that it requires an equally large currency to accommodate it. Also, neither the Europeans nor the Japanese, the only two possible alternatives, are willing to risk the external deficits or inflation that the U.S. suffers as the host for the global currency.

What global currency will replace the fiat paper dollar? None. As this article is being written, gold is the second-largest reserve asset for central banks after the dollar. “The initiation in 2002 of the Shanghai Gold Exchange was of great strategic significance, both for gold and the global monetary system,” notes veteran gold fund manager Henry Smyth in an interview in The Institutional Risk Analyst. “Now it is completely clear what happened.”

Smyth and many other observers see the creation of the SGE in 2002 as the return of gold to the international monetary system. But while gold is growing in importance as a reserve asset for many countries, it does not mean that the role of the dollar as a global means of exchange or unit of account is about to change.

The dollar will remain the dominant asset. And even then, displacing the dollar will require a major change in the international monetary system, a change that is already underway.

The author is the chairman of Whalen Global Advisors LLC in New York and the author of Inflated: Money, Debt and the American Dream published by Wiley Global (2025).