The ASEAN alliance wants to promote its native currencies for cross-border transactions.
Southeast Asia is keen to reduce its dependence on the US dollar. The region is exploring ways to increase the usage of local currencies for cross-border transactions instead of the US dollar. To turn into an actionable plan, ASEAN, along with China, Japan, and South Korea, have signed a pact to use local currency settlements.
Under the agreement between ASEAN and the other three countries, a task force will be set up to identify ways to transition to local currencies from the US dollar. The idea is to strengthen the local economy and protect the region from global shocks.
The move to de-dollarise has become stronger, with even the BRICS nations planning to launch their own currency to counter the US dollar. It is a sign that emerging economies want to increase their interdependence and decrease their overdependence on the West.
The US dollar holds disproportionate control over international trade primarily because all transactions are settled in the currency. So, US economic instability affects currency and global trade.
In 2017, Indonesia, Thailand, and Malaysia formed a local currency framework to strengthen regional trade and finances. The Philippines joined this alliance in 2019. But what was missing was a comprehensive policy to slash the dominance of the US dollar.
Southeast Asia nations took cognisance of this development and adopted a policy change during the 42nd ASEAN Summit in May 2023. The joint statement by the leaders recognised the potential benefits of local currency usage in strengthening financial resilience. The nations also expressed the need to deepen regional financial integration by improving intra-ASEAN trade via local currencies. Eventually, the plan is to enable payment linkages across countries in the region.
By moving away from the US dollar, ASEAN will increase global settlement in native currencies. In addition, international trade will be settled within the existing bloc of 10 countries and not with other nations out of the ASEAN alliance.
If this momentum continues, emerging economies in ASEAN can come together and build shock-proof trade settlement systems. Stronger local currencies can lower import prices and manage inflationary pressures.
WHAT ARE THE IMPLICATIONS?
The weaponisation of the US dollar has been a cause of concern in ASEAN. During geopolitical situations, sanctions by the US government affect global trade. ASEAN is keen to break free from these restrictions by developing an internal support mechanism.
In the short term, self-reliance through local currencies might be adopted in a phased manner. Take Indonesia, for example. The country has implemented the local currency system, wherein it is trading in its local currency with Thailand, Malaysia, China, and Japan. This will be expanded to other countries soon.
Alternatives such as the Chinese yuan have also been explored. Thailand, for instance, is planning to use Yuan-Baht currency swap settlements for trade. This will reduce the influence of the US Dollar on the country’s imports and exports.
However, there is a caveat. Since local currency replacements have not yet achieved international prominence, abrupt detachment from the US dollar may be counterproductive. A step-by-step transition to local currencies with bilateral cooperation will be beneficial. The US dollar cannot be completely phased out from international transactions. However, a combination of cross-border treaties and the proliferation of non-USD currencies will enable a seamless transition. A diversified economic framework with an emphasis on multiple currencies will be beneficial for the world economy.
Sumit Dutta is the Founder and Chief Executive Officer of ASEAN Business Partners. Prior to this, Sumit spent 26 years working for HSBC, one of the biggest banks in the world, in countries including Indonesia, Vietnam, USA, Hongkong and India.
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