Brazil and China have this week agreed to ditch the greenback when paying for goods and services between the two countries. 

The deal, announced on Thursday, means Brazilian firms will no longer convert transactions into US dollars – traditionally the world’s reserve currency – when selling its goods and services to their Chinese customers. 

While Beijing has long dreamed of establishing its own Yuan as the dominant international currency at the expense of the American dollar, the Brazilian deal is a significant step in that direction. 

So what are the implications for Australia?

Like our own economy, Brazil is heavily reliant on its exports of natural resources, with iron ore a major component. According to data from Statista, the South American country was the world’s 7th largest exporter of natural resources in 2021 with an estimated $US23trn –calculated in US dollars of course - flowing into Brazilian coffers from trade in the sector.       

China is also Brazil’s largest trading partner, with approximately one third of its entire exports ending up on Chinese shores. 

It will not be lost on Australian investors that trade with China represent a significant portion of our own export market (currently 32% according to the latest data). Recent OEC figures indicate Iron Ore alone accounts for nearly 70% of the US$138bn annual export revenues Australia generates from the Southeast Asian powerhouse. 

The upshot?

If the Chinese start insisting on paying for Australian resources purely in Yuan rather than a third-party currency such as US dollars, this could create a problem for the Australian Government, given their close geo-political relationship with the United States. 

Would Canberra allow the big miners to jettison the US dollar in order to protect their trade with China?  And what would be the economic consequences for Australia if we refused to comply with Chinese demands?

While we have yet to see China insist on non-US dollar commodity transactions with Australia, the Brazilian deal may be a sign of things to come. Being prepared with a response to this potential scenario would seem a wise move. 

It’s fair to say that the US dollar losing its global reserve currency status is unlikely in the short term. However, the rise of the Yuan could affect major resource exporting nations such as Australia sooner than most.