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Changing the Top Global Currency Means Changing the Patterns of Global Trade
Giving up use of the U.S. dollar for global trade and reserve accumulation would be very difficult for U.S. adversaries and would require major economic adjustments, though it would be in the best long-term interests of the United States for the global use of the dollar to be more constrained.
- April 12, 2022
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But while there has been much debate over whether or not the world—or at least part of the world, including countries like China, Iran, Russia, and Venezuela—can live without the dollar, there has been much less attention on an equally important issue: what the trade impact would be of a world less tied to the U.S. dollar. The two issues cannot be separated. The issue of the dollar is part of the debate over global capital flows, but capital flows are just the obverse of trade and current account flows. Savings, after all, can only be expressed as the excess production of goods and services.
This essay makes three related points. First, it would be extremely difficult, if not impossible, for countries like China and Russia to upend the dominance of the U.S. dollar. Most sophisticated economic policy advisers in China and Russia know this, even if they have to express this knowledge cautiously.
Second, for the U.S. dollar to stop being the world’s dominant currency would mostly require specific action by U.S. policymakers to limit the ability of foreigners to use U.S. financial markets as the absorber of last resort of global savings imbalances. While most analysts still believe that the United States will never willingly take the necessary steps to end U.S. dollar dominance, there is a growing awareness of the costs of playing this role to the U.S. economy. Although any move to limit the international use of the dollar would be opposed by parts of Wall Street and the foreign affairs and military establishments, as the costs rise, this outcome will become increasingly likely.
And third, a global economy without the U.S. dollar—or some unlikely alternative—as the currency lingua franca also would be a global economy in which large, persistent trade and savings imbalances are impossible. This is probably a good thing for the global economy overall, but with so many major economies locked into structural domestic demand deficiencies, any policy that forces an elimination or sharp reduction of global trade imbalances also would force deep institutional changes in the global economy—changes which also would likely be politically disruptive for many countries. This is especially the case for countries whose economies have grown around persistent trade surpluses.
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It helps to consider the alternative assets surplus countries can accumulate to see why, in spite of decades of complaints in the international community, the U.S. dollar remains the dominant currency. In principle, surplus-running economies can accumulate small amounts of assets in other advanced economies, but with the exception of the European Union (EU) and perhaps Japan, none is big enough to balance more than a tiny share of the world’s accumulated trade surpluses. More importantly, Japan and the EU, along with most advanced, non-Anglophone economies, run persistent surpluses themselves, so they cannot accommodate the surpluses of countries like China and Russia. I will explain later why giving up these surpluses would be so difficult.
For the rest of this stimulating article:
https://carnegieendowment.org/chinafinancialmarkets/86878
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weehingthong 