Trade is an important factor in establishing a currency as an international currency, notably by fulfilling the transaction/medium of exchange and unit of account motives of currency demand. A well prepared liberalization of currency use for international trade and foreign direct investment transactions can even be helpful in achieving the international investment and reserve currency status. While in the distant past the later was also linked to preponderance of a country in trade markets, it is now linked to the prevalence of the currency in international financial transactions, which supposes that the country in question engages at least partly in some liberalization of capital account transactions.
This paper shows theoretical and practical reasons explaining the current dominance of the US dollar and the euro in the invoicing of international trade. There is little doubt, though, that in the medium-to-long term the RMB will become a major currency of settlement in international trade. This is not only the current direction of government policy but also that of markets, as evidenced by the rapid expansion of off-shore trade payments in that currency. In the meantime, though, the US dollar and the euro are enjoying a near-duopoly as settlement and invoicing currencies in international trade. The stability of this duopoly is enhanced by a number of factors recently highlighted by economic analysis: coalescing, “thick externalities” and scarcity of international currencies are useful to explain that, until such time that RMB payments match at least the share of China in global trade, the US dollar and of the euro will remain the main currencies in the invoicing and payment of international trade.
Section 1 looks at the factors that determine the use of currencies in the invoicing and settlement of international trade. Section 2 looks at the actual reality of currency use for international trade flows, and short-term prospects for the development of a possible alternative to the use of the US dollar and the euro (in particular in Asia), the RMB.
World Trade Organization
cooperation with international financial institutions, coherence, G-20, financial crisis
JEL classification numbers:
F13, F34, F36, O19, G21, G32
Disclaimer back to top
This is a working paper, and hence
it represents research in progress. This paper represents the opinions of
the author, and is the product of professional research. It is not meant
to represent the position or opinions of the WTO or its Members, nor the
official position of any staff members. Any errors are the fault of the
author. Copies of working papers can be requested from the divisional
secretariat by writing to: Economic Research and Statistics Division,
World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21,
Switzerland. Please request papers by number and title.
Download paper in pdf format (22 pages, 212KB; opens in a new window)