Changing the top global currency means changing the patterns of global trade

By Michael Pettis

Few topics have generated as much discussion in recent weeks as the evolving role of the U.S. dollar in the global trade and capital regime. The sanctions imposed on Russia by the United States and its allies have demonstrated the immense geopolitical power that control of the global currency system can confer.

These same sanctions also make clear, however, why the governments of other countries that might one day be subject to such penalties are doing all they can to opt out and establish an alternative global currency system—either one they control or one that is unlikely to be controlled by potential adversaries. That is why a vibrant debate has erupted over whether or not countries like China can establish a credible alternative to the dollar.

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.

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Michael Pettis is a nonresident senior fellow at the Carnegie Endowment for International Peace. An expert on China’s economy, He is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.


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