WORKING PAPER 1/2022 - US DOLLAR DOMINANCE IN ASIA’S TRADE INVOICING

In the Asia and Pacific region, the median share of US dollar in the trade invoicing of economies with data is even higher at about four-fifths, whereas the median share of the US in the region’s goods trade is less than a tenth (ADB 2021).1 The use of the US dollar as ‘vehicle’ currency in trade invoicing has several implications. [...] First, they conclude that the large size of the euro area and the US underpins strategic complementarities in price setting and directly correlates with the role of the euro and the US dollar as invoicing currencies for imports from the euro area and the US. [...] In addition, Ito and Kawai (2021) purport that the dominance of the US dollar is anchored by (i) the position of the US as being the largest and most dynamic economic power; (ii) the level of development of the dollar-based financial market as it is the most open, deepest, broadest, and most liquid in the world; (iii) the reputation of the Federal Reserve as one of the most responsible central ban. [...] In the absence of comprehensive datasets, however, there appears to be no solid account on the extent of contribution of MNC affiliates to the trade and economic output of the Asia and Pacific region.7 At the global level, by imposing some assumptions, OECD (2018) estimates that the production of MNCs and their affiliates is about 33% of the economic output in 2014, of which the affiliates contrib. [...] In several of the European countries, for example, the role of the US dollar as invoicing currency in international trade is limited by the greater use of the euro due to the importance of the euro area in the countries’ overall trade.