Deglobalization and Dedollarization

Featured Post | Published at Jun 12, 2023, 8:00 PM in general by Buğra Bakan

In this publication we assess common questions we receive about globalization. This includes whether global trade is on the decline, if onshoring is replacing foreign direct investment, and if the dollar’s status as the world’s reserve currency is in jeopardy. Global trade and FDI (foreign direct investment) flows are down from their early 2000s peaks, but by no means is globalization dead. Most of the downside in flows has come from China, which has been becoming more self-sufficient for longer than most may have thought.

Is global trade becoming less important?

At the onset, it is technically true that global trade volumes have been slowing for some time. Global trade volume growth since 2011 has generally been much slower compared to expansions in the pre-global financial crisis (GFC) period. Some of this reflects the slow global growth following the GFC since it took a long time for economies to heal their wounds from the crisis. But looking at the trends by economy, it appears that China has played a disproportionally large role in the reduction in global trade volumes. Much of this reflects internalization of its supply chains. As Chinese production moved up in the value chain, it needed less from outside sources to produce its final goods (most of which are used for domestic consumption). China’s insatiable demand for commodities also slowed as population declined and overbuilding has reduced the need for as much infrastructure/real estate growth

China has been importing and exporting less with the U.S. as a share of its total trade since well before the Trump tariffs. On the other hand, its trade volumes as a share of the total have been increasing with Europe, Latin America, and Asia. U.S. trade with China peaked in 2018, when the Trump tariffs were enacted and instead, the U.S. has increased its trade with Europe, Mexico and Canada, and south Asia at China’s expense.

Are we experiencing Dedollarization?

Tensions between the U.S. and China, as well as rising U.S. fiscal debt and political disfunction, have enticed many to say that the dollar will quickly lose its status as the world’s reserve and most actively traded currency. But there is little evidence to suggest that the dollar will lose its status anytime in the near-term. In 2022 the U.S. dollar was involved in almost every foreign exchange transaction. In far second is the euro, followed by the yen. The dollar’s share has been little changed over the past decades. Chinese yuan transactions have increased at the expense of other currencies, but to a still meager 7%. The chart below shows official foreign exchange reserves in various currencies. Although the dollar’s share has fallen, like the dollar transactions, it’s by far the largest. On an absolute basis one could assess that the U.S. dollar is becoming less desirable – slowing growth, rising debt, etc... But it’s the least ugly in the contest, as most of the other currencies in the running are even worse positioned.

Economic size matters for reserve status, but changes take time. In the 19th century, the British economy was the world’s largest, with the pound being the world’s major currency. The U.S. economy’s size surpassed Britain’s in 1916. But it wasn’t until after WWII that the dollar became the world’s major currency. China’s economy could beat the U.S. economy in size at some point, but given the yuan’s low use in forex transitions, it would take some time. It’s also questionable whether the yuan is even a viable alternative given that it’s still somewhat managed and that its trade and FDI ties are falling in most parts of the world.

The gold market is not large enough to be a fiat currency alternative. Crypto is an interesting option in terms of its potential reach. But unlike other major fiat currencies, it still struggles to be a reliable medium of exchange and store of value. It’s also worth noting that crypto is illegal in China, which would mean its reach would still be limited.