Pulling some threads together

Trade wars and currency multipolarity

Over the past few months, I’ve published a number of essays that touch on the question of the evolving global trade landscape and the evolution of currency multipolarity. This short piece simply aims to summarise the key threads of argument and provide the links for convenience. The series of related pieces are listed below, in chronological order (oldest to newest).

• To be like water. In this piece, I explored the implications of Trump’s threatened 100% tariffs on BRICS countries. The core argument was that they are well-placed to adjust, due in large part to their fundamental economic complementaries and foundational productive capacities. I argued that adjustments - namely, to fully replace lost US markets - would take between 2.5-4 years, depending on country and depending on policies. Fiscal policy stimulus, coordinated fiscal responses together with intensified trade policy and regime alignment could fast-track the adjustment. The US reaction will be slower, and likely to land the US at a higher cost plateau with supply chain shortages becoming prevalent.

• The transition away from the USD. This piece then explored how the transition is ‘financed’. There is a common argument that the US deficit (or China’s surplus) is financed by deep American capital markets. The claim then goes on to argue that because no other capital markets are sufficiently deep (and wide) any transition away form the US market cannot happen quickly. This is erroneous. It has the cause and effect back to front. US capital markets are the result of financing of trade deficits via the endogenous issuance of US dollars, either by way of government expenditure or new credit from commercial banks. Capital markets do not finance trade deficits; they are the result of trade deficits, which in themselves are a reflection of the spatial distribution of productive capacity.

• Never look a gift horse in the mouth. This essay responded specifically to Trump’s announced tariffs, arguing that rather than be despondent at the prospects of adverse impacts on trade (which there will be), this was an opportunity to fast-track the development of new trading relationships. This piece drew on the previous core arguments.

• Revisiting the Bancor. Finally, this essay explored alternative payments systems through the historic lens of Keynes’ International Clearance Union and Bancor proposals of the early 1940s. The discussion explained the design mechanisms of the ICU concept before exploring whether the IMF’s own Special Drawing Rights could fulfill the role of a non-national numeraire in a reformed global settlements system. The short answer is ‘no’. Questions of how to deal with exchange rates are then discussed, before those of governance are considered. This essay is certainly not a blueprint, with more modest aims. It simply shows that the issues that BRICS Clear are likely to be addressing can draw on historic thinking to frame a national currency-based settlements system.