SK22

Dominant currency pricing in international trade of services

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Abstract

Key Points: 
    • Abstract
      We analyze, for the first time, how firms choose the currency in which they price transactions
      in international trade of services and investigate, using direct evidence, whether the US dollar
      (USD) plays a dominant role in services trade.
    • JEL: F14, F31, F41
      Keywords: dominant currency paradigm, international trade, services.
    • Related research has
      shown that the US dollar (USD) exchange rate is a major source of swings in
      global trade in goods?a ?dominant currency pricing? (DCP) phenomenon?since
      most goods traded internationally are invoiced and sticky in USD.
    • Yet it is also key to look at dominant currency pricing in international trade
      in services for several reasons.
    • First, global trade in services is big?accounting for
      about a quarter of global gross trade flows and for around 40% in terms of valueadded trade.
    • Third, and relatedly, the
      future of globalisation might be in trade in intermediate services?as progress with
      digitech lowers technological barriers to such trade across borders.
    • But perhaps the main reason is that trade in services is conceptually different
      from trade in goods.
    • Our paper is the first, to our best knowledge, that analyzes how firms choose
      the currency in which they price transactions in international trade of services and
      that examines whether dominant currency pricing differs between trade in goods
      and services using direct evidence? hitherto unavailable?on patterns of currency
      choices in international transactions in services compared to goods.
    • Work on dominant currency pricing has
      almost exclusively focused on trade in goods.
    • One reason is that data on patterns
      in invoicing currency for trade in services are ?virtually nonexistent? (Adler et al.
    • Yet it is important to look at dominant currency pricing in international trade
      in services for several reasons.
    • Using the exporter?s (or producer) currency in exports is known in the literature as producer
      currency pricing (PCP), while using the importer?s currency is known as local currency pricing (LCP)
      and using a third currency is known as vehicle currency pricing (VCP).
    • Our paper is the first, to our best knowledge, that analyzes how firms choose the
      currency in which they price transactions in international trade of services and that
      examines whether dominant currency pricing differs between international trade in
      goods and services using direct evidence ? hitherto unavailable ? on patterns of
      currency choices in international transactions in services compared to goods.
    • First,
      we rule out compositional effects, that is that differences in the use of currencies
      reflect differences in trade partners in services vs. goods trade.
    • Both in extra-EU and intra-EU trade, the EUR is the
      most widely used currency, be it on the export or import side.
    • Based
      on the framework, we stress which factors should determine currency choices in
      international trade, and to what extent one should expect differences between
      services trade and goods trade.
    • Second, it can price in the importer?s currency
      (local currency pricing, LCP).4 Third, it can use a third currency, say currency
      v (vehicle currency pricing, VCP).
    • That is,
      the currency choice problem is equivalent to determining the currency in which the
      desired price is least volatile.
    • (2022)
      provide systematic empirical evidence ? firm size and exposure to foreign currencies
      in imported inputs ? should also shape currency choices in services trade.
    • Dominant currency pricing in USD ? services vs. goods trade
      Having established that currency choice in international trade of services is an
      active firm-level decision as well as the determinants of this decision, we now

      8.

    • Services and goods exports: prevalence of different pricing strategies (percent)
      Notes: The table shows the shares (in value terms) of different pricing strategies: producer currency
      pricing (PCP), local currency pricing (LCP) and vehicle currency pricing (VCP).
    • To make comparisons with goods trade, we rely on Eurostat?s
      macro data on international trade in goods by invoivcing currency.
    • If intra-EU trade is more important in services than
      in goods trade, this could hence be an explanation for the lower prevalence of the
      USD in services trade.
    • We showed
      that while the USD is also extensively used as a vehicle currency in services trade, its
      prevalence is systematically lower than in goods trade.
    • Hence for all travel services exports
      the invoicing currency is the EUR; for travel imports it is the currency of the
      destination of travel (i.e.
    • Also for these

      ECB Working Paper Series No 2932

      33

      services it seems plausible that trade does not take place vis-?-vis all counterparts
      in each currency.

    • Figure B.2: Share of international trade in services in global GDP broken down by type (%)
      Notes: Authors? calculations using World Bank and World Trade Organization data.
    • An earlier version of this paper circulated under the title ?Currency choices and the role of the
      U.S. dollar in international services trade?.