Multicurrency Mercantilism and the New International Economic Order
Commentary by Kathleen Tyson - January 20, 2023
Last month I wrote Bretton Woods II ended today. It went viral globally. (Came back to us through contractors in India!) Since then we started our Multipolar Transition Timeline as a way for others to follow the shift from the unipolar world of dollar dominance to a multipolar world where trade, finance, and credit are increasingly transacted in diverse currencies.
I call the new order Multicurrency Mercantilism, inspired by a warning from Henry Kissinger in 2014 that sanctions in a global economy invite a mercantilist defence by large nations. The West's sanctions on Russia for the war in Ukraine, and on China for merely outcompeting Western industries, have triggered a major global shift. Now that it's here, I'm an optimist. Multicurrency Mercantilism is going to be great for the world. Here are some advantages:
- Multicurrency Mercantilism does not require agreement of the G7 nations that dominate the Bretton Woods II monetary order. While the US has an informal veto at the IMF, World Bank, BIS, etc. it cannot veto bilateral deals, or state legislation or regulations, for payment in local, regional or other preferred currencies.
- Payment in local currencies or through vostro accounts in regional currencies provides superior transparency on export and trade proceeds. Exporting states can better collect export taxes and tariffs. Too much trade now in dollar or euro goes through tax havens and uses dual-pricing to avoid customs levies or corporate taxation, lowering fiscal capacity in exporting nations, undermining growth and development.
- Monetary Mercantilism can be implemented incrementally as each nation adapts its legal and financial framework and measures the benefits. Russia used its rubles-for-energy order in 2022 to stabilise the economy after the broadest economic sanctions. Russia then saw the ruble become the best-performing currency of 2022 as 'unfriendly' states were forced to sell USD and EUR to buy rubles to purchase Russian gas and oil. The Russian economy stabilised and suffered far less harm than predicted. Russia was able to rescind the order in December. Other nations can likewise experiment with local currency or vostro payment in one or two export commodities to assess the effects on tax revenues, fiscal capacity, financial stability, and development capacity. The WTO Bilateral Import tool in our Data toolkit is designed to support exploration and prioritisation.
- Payment in local currency or vostro accounts may improve debt service capacity by making revenues more predictable and less prone to exchange rate instability. Also, if more customs levies and corporate taxes are collected locally by exporting nations, then better policies to support growth can be advanced. Credit ratings for the state, financial sector, and non-financial sector should also improve, lowering debt service burdens.
- Payment in local or vostro currencies eliminates the overhead of AML-CTF and Trade Finance where commercial bank capacity has been strained and steadily reducing. Only the largest exporters can still find commercial trade finance in many smaller economies, leaving small and medium exporters locked out of the global economy. Payment for exports in local currency intermediated through local banks may reduce AML-CTF risks, red tape, foreign exchange risks, hedging costs, and cross-border banking complexity.
- Payment in local currency or vostro account in regional currencies reduces the risk of sanctions undermining and destabilising an economy that is not aligned with the West. Too many nations have suffered poverty and political instability as a result of sanctions since the US first imposed unilateral sanctions on China in 1949.
- Payment in local currency or regional vostro accounts can reduce inequality and exploitation. Importing energy and commodities in USD tends to undervalue domestic production and labour. Payment in domestic currency or currencies of export partners may promote trade stability, local consumption, local production, and so reduce global income and wealth inequalities.
- Finally, there is no need for complicated or expensive new financial infrastructure or a new global currency or replacement for the dollar. Every currency is eligible as the parties contract in Multicurrency Mercantilism. As we saw with Russia in February 2022, countries can adapt existing payment systems, domestic bank operations, corporate accounting, and central bank operations to support Multicurrency Mercantilism in weeks rather than years.
The BRICS+, GCC and others are moving toward trade in their own and regional currencies. They are self-selecting and they embody the change they seek. Their aspirations were documented in the United Nations Resolution on a New International Economic Order, passed in December 2022. That Resolution expressly condemns unilateral sanctions.
Perhaps the alternative to dollar hegemony is not the renminbi, gold, or a new synthetic asset, but a diverse Multicurrency Mercantilism where each state and non-state actor trades in chosen currency according to perceived advantage and risk assessment. That is decentrialised finance that might really make a difference.
So the alternative to the dollar is the dollar and ALL other currencies. There is no new hegemon. No need for wars, coups, or other militarised interventions to police the perimeter of a dollarised world.
Pacemaker.Global can help the West as much as the East and the South by sharing our perspective on Multicurrency Mercantilism as it grows from a small base in 2022 to a more structured global movement going forward. I'm an optimist that Multicurrency Mercantilism could be much, much better for the world than the dollarised international order I spent my early career building and globalising.