The Dollar Will Survive Russia-China Trade Deal

The Dollar Will Survive Russia-China Trade Deal

Last week, China and Russia announced they will no longer use the dollar to conduct their bilateral trade, but instead will use their domestic currencies, the yuan and ruble, to do so. Some doomsayers have depicted this move as yet another sign of the dollar's imminent decline and claim it threatens the greenback's status as the pre-eminent reserve currency. But a closer examination suggests the deal will have more of a symbolic impact than any tangible economic or geopolitical effects.

Since 1992, self-imposed restrictions have been in place requiring that trade between China and Russia be conducted in dollars, a practice that is quite common in bilateral trade relations. When goods or services are traded internationally, parties to the transaction must agree on the currency that the transaction will be settled in. It is often easier to conduct trade in a convertible and widely available currency that acts as a yardstick against which all monies are measured. The dollar is the dominant such yardstick, used to settle approximately half of the world's trade transactions.

The move by Beijing and Moscow doesn't do much to threaten the dollar's role as the world's dominant trade invoicing and settlement currency. In 2009, China's total trade with Russia -- exports plus imports -- made up less than 2 percent of its total trade with the world. For Russia, trade with China made up about 8 percent of its total trade with the world. These numbers don't exactly turn the global currency hierarchy on its head.

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