Argument: Dollarization makes sense for nations trading mainly with US

Issue Report: Dollarization


  • C. Fred Bergsten, Peterson Institute. “Dollarization in Emerging-Market Economies and Its Policy Implications for the United”. – “one additional criterion has recently been suggested for dollarization: close economic links between a country and the United States. The argument is that such a country, in addition to enhancing its monetary stability, could achieve significant savings in transaction costs because of those extensive trade and investment links. For example, studies show that transactions between Canadian cities are 20 times those between similar Canadian and American cities despite ten years of a free trade area and the geographic propinquity, common language and culture of the two countries; the main barrier may be the different currencies and the fluctuating exchange rate between them. This is one of the main economic arguments for creating the euro as a common currency for countries that have already developed extensive trade and other economic ties in Europe.
On this criterion, Mexico and Canada—the NAFTA trading partners of the United States—might seriously consider dollarization. About one-third of total Canadian output, and about one-fifth of all Mexican production, is exported to the United States. (By contrast, the ratio is less than 1 percent in Argentina or Brazil. Dollarization would not shield Argentina from the substantial impact of devaluation by Brazil, by far its largest trading partner.) Hence full financial integration with the United States, as the European Union has chosen via the euro in part because of the members’ extensive trade ties, has some appeal—along with the presumed advantages of greater price stability and lower interest rates, as noted above and as achieved already by some of the less industrialized members of Euroland (especially Italy, Portugal and Spain).”