Swings

• 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?.

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