Since the US dollar is the reserve currency of the world, does that mean that other countries have to convert their own currency to US dollar to pay for their imported products? let’s say for example..
if Thailand wants to import products from Japan, does Thailand have to convert its national currency to US dollar inorder to pay for the japanese products? or can Thailand just pay Japan by using their Thai currency?
Short answer: No.
Long answer: They’ll have to pay the Thai seller in something they want in exchange. If that is US dollars, Thai currency, gold pieces or poltry depends on the spesific situation. What is meant with that the US dollar is the reserve currency of the world is that many governments have stores of dollars in their central banks.
So exporters can choose whatever they want to recieve as payments for their products? just like OPEC choosing US dollar as payment for their oil?
is that right?
Yeah but OPEC is a bit different. Most of the OPEC nations have their currencies pegged to the US dollar. I believe the way this is achieved, practically, is that if their currency floats up as a result of oil exports (or any other exports, for that matter), they deal with that situation by buying US bonds or something. Implicitly, in doing this they are:
a) Buy US dollars
b) Selling their own currencies
The result is that the US dollar strengthens and their own currencies weaken - allowing them to maintain the dollar peg. Hong Kong is another country that has it’s currency pegged to the USD (god knows why).
If the OPEC nations were to abandon their currency peg, this could have significant implications for the exchange rate on the USD (i.e. it could plumet like a dead baloon)… The US tends to get a bit frisky when any of them talk about this possibiliy. Up until recently, there haven’t really been many plausible alternatives to the US dollar or reasons to want to abandon the currency peg, since the US dollar was as stable as any other currency. The last 10 years of US central banking and government financial policy haven’t exactly been their best though - so the future is anyone’s guess. A lot of the OPEC nations currently have serious inflation problems (as a result of US monetary policy, which they are inadvertently victims of by way of their currency peg) and so they’re giving some serious thought to alternative currency solutions that are less prone to inflation (a problem that is quite literally starving people to death in countries like Yemen - amongst the poorest countries in the world, despite being an OPEC member).
We invaded Iraq because Saddam started trading oil in Euros instead of Dollars. Iran is also starting to trade in Euros, that’s why we are so hostile, not because of nuke weapons
oh ok , so two countries can trade their goods to each other without even using any kind of money? let’s say for example…
Japan exports their Japanese automobiles to the Philippines in exchange for Filipino bananas? does this kind of transaction always takes place in the Global market nowadays? or do countries still need money inorder for them to trade?
to make it short, is money still needed for export/import to take place?
Pretty rare these days I’d think… but then what are you defining as a country? A country is a whole bunch of individuals… I’m sure individuals in some countries barter with individuals in other countries (I’ve done it myself in Morroco). Are you asking if a big percentage of individuals in some countries today barter for goods and services for a big percentage of individuals in another country?
I know it’s a wierd question, but I’m just curious
I’m asking about the trade between two countries that goes through government regulations, i.e. trade laws, customs, taxes,etc..
I think you are slightly mixed up in your thinking about global trade. “Japan” isn’t trading with the “Phillippines” cars for bananas, though it may end up that those exchanges are what balances the countrie’s trade. Honda might go into the Phillippines and sell some cars, for which they’ll get Phillipine pesos, assuming they are willing to deal with them. If they weren’t they’d demand Yen, dollars, gold, wood chips, it doesn’t really matter, and the company wanting to buy Japan’s cars would be responsible for coming up with that currency. Lets say they accept the pesos though.
Once they have the peso’s they have two options, they can either find something to buy from the phillipines with those peso’s, such as if they were a supplier of raw steel to make automobiles, but a car company definitely isn’t going to want a ton of bananas for anything, and they weren’t dealing with a banana producer to start with, they were dealing with a car dealership.
So the other option would be to exchange the newly earned peso’s for yen, dollars, or whatever currency they would prefer to have by going to a currency trader. So they get a certain amount of yen in exchange for a certain amount of pesos. But of course if this only happened in one direction the currency trader would soon have a ton of worthless pesos. So a fruit importer from Japan comes in and exchanges their Yen for Pesos in order to go buy bananas from the phillipines and the cycle starts over.
This is overly simplified, but the important thing to take away from this is that it isn’t the currency that creates the value, even though it is traded. If the Phillipines didn’t have bananas to offer then Honda wouldn’t want the Pesos to begin with because they would be worthless.
I hope I didn’t offend any economists with this, but please let me know if you see anything wrong with this. (I’m an engineer by trade, economics is only a hobby)
but let’s just say for EXAMPLE, Honda is willing to exchange 10 autmobiles for 20 Philippine Steel, how is that going to happen step by step?
is it the responsibility of the Philippine company selling Honda automobiles to give Honda 20 Philippine Steel as payment for the 20 automobiles, or
does the Philippine company have to give Honda some pesos,US dollars, yen, or other fiat paper money/currency so Honda can buy 20 steels in the Philippines?
or are both scenarios possible?
I would assume either could happen provided neither country had barter laws for tax purposes. But if I’m selling my cars to buy steel, but you want to sell steel to buy cars there is no reason we couldn’t just trade. Currency is just there to make the process easier when you have multiple people involved in transactions.
Hm, OK. Well governments live off taxes and it’s a bit difficult to tax commerce based on barter. It’s not impossible, but it’s difficult. This used to be done, not between countries but between cities. When commercants hit the borders of cities the local customs officers for that city would inspect the caravans etc. that they were using to transport their goods and take a slice for themselves. You’ll find various of the ports around europe (in places like Corsica) still have the towers where the customs officials would store the loot that they’d accumulated - these towers served both as their homes and as depots for the loot. Every few months officials from the king/prince that laid claim to that land would come around and take a portion of the plunder in the name of the prince/king (ostensibly, at least, in exchange for protection services) and so it was that the big protection racket was run in the days of barter (in Europe at least - perhaps the asians had different customs, and the pacific islanders had different customs still).
Today though, most governments want their citizens to conduct their transactions in the “legal tender” that the government forces upon everyone. This means that:
a. The government can better calculate, after expenses, exactly how much it can bleed it’s cattle (ahem, I mean citizens)
b. The government can collect additional taxes through inflation, by monetizing their debt (something the US and Europe will likely know about all too soon)
In recent US history the government has outlawed the use or even possession of other currency (such as gold) to ensure that it can achieve the above two ends. For some reason, relatively few US citizens appear to be aware of this. I guess they lost a bit of the spirit that the founding fathers had, gradually loosing their memory of what freedom was and what it’s worth. However the americans are hardly alone in this respect, so it’s a bit unfair to pick on them specifically.
so are you saying that barter exchange nowadays is impossible or maybe hard to do because of Government regulations, laws, tariffs, taxes, etc..? so inorder for an export/import of goods to take place, a fiat paper money has to be used?
It wouldn’t have to be used, but at some point you are going to have to decide the value of the goods in a fiat currency, because you are going to have to pay your tarriffs in that currency. Just like in the US, if I go next door and trade my goat (I actually own a blind goat, and if you want it you can have it) for a peacock (my neighbor has these, don’t ask me what for) then we are supposed to report the value of each and pay taxes on it.