There are serious implications for commodities, trade and financial flows. Already, China accounts for one-third of global demand for metals and this is rising. India could follow suit, not just in metals, but in food as well. The outcome will be higher commodity prices, increased investment in countries rich in resources and in water, and a growing need for technological solutions.
Regional trade flows are already shifting, with more bilateral deals, rising intra-Asian trade, and greater flows of commodities, goods, and investment between Asia and the Middle East, Africa, and Latin America. This will continue, and as it does, it will spell problems for the dollar.
There is a slow-burning fuse underneath the dollar. A decade ago, Asian central banks held one-third of global currency reserves, and this has now risen to two-thirds, the bulk in dollars. Although this has been called the “dollar trap,” the reality is that countries do not want to sell the dollar actively. Instead, passive diversification is underway. As reserves build, fewer are put into the dollar. Brazil and China recently discussed paying for each other’s trade in their own currencies, not in dollars, as is the norm. As trade flows change, we expect more countries to manage their exchange rates against baskets of currencies with which they trade.
The shift of economic power from the West to the East will create profound challenges for many economies, not least the US. It will create huge opportunities for emerging economies, especially those which can position themselves to benefit from the new reality. Regardless of the winners and losers, this shift is inevitable, and it is crucial to correcting the imbalances in the global economy.
Gerard Lyons is chief economist and group head of global research at Standard Chartered Bank.
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