Bargaining power, product differentiation, and currency patterns in intra-BRICS trade

Abstract

The paper aims to model the currency structure of intra-BRICS trade using readily available data at the product-country level. The research is motivated by the existence of data availability problem that has arisen because the Bank of Russia does not publish data on invoicing currencies in a detailed breakdown by currency and partner. It involves the two factors that require only trade data: the index of trading partners’ bargaining power and the degree of product quality differentiation. First, I link the hypothetical model share of trade invoiced in the producer currency to the ratio of the bargaining powers of exporter and importer countries by logistic curves with different parameters; assuming that trade in homogeneous products with low quality differentiation is invoiced in vehicle currencies, I then compare the model structure of Russia’s intra-BRICS trade with the aggregated data, and choose the parameters of the logistic curve that provide the best fit. I use CEPII BACI database for 2019. The results show that the actual and the model invoicing currency structures for Russia’s intra-BRICS trade are very close for exports but differ for imports, which highlights the role of the importer’s foreign exchange reserves currency structure. The model share of Chinese renminbi in total intra-BRICS trade is about 47% and the model share of vehicle currencies is estimated at 38%. The long-term potential share of Chinese renminbi in total intra-BRICS trade may exceed 80% that makes it the strongest candidate for substituting vehicle currencies in intra-BRICS trade.