How Did the Dollarization of Ecuador Affect Trade?

In 2000, the Ecuadorian Sucre collapsed. The country stopped producing its currency and officially adopted the US dollar. While that did have some positive and negative impacts on the economy, how did the dollarization of Ecuador affect trade?

Transaction Costs

One of the most notable benefits of utilizing the US dollar is decreased transaction costs for international trades. The United States is already Ecuador's largest trade partner. Usually, transaction costs occur when exchanging one currency for another. But because Ecuador now uses USD, that issue is not part of the equation.

The lower transaction costs had a rippling effect throughout Ecuador. The stability encourages long-term investment and trade agreements. According to Ecuador trade intelligence, the lower costs have resulted in more businesses between the United States and Ecuador. Exports have increased significantly since dollarization. Meanwhile, neighboring countries' trade activity remained stagnant.

Inflation

Some experts say that dollarization and its effect on inflation helped boost trade activity, too. By switching to the US dollar, Ecuador enjoys a lower inflation risk. Confidence that inflation of the dollar will remain low provides assurance. Economists predict that long-term inflation will remain consistent with the United States.

There are still risks. Ecuador is a developing country, and the lack of economic stability can cause issues. However, the predictability of inflation helps maintain trade activity and continued economic growth.

Potential Disadvantage

The biggest problem with dollarization is that Ecuador doesn't have its own monetary policy or the means to control the economy. As a result, the Ecuadorian government can't intervene during a recession.

A weaker domestic currency spurs exports, which is why Ecuador saw a significant boom after dollarization. But according to Ecuador trade intelligence, exports were less competitive on a global scale when the US dollar experienced recent appreciation. That resulted in the country's non-oil export value dropping almost six percent.

Assistance for a Developing Economy

Ultimately, Ecuador's dollarization is considered a positive shift. While there are setbacks, the improvements to trade have done a lot to help Ecuador's economy flourish.

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