As discussed in Ozili (2021a), central bank digital currency (CBDC) can promote financial

inclusion by digitizing the value chains in the economy, improving access to digital financial
services, enlarging the digital economy, enhancing the efficiency of digital payments, and
reducing transaction costs. These factors can have a significant impact on international trade,
particularly for small and medium-sized enterprises (SMEs).

For example, digitizing value chains can help SMEs to better integrate into global supply chains,
which can increase their competitiveness in international trade. Moreover, by improving access
to digital financial services, SMEs can more easily access funding for export activities, which can
further enhance their competitiveness in international trade. CBDC can also reduce the cost of
cross-border transactions, which can be particularly beneficial for SMEs that often struggle to
access international trade due to high transaction costs. By reducing transaction costs, SMEs can
access new markets and customers, which can increase their revenue and growth prospects.

Furthermore, CBDC can enhance the efficiency of digital payments, which is crucial for
international trade. Fast and secure payment systems are essential for facilitating international
transactions, and CBDC can provide an efficient and secure payment system that can operate
across borders without the need for intermediaries.

Ozili, P.K. (2021a). Can central bank digital currency increase financial inclusion? Arguments for
and against. Forthcoming

Andolfatto (2021) argues that an interest-bearing central bank digital currency (CBDC) may
reduce the demand for cash and increase financial inclusion. This could have significant
implications for international trade, as cash transactions are often a barrier to cross-border
trade. Cash transactions can be expensive, slow, and pose security risks, which can discourage
businesses from engaging in international trade. By reducing the demand for cash through
CBDC, businesses can more easily access international markets and engage in cross-border
transactions.
Andolfatto, D. (2021). Assessing the impact of central bank digital currency on private banks. The
Economic Journal, 131(634), 525-540.

Barontini and Holden (2019) highlight the potential of central bank digital currency (CBDC) to
broaden financial inclusion goals. This can have significant implications for international trade,
particularly in emerging countries where financial exclusion is a major barrier to trade.

Emerging countries often struggle to access international trade due to lack of access to financial
services and high transaction costs. By broadening financial inclusion through CBDC, these
countries can improve their competitiveness in international trade. Moreover, the interest of
emerging countries in the financial inclusion benefits of a retail CBDC suggests that CBDC can be
an effective tool for promoting inclusive economic growth. Inclusive economic growth can
benefit international trade by increasing the number of potential trading partners and
expanding the global market. However, Barontini and Holden (2019) note that many central
banks are not yet convinced that the benefits of CBDC will outweigh the costs. This highlights
the need for further research to determine the potential benefits and risks of CBDC for financial
inclusion and international trade.

Barontini, C., & Holden, H. (2019). Proceeding with caution-a survey on central bank digital
currency. Proceeding with Caution-A Survey on Central Bank Digital Currency (January 8,
2019).
BIS Paper, (101). Basel, Switzerland.

Economic theory that discuss the economic impact of digital currency on

international trade
1) Monetary theory

Monetary theory is a branch of economics that studies the relationship between the money
supply and economic activity. It suggests that changes in the money supply can have a
significant impact on the level of economic activity, including international trade. In the case of
digital currency, monetary theory can provide insights into the potential economic impact of
these currencies on international trade. Digital currencies can potentially increase the money
supply by facilitating greater financial inclusion and by making it easier for businesses and
individuals to engage in cross-border transactions. This can potentially stimulate economic
growth and promote greater trade and investment between countries.

Financial stability theory

Financial stability refers to the ability of a financial system to withstand shocks without causing
systemic disruptions. Financial stability theory argues that instability in the financial sector can
lead to negative spillover effects on the broader economy. Therefore, policymakers need to
ensure that the financial system remains stable to avoid economic disruptions. The use of digital
currencies also raises concerns about financial stability. Digital currencies are not backed by any
government or central bank, which means they are subject to significant price volatility and
market uncertainty. This can make international trade more risky and unpredictable, particularly
for businesses that rely on stable exchange rates and predictable cash flows.