Currency war

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Currency Wars - A threat to Global Recovery? Abstract: A drastic yuan appreciation may price many Chinese goods and
businesses out of world markets but is unlikely to reverse consumer demand for lower-priced products from efficient producers in the developing world. Rather than changing the fortune of US exports and jobs, a looming global currency war would see no winners. It would only deepenthe mistrust between countries, especially the US as the only superpower and China as a rising power, whose mutual cooperation is essential for a speeder economic recovery and grappling with the many global challenges of the coming decades.

The Currency Manipulation Bill has been passed in the House of Representatives with a large majority, targeting China. While many view a full-scale currencywar between the US and China as not a very smart idea, with a record-high unemployment rate, depressed blue-collar and even white-collar wages, a struggling economy, and a general perception that American dominance in the world is ebbing away towards a ‘Communist’ China, chances are that in the run-up to the mid-term elections, the President should like to be seen to be keeping his finger firmlyon the Bill’s trigger. The irony is that even if Chinese products were entirely priced out of the world market, this may not succeed in turning the tide for US exports and jobs. Consumers in the US and elsewhere are likely to buy similarly competitively-priced substitutes produced by other developing countries. Moreover, as China’s Premier Wen has pointed out, the yuan has appreciated by some 55%since China’s first currency reform in 1994. Since then, this magnitude of appreciation has not helped US exports or reduce Chinese imports. Additionally, net exports account for only 8% of China’s GDP as a great deal of China’s export content is represented by imports of parts, components, materials, proprietary technology and services from other countries. Any appreciation of the Chinese yuanwill lower the costs of such production inputs to the Chinese manufacturers, offsetting a significant proportion of

the impact of a yuan appreciation. So the Chinese yuan would have to appreciate quite drastically to have the intended effect. However, most Chinese products are now trading at very thin margins, often below 5%. A substantial appreciation, as Premier Wen has warned, will drive manyof China’s manufacturers out of business, resulting in massive unemployment and social instability. This will be a disaster not only for China, but also for the rest of the world. But that is not all. In the aftermath of the financial crisis, Western countries, especially key reserve-currency issuers, have resorted to Keynesian ‘quantitative easing’, or turning on the money-printing press, torevive their economies, thereby depressing their exchange rates. Particularly for the US, this is welcome as a boon for exports and diminution of the trade deficit as well as public debt. To safeguard competitiveness, exporting countries from Japan to Brazil have to intervene to keep their currencies from rising too much as a result. Now every country is looking after its own interests and ‘Beggar thyneighbour’ is the name of the game. It is no surprise that the current IMF meeting in Washington D.C has failed to reach any consensus on easing global currency tensions. So what is at stake is not only the value of the Chinese yuan, but how trade should remain free and fair between countries and the stability of the global currency system. Indeed, the need for a more stable internationalcurrency system was earlier highlighted by Zhou Xiaochuan, the Governor of the People’s Bank of China, referring to the so-called Triffin Dilemma (1). Zhou proposed using Special Drawing Rights to replace the US Dollar as a primary reserve currency. While this may not be the ideal solution and is unlikely to gain international consensus, in the wake of China overtaking Japan as the world’s second...