In Pursuit of Competitive Advantage, a Number of Countries Have Turned to Devaluation

In recent months, numerous countries have resorted to a shortcut to more competitive exports – currency devaluation. This unpleasant trend is currently strongest in the Far East, but is spreading towards South America. However, this practice has long been adopted by the USA, whose currency has been continuously devaluing for decades, with a few short pauses.

written by Vanja Figenwald
[email protected]

A topic that was long limited to unofficial whispers has become a public matter. Guido Mantega, Brazil’s finance minister, has provided reputable media with the basis to start writing about a trend that has been simmering beneath the surface for some time, a currency war. What has so far largely been confined to the framework of Sino-American relations has now become a general plague. In recent months, a number of countries have resorted to the despised shortcut to more competitive exports, currency devaluation, which ultimately prompted the concerned minister to cry out against such practices that diminish the competitiveness of countries with strong currencies. This unpleasant trend is currently strongest in the Far East, particularly in Japan, where the yen has been devalued for the first time in six years, as well as in South Korea and Taiwan. In this company, China is a sort of veteran, where the artificially low level of the renminbi is a subject of continuous economic policy and one of the most contentious points in relations with America. Recent information suggests that this strange phenomenon will not be confined to the East, as announcements have already been heard from other countries ranging from Singapore to Colombia, warns the Financial Times.

Thus, reputable media have finally broadened their horizons when it comes to currency games, as all discussions so far have ended up focusing on China. The favored thesis, which is economically quite unconvincing but very popular, has been that China deliberately keeps its currency low, thereby creating an ‘imbalance’. This is, of course, entirely true, but the implications that Americans, the creators of this thesis, persistently draw from it are generally inaccurate and devoid of important facts. First, the American insistence on the appreciation of the yuan, which is supposedly intended to raise the competitiveness of the American economy, is mere nonsense suitable for daily political purposes. A higher yuan exchange rate cannot help America, and the claim that the number one American export product is actually the financial services sector, a sandcastle recently collapsed, is still mostly in the realm of personal opinions, not newspaper articles. There is also no consensus among experts on the effect of currency control on exports. For example, from 2005 to 2008, the yuan appreciated against the dollar by about 25 percent, but the trade surplus was even larger at the end than at the beginning. The American Senate is not to be placated and is sending a bill through the procedure that would impose tariffs on the Chinese, but ultimately, they could end up punishing themselves the most.

The Propaganda Spin on Evil Chinese
Another, no less important, piece of information is about the course of the dollar, which changes the perception of China as a source of problems. That country has merely followed the practice of America, whose currency has been almost continuously devaluing, with a few short pauses, for at least the last few decades. In the case of the offended Brazil, it is worth noting that their real has strengthened against the dollar by 25 percent since the beginning of last year, and the yen has also appreciated by the same percentage against the dollar in the past two years. For many, the problem is the dollar, at least as much as the yuan. America’s monetary policy is based on low interest rates and almost uninterrupted printing of money, which is clear even to a complete layman who has watched an older film. What was a pile of dollars ten or twenty years ago is now pocket change. The propaganda spin about evil Chinese who cheat while Americans work hard and produce various real goods thus looks a little different. Americans mostly produce debt, and that with a monetary policy that uses low interest rates and encourages constant consumption. This also means a constant decline of the dollar.

The latest in a series was Japan, with the sale of about 20 billion dollars worth of yen, thus ending its six-year abstinence. There are more examples. Switzerland intervened last year for the first time in eight years, and Korea has done so several times this year, keeping the value of the won at a slightly lower level. This has understandably caused frowning in Washington, accustomed to currency exclusivity. This development indicates an increasing reluctance of major world economies to pressure China despite such desires from America. Instead, everyone has slowly started to enter this game, which signals something else – that for many, pleasing America is no longer the top priority; it is more important to keep China happy. The Brazilians themselves reacted quite strongly in September, trying to rein in the real, but despite that, their currency is one of the strongest in the world according to Bloomberg’s measurements.

Without Friendly Intentions
On the other hand, there are those who consider this widespread currency devaluation potentially beneficial, as the effect could ultimately be similar to classical monetary easing. The problem is actually that such a game does not suit America, nor its loyal Europe, because it makes their already reduced production capacities uncompetitive in the global market. Within the story of a series of devaluations, the relationship between China and Japan, the two largest trading partners, is also interesting. Since the yuan is closely tied to the dollar, interesting interactions occur when playing with currencies in the triangle of yen-yuan-dollar. When the dollar falls against the yen, the yuan also falls, so when China buys Japanese bonds, which it has done, the yen rises. Japan has devalued the yen by buying dollars, to which China reacted by selling dollars and diversifying into other currencies, so some consider the recent very strained relations between the two countries as one of the causes of this currency spat.

Although it is evident that these are not isolated cases but a trend, analysts still refrain from using the word ‘war’, mostly because it does not seem that the goal of such moves is the direct impoverishment of other countries, but rather the protection of one’s own economy. However, after a long period of popular mantras about cooperation and love among nations and countries, it is becoming increasingly clear that a market economy ultimately means competition and rivalry, in which there are no friends and partners. In other words, the fact that no one devalues their currency out of spite but out of necessity does not mean that they do so in a friendly tone, but rather to ultimately gain an advantage. The effect is the same, and the intention is not friendly.