Currency wars occur when states intentionally try to take down the exchange rate of their ain currency in order to help the development of their place industries, particularly in the universe market. The most common illustration of a currency war in today ‘s clip is the undervalued exchange rate of China ‘s currency, peculiarly in relation to the U.S. dollar. This issue has been the object of much argument over the last few old ages.
China, since 2003, has been pull stringsing its exchange rate to maintain its currency undervalued. It has been selling its currency and demanding more of foreign currency. This policy kept China ‘s currency weak and supported its exports unnaturally by doing them cheaper in the foreign market. In 2003, while following this policy, China added about $ 10 billion to its militias, holding an overall excess on its current history ( Krugman, 2010 ) .
Although China made efforts to appreciate its currency in 2005 and 2008, the alterations they made were non important, nor did they fulfill other states into believing that China ‘s minute grasps would function to cut down the menace it posed to their currency. In fact, China ‘s weak currency has been seen as a part to the lag in the planetary economic system, chiefly because China is a state that plays a important function in the universe economic system. ( Lachman, 2010 )
The state most affected by China ‘s undervalued currency is the U.S. It is of import to observe that other states such as the UK are besides affected by China ‘s low exchange rate. Similarly, China is non the lone state that pegs its exchange rate against the U.S dollar. Some In-between Eastern states do the same ( Bruegel, 2010 ) .
However, in this paper, we will analyse the on-going argument on such currency wars. Most states, such as the U.S, argue that a currency that is valued lower than it really should be brings many drawbacks to the viing state. First, the fact that another state ‘s currency is valued lower makes their exports more competitory in the planetary market. We can see this illustration in the current universe market every bit good, where China ‘s exports are cheaper for many states around the universe.
But for states that have a higher exchange rate, their exports remain uncompetitive in comparing, for illustration the U.S exports as compared to Chinese exports. Even more so, the low exchange rate of one state, makes importing expensive for them, therefore detering them from importing from other states.
One states imports are another states exports. This negative attitude toward importing from other states renders the high valued exchange rate state, at a loss because it will be losing out on exporting if no 1 is willing to purchase. This is damaging to the industries located in such states and could give rise to unemployment and impede economic growing ; the exact statement that the U.S. nowadayss in visible radiation of China ‘s exchange rate.
A state with a lower exchange rate, like China, could reason that its low exchange rate is to maintain its domestic economic system stable, where most of its population is employed in industries that thrive on exports. A measure of appreciating the currency could turn out to be really damaging since it could take to the shuting down of many industries in the state ( Huang, 2010 ) . These effects could non merely affect the place state, but could go forth an consequence on the remainder of the universe, particularly if most states relied on the inexpensive exports of this state.
But what truly should be understood is that appreciating a currency could non ever be harmful to a state. Of class the procedure would be a hurting venturing one, but there may be many benefits of appreciating the currency every bit good. For illustration, if China were to appreciate its currency by a important sum, it could happen some of its of import imports cheaper. For case the oil and Fe ore that are imported utilizing U.S. dollars, along with other trade goods, could go cheaper for the state.
Furthermore, it could assist in commanding imported rising prices, which is another issue that is a menace to every economic system ( Rosen, 2010 ) . Besides, by appreciating its currency, it can seek to beef up the industries in the state, which are dependent upon an unreal exchange rate to boom and be successful ( Huang, 2010 ) .
There may be other positions to see this issue from. States that are affected by the currency war, must seek to look past the talk of currency. Such states may still be at a disadvantage if the low valued currency is revalued. This is because there are differences in costs, in different states. For illustration, China has low costs of borrowing and their research and development is subsidized. Significant grasps in its exchange rate may still go forth the U.S. with a shortage when trading with China, as the exchange rate may non be the lone factor that influences the the high degree of exports that China makes ( Rosen, 2010 ) .
The currency war can take to revenge from states that suffer a shortage in their balance of payment, at the disbursal of other states. Such revenge could take to future crises ‘ and can do an instability in the planetary market ( Bruegel, 2010 ) . The currency war is a really sensitive issue and needs to be dealt with carefully.
A solution to this job needs to be reached, maintaining in head the planetary economic crisis that is predominating around the universe. This currency war leaves everyone affected by it, in one manner or another. A via media needs to be reached by everyone so that there may be a alteration in the on-going recession that is taking topographic point.
The currency war contributes to the recession that is predominating in the economic system. Solving this issue can take to a velocity up in growing, globally, since one of the issues that hinders the advancement of covering with the recession is the currency war itself. By coming to an appropriate and compromising solution, that is in the benefit of the long term chances of every state, the currency war can come to a arrest, to some extent, if non wholly.