The possibility of currency and trade wars and how to avert them were major topics at the G20 meeting in Seoul on 11 and 12 November 2010. Some countries, such as the USA and the UK have been running large current account deficits. Others, such as China, Germany and Japan have been running large current account surpluses. But balance of payments accounts must balance. Thus there have been equal and opposite imbalances on the financial plus capital accounts. Large amounts of finance and capital have flowed from the trade-surplus to the trade-deficit countries. In particular China holds a vast amount of US dollar assets: a debt for the USA.
The trade and finance imbalances are linked to exchange rates. The USA has accused China of keeping its exchange rate artificially low, which boosts Chinese exports and further exacerbates the trade and finance imbalances. The USA is keen to see an appreciation of the Chinese yuan (also known as the renminbi). The Chinese response is that the USA is asking China to take medicine to cure America’s disease.
So was the meeting in Seoul successful in achieving a global response to trade and exchange rate problems? Has it averted currency and trade wars? Or were national interests preventing a concrete agreement? The articles look at the outcomes of the talks.
Articles
G20 pledge to avoid currency war gets lukewarm reception Guardian, Phillip Inman and Patrick Wintour (12/11/10)
G20 fails to agree on trade and currencies Financial Times, Chris Giles, Alan Beattie and Christian Oliver (12/11/10)
Main points of the G20 Seoul summit document Reuters (12/11/10)
Factbox: Outcome of the Seoul G20 summit Reuters (12/11/10)
No deal: Seoul’s G20 summit fails to deliver on currencies, trade imbalances The Australian, Laurence Norman and Ian Talley, Dow Jones Newswires (12/11/10)
G20 to tackle US-China currency concerns BBC News (12/11/10)
The expectations game BBC News blogs: Stephanomics, Stephanie Flanders (12/11/10)
Obama: Imbalances threaten growth BBC News (12/11/10)
Obama leaves G-20 empty-handed on currency spat msnbc (12/11/10)
The ghost at the feast The Economist, Newsbook blog (12/11/10)
Forget summit failures, look at G20 record Financial Times, Christian Oliver, Chris Giles and Alan Beattie (12/11/10)
Obama warns nations not to rely on exports to US BBC News (13/11/12)
G20 summit distracted by ‘currency wars’ Guardian, Mark Weisbrot (12/11/10)
Current account targets are a way back to the future Financial Times podcasts, Martin Wolf (2/11/10) (Click here for transcript)
Ben Bernanke hits back at Fed critics BBC News (19/11/10)
Why should you care about currency wars? BBC News, Stephanie Flanders (9/11/10)
G20 sites
G20 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
Questions
- What are the causes of the large trade imbalances in the world?
- What problems arise from large trade imbalances?
- What is meant by beggar-my-neighbour policies?
- Are moves towards freer trade a zero-sum game? Explain.
- Are moves towards protectionism a zero-sum game? Explain.
- Are attempts to get a realignment of currencies a zero-sum game? Explain.
- How successful has the G20 been over the past two or three years?
- Would it be desirable for governments to pursue current account targets?
With countries around the globe struggling to recover from recession, many seem to believe that the answer lies in a growth in exports. But how can this be achieved? A simple solution is to lower the exchange rate.
Under a pegged exchange rate, the currency could be devalued. Alternatively, if the country’s inflation is lower than that of other countries, merely leaving the exchange rate pegged at its current level will bring about a real devaluation (in purchasing-power parity terms).
Under a floating exchange rate, one answer would be to lower interest rates. This would involve open market operations to support the lower rate and that would increase the money supply. But with central banks’ interest rates at virtually zero, it is not possible to lower them further. In such circumstances a solution would be a deliberate policy of increasing the money supply through “quantitative easing”. For example, the USA is considering a second round of quantitative easing (known as “QE2”). This would tend to push down the exchange rate of the dollar.
But stimulating exports through devaluation or depreciation is a zero-sum game globally. If currency A depreciates against currency B, currency B necessarily appreciates against currency A. Country A’s gain in exports to Country B are an increase in imports for Country B. It is logically impossible for every currency in the world to depreciate! Yet depreciation is exactly the policy being pursued by countries such as Japan, South Korea and Taiwan, all of which have directly intervened in the currency markets to lower their exchange rates. And, in each case of course, other countries’ currencies have an equivalent appreciation against them.
Economists and politicians in the USA argue that the dollar is fundamentally over valued against the Chinese yuan (or ‘renminbi’ as it is sometimes called). They are calling on China to revalue by far more than the 2% increase since June 2010. But what if China refuses to do so? On 29 September the House of Representatives passed a bill giving the executive branch the authority to impose a wide range of tariffs on imports from China. The bill was passed with a huge majority of 348 to 79.
So is this the start of a trade war? Many in the USA argue that China is already waging such a war by giving subsidies to a wide range of exports. And that war is hotting up. China has just announced that it is imposing traiffs ranging from 50% to 104% on various poultry imports from the USA. And if it is a trade war, will there be any winners? The following articles investigate.
Global recovery’s weakness raises possibility of trade war Guardian, Larry Elliott (4/10/10)
Tension mounts as China and US trade insults over currency Independent, Stephen Foley (1/10/10)
Is the world in a trade war? Time Magazine blogs: The Curious Capitalist, Michael Schuman (29/9/10)
Trade War Is Here – and We’ve Disarmed The Huffington Post, Robert Kuttner (3/10/10)
US House Passes Anti-China Trade War Bill GlobalResearch.ca, Barry Grey (1/10/10)
Currencies the key to market’s next move BBC News, Jamie Robertson (3/10/10)
A Message for China New York Times (30/9/10)
Taking On China New York Times, Paul Krugman (30/9/10)
Krugman Makes Two Powerful Arguments Against “Taking on China” Wall Street Pit, Scott Sumner (2/10/10)
Why the U.S. can’t win a trade war with China The Globe and Mail (Canada), Carl Mortished (4/10/10)
China-Japan trade war looms CTV News (Canada), Mark MacKinnon (23/9/10)
IMF chief’s warning of currency war ‘real threat’ BBC News, interview with Dominique Strauss-Khan, head of the IMF (7/10/10)
Could disputes over currency levels lead to a depression? BBC World Service, interview with Robert Zoellick (8/10/10)
China stands firm over yuan move BBC News, Andrew Walker (9/10/10)
What to do about China’s currency? Washington Post (10/10/10)
How to stop a currency war The Economist (14/10/10)
What’s the currency war about? BBC News, Laurence Knight (23/10/10)
Nominally cheap or really dear? The Economist (4/11/10)
Questions
- Why are competitive devaluations globally a zero sum game while global trade wars are a negative sum game?
- What are the arguments for and against using tariffs as a means of stimulating recovery?
- Why has quantitative easing so far had a more discernible effect on asset prices than on the real economy?
- Do a search on “Smoot-Hawley Tariff Act” of 1930 and describe its impact on the global economy in the 1930s. Are there any parallels today?
- How is it possible for massive trade surpluses and deficits to persist and yet for individual countries’ exchange rates and overall balance of payments to be in equilibrium?
- Are global trade imbalances widening, and if so why?
- What would determine the size of the effect on the US balance of trade of an appreciation of the yuan?
One of the key problems faced by all countries over the past three years has been a lack of consumer demand. Firms face demand from a number of sources and when the domestic economy is struggling and domestic demand is weak, a key source of demand will be from abroad. By this, we are of course referring to exports. However, it was not just one country that plunged into recession: the global economy was affected. So, when one country was suffering from a weak domestic market, it turned to its export market and hence to other countries for demand. However, with these economies also suffering from recession, the export market was unable to offer any significant help. In order to boost exports, governments have tried to make their export markets more competitive and one method is to cut the value of the currency. Japan, South Korea, Thailand, Columbia and Taiwan are just some of the countries using this strategy.
Following these interventions, the Brazilian finance minister has commented that a new trade war has begun. Speaking to a group of industrial leaders in Sao Paulo, Mr. Mantega said:
‘We’re in the midst of an international currency war. This threatens us because it takes away our competitiveness.’
As more and more governments intervene in the currency market in a bid to boost exports, those refraining from intervening will suffer. Furthermore, interest rates throughout the developed world have remained low, as central banks continue their attempts to boost economics. However, this has led vast amounts of money to be transferred into countries, such as Brazil, where there is a better supply of high-yield assets. This has worsened the state of affairs in Brazil, as the Brazilian currency is now thought to be the most heavily over-valued currency in the world. This adversely affects Brazil’s export market and its trade balance. The following articles look at the lastest developments in this new ‘war’.
Articles
Currencty ‘war’ warning from Brazil’s finance minister BBC News (28/9/10)
Brazil warns of world currency war Telegraph (28/9/10)
Brazil warns of world currency ‘war’ Associated Press (28/9/10)
Brazil defends exporters in global currency battle Reuters (15/9/10)
Kan defends Japan’s intervention in the currency markets Associated Press (25/9/10)
US and China are still playing currency Kabuki Business Insider, Dian L. Chu (21/9/10)
How to stop a currency war The Economist (14/10/10)
What’s the currency war about? BBC News, Laurence Knight (23/10/10)
Exchange rate data
Exchange rate X-rates.com
Statistical Interactive Database – interest and exchange rates data Bank of England
Currencies BBC News
Currency converter Yahoo Finance
Questions
- Demand for a firm’s products comes from many sources. What are they? Illustrate this on a diagram.
- Why is a weak currency good for the export market?
- How will a country’s trade balance be affected by the value of its currency?
- Explain the process by which investors putting money into high-yield assets in countries like Brazil leads to currency appreciation.
- What are the options open to a government if it wants to devalue its currency? What are the advantages and disadvantages of each method?
The east African countries of Kenya, Tanzania, Uganda, Burundi and Rwanda have been operating with a common external tariff for some time. The East African Community (EAC), as it is known, came into force in 2000. Initially it had just three members, Kenya, Tanzania and Uganda; the other two countries joined in 2007. As the Community’s site says:
The EAC aims at widening and deepening co-operation among the Partner States in, among others, political, economic and social fields for their mutual benefit. To this extent the EAC countries established a Customs Union in 2005 and are working towards the establishment of a Common Market in 2010, subsequently a Monetary Union by 2012 and ultimately a Political Federation of the East African States.
This Common Market came into force on 1 July 2010, with free movement of labour being instituted between the five countries. The plan is also to do away with all internal barriers to trade, although it may take up to five years before this is completed.
The following articles and videos look at this significant opening up of trade in east Africa and at people’s reactions to it. Will all five countries gain equally? Or will some gain at the others’ expense?
Articles
East African Countries Form a Common Market New York Times, Josh Kron (1/7/10)
Dawn of an era for East Africans The Standard, John Oyuke (1/7/10)
5 East African countries create common market The Associated Press, Tom Maliti (1/7/10)
FACTBOX-East African common market begins Reuters (1/7/10)
Bold plan to have single EAC currency by 2012 Daily Nation, Lucas Barasa (1/7/10)
East Africa’s common market begins BBC News, Tim Bowler (30/6/10)
East Africa: Poor Road, Railway Network Holding Back Integration allAfrica.com, Zephania Ubwani (1/7/10)
Challenges for one East Africa Common Market The Sunday Citizen, James Shikwati (4/7/10)
Videos
Common market barriers NTVKenya (on YouTube) (2/7/10)
The fruits of E.A.C. NTVKenya (on YouTube) (2/7/10)
The East African Community (EAC)
Official site
Wikipedia entry
Questions
- Distinguish between a free trade area, a customs union, a common market and a monetary union.
- How is it possible that all five countries will gain from the establishment of a common market?
- Distinguish between trade creation and trade diversion. Under what circumstances is the establishment of a common market more likely to lead to (a) trade creation; (b) trade diversion?
- Why do some people worry about the consequences of free movement of labour with the EAC? How would you answer their concerns?
- What factors would need to be taken into account in deciding whether or not the five countries would benefit from forming a monetary union?
In October 2004, the USA lodged a complaint with the WTO. The claim was that the EU was paying illegal subsidies to Airbus to develop new aircraft, such as the superjumbo, the A380. This provoked a counter-complaint by Airbus, claiming unfair subsidies for Boeing by the US government since 1992. In July 2005, two panels were set up to deal with the two sets of allegations.
A ruling on the US claim was published on 30 June 2010. The WTO found Airbus guilty of using some illegal subsidies to win contracts through predatory pricing. For example, some of the ‘launch aid’ (LA) for research and development was given at below market rates and hence violated WTO rules. Also the provision of infrastructure and infrastructure grants for runways, factories, etc. also violated the rules. However, the WTO dismissed some of Boeing’s claims, as many of the subsidies were reimbursable at commercial rates of interest.
We still await a ruling on the EU’s complaint against US support for Boeing. This is due later in July.
Articles
WTO backs Boeing in Airbus dispute Financial Times, Joshua Chaffin and Jeremy Lemer (30/6/10)
FACTBOX-Subsidies and the WTO – issue at heart of Airbus case Reuters (30/6/10)
Q&A-What next in the Airbus dispute? Reuters (30/6/10)
TIMELINE-Key dates in Airbus subsidy dispute Reuters (30/6/10)
EU Airbus subsidies illegal, says WTO BBC News (30/6/10)
Boeing and Airbus row ruling to be made public BBC News, Richard Scott (30/6/10)
European loan rates to Airbus illegally low, says WTO Europolitics, Chiade O’Shea (30/6/10)
Airbus Subsidies From Europe Are Ruled Improper New York Times, Christopher Drew (30/6/10)
Airbus-Boeing Rivals May Benefit From Spat Aviation Week, Madhu Unnikrishnan (28/6/10)
WTO ruling
WTO issues panel report on Airbus dispute WTO (30/6/10)
Data on orders and deliveries
Competition between Airbus and Boeing (orders and deliveries) Wikipedia
Questions
- What is meant by ‘predatory pricing’?
- Which subsidies were found to be illegal by the WTO? What was it about them that violated WTO rules?
- What is Airbus’s complaint against Boeing?
- How might strategic trade theory be used to justify subsidies given to Airbus?
- In what ways might the disputes between Boeing and Airbus benefit other aircraft manufacturers?