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.
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 Korea, home page
Korean G20 site
2010 G-20 Seoul summit Wikipedia
- 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?
In the wake of the credit crunch, the Federal Reserve Bank (the Fed) reduced interest rates to virtually zero in December 2008 and embarked on a huge round of quantitative easing over the following 15 months, ending in March 2010. This involved the purchase of some $1.7 trillion of assets, mainly government bonds and mortgage-backed securities. There was also a large planned fiscal stimulus, with President Obama announcing a package of government expenditure increases and tax cuts worth $787 billion in January 2009.
By late 2009, the US economy was recovering and real GDP growth in the final quarter of 2009 was 5.0% (at an annual rate). However, the fiscal stimulus turned out not to be as much as was planned (see and also) and the increased money supply from quantitative easing was not having sufficient effect on aggregate demand. By the second quarter of 2010 annual growth had slowed to 1.7% and there were growing fears of a double-dip recession. What was to be done?
The solution adopted by the Fed was to embark on a second round of quantitative easing – or “QE2”, as it has been dubbed. This will involve purchasing an additional $600 billion of US government bonds by the end of quarter 2 2011, at a rate of around $75 billion per month.
But will it work to stimulate the US economy? What will be the knock-on effects on exchange rates and on other countries? And what will be the effects on prices: commodity prices, stock market prices and prices generally? The following articles look at the issues. They also look at reactions around the world. So far it looks as if other countries will not follow with their own quantitative easing. For example, the Bank of England announced on 4 November that it would not engage in any further quantitative easing. It seems, then, that the USA is the only one on board the QE2.
QE2 – What is the Fed Doing? Will it Work? Kansas City Star, William B. Greiner (5/11/10)
The ‘Wall Of Money’: A guide to QE2 BBC News blogs: Idle Scrawl, Paul Mason (2/11/10)
Federal Reserve to pump $600bn into US economy BBC News (4/11/10)
Beggar my neighbour – or merely browbeat him? BBC News blogs: Stephanomics, Stephanie Flanders (4/11/10)
Too much cash, bubbles and hot potatoes Financial Times (5/11/10)
Bernanke Invokes Friedman’s Inflation-Fighting Legacy to Defend Stimulus Bloomberg, Scott Lanman and Steve Matthews (7/11/10)
The QE backlash The Economist (5/11/10)
Former Fed Chairman Volcker says bond buying plan won’t do much to boost US economy Chicago Tribune, Kelly Olsen (5/11/10)
Ben Bernanke’s QE2 is misguided Guardian, Chris Payne (6/11/10)
Effects on commodity prices and stock markets
Gold hits record high, oil rallies on Fed stimulus Taipei Times (7/11/10)
Analysis: Fed’s QE2 raises alarm of commodity bubble Reuters, Barbara Lewis and Nick Trevethan (5/11/10)
Fed’s Bernanke defends new economic recovery plan BBC News (7/11/10)
Sit back and enjoy the ride that QE2 has set in motion Financial Times, Neil Hume (5/11/10)
US accused of forcing up world food prices Guardian, Phillip Inman (5/11/10)
Effects on other countries
The rest of the world goes West when America prints more money Telegraph, Liam Halligan (6/11/10)
Backlash against Fed’s $600bn easing Financial Times, Alan Beattie, Kevin Brown and Jennifer Hughes (4/11/10)
China, Germany and South Africa criticise US stimulus BBC News (5/11/10)
G20 beset with fresh crisis over currency International Business Times, Nagesh Narayana (5/11/10)
European Central Bank Keeps Rates at Record Lows New York Times, Julia Werdigier and Jack Ewing (4/11/10)
Official statements by central banks
FOMC press release Board of Governors of the Federal Reserve System (3/11/10)
News release: Bank of England Maintains Bank Rate at 0.5% and the Size of the Asset Purchase Programme at £200 Billion Bank of England (4/11/10)
ECB Press Conference ECB, Jean-Claude Trichet, President of the ECB, Vítor Constâncio, Vice-President of the ECB (4/11/10)
- How has the Fed justified the additional $600 billion of quantitative easing?
- What will determine the size of the effect of this quantitative easing on US aggregate demand?
- How will QE2 influence the exchange rate of the dollar?
- Why have other countries been critical of the effects of the US policy?
- What will be the effect of the policy on commodity prices?
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)
- 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?