No One Need Fear a Currency War

(Published in Stabroek News' Letter Page on October 21, 2010)

Dear Editor,

After reading the article in your October 20 edition by Peter Apps titled, ‘The return of great power politics,’ I felt inclined to offer a response. Recently, the US has been vociferous in protesting China’s long-standing policy of deliberately devaluing its currency so as to make its products cheaper on the export markets. This policy has contributed to an enormous trade imbalance in favour of the Chinese, with the US, European and other countries. In response to the US’s discontent, the Chinese are reluctant to capitulate to the demands because of fears such a move would have on its primary driver of economic growth over the past decade – its exports.

Using a complex economic model, Harvard Political-Economy Professor, Dani Rodrik, estimated in 2009 that China’s currency is undervalued by some twenty-five per cent, and if corrected by appreciation, Chinese economic growth would diminish by approximately 2.1 percentage points. Not much considering China’s growth averages just above ten per cent. The Chinese are taking advantage of a loophole in global trading arrangements and seem to be buying time for the inevitable relaxing of its current policy of devaluation. This is the only logical course that China can follow because of the interdependency of the global trading system and its reliance on income from its main trading partner, the US and Europe. Similarly, the US is entangled in this global trading web and depends on the cheap Chinese imports to satisfy a consuming populace that is struggling through a recession (which by the way has little to do with Chinese policy). Furthermore, China was (is) the principal lender to the US during the economic calamity that engulfed its economy.  For both countries, despite the tough rhetoric and political posturing, only cooperation and agreement is possible going forward.

This brings me back to the said article, and many of the like that have appeared in the mainstream media the past few days, and the use of explosive words and phrases with zero-sum connotations, like “power politics” and “currency war.” This is just another example of how the media can frame a dialogue to induce fear and create artificial conflicts to sell their content.

Let us not be hoodwinked by this ruse; there is no currency war for anyone to fear, just rumblings that in the end would be resolved to ensure the current trading system remains intact.

Yours faithfully,
Clinton Urling