Currency Wars

Topics: International trade, Bretton Woods system, Currency Pages: 6 (2079 words) Published: April 6, 2012
Currency Wars
When we think of war, it is easy to imagine soldiers, guns, tanks and perhaps a bloody chaotic war zone. Then, when we think of trade, exchange rates, foreign exchange, currency and its policies what comes to mind--War? Probably not. We are however, “in the midst of an international currency war…this threatens us because it takes away our competitiveness” (Mantega). A currency war can be defined as a “competitive devaluation, [a] condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry…[a] situation where one nation, relying on its strong economic power, buffets its competitors and seizes other nations’ wealth through monetary and foreign exchange policies. It is a form of economic warfare…” (Currency War). To fully understand the currency war we must look at and grasp the concepts of international trade, trade politics and foreign exchange policies, along with some background on currency and financial systems. International trade is a vital part of our global economy. With the phenomena of globalization, trade has become the cornerstone to our international economic relations and economic integration. Trade is a dated practice that has been used for centuries and will continue be used for years to come. The reason to why we trade is to acquire goods we are not able to produce ourselves. A benefit which trade has allowed is the ability to realize and follow our comparative advantage. The theory of comparative advantage suggests that countries specialize in products and services they produce most efficiently and then buy goods they produce less efficiently. This then, leaves the global economy with a large free trade market, meaning most countries limit or remove all barriers to have a free flow of goods and services. In short, trade lowers prices for goods and services, stimulates economic growth, promotes resource utilization and can even create jobs. Some concerns that could fall outcome trade include trade barriers, protectionist practices, and other politics which will be further discussed. The main portal to trade is the foreign exchange market. The foreign exchange market doesn’t exist in any one place it is a market that never sleeps and one that is integrated in various trading centers around the world. The foreign exchange market is a market which we use to convert the currency of one country to that of another country which allows countries to trade. The exchange rate itself is the rate at which one currency converts to a currency of another country. For example, the amount of X-dollars(US currency) is equal to the amount of X-yuan(Chinese currency). The exchange rate is determined by inflation, interest rates, and at times investor psychology. The exchange rate can be a controversial topic because it affects each country differently. Sometimes a country can benefit when currencies are fixed while others do not. This a zero-sum game, since one country gains and another country loses. Political risks deal with changes in governments policies that affect profitability to a country engaged in trade. There are many risks dealing with trade: cultural, legal, commercial, economic, and political risks, political risks highlighted within. In international trade, trade policies exist. A governments trade policies are determined with its own self-interests in mind, however, political institutions such as the World Trade Organization, International Monetary Fund and World Bank, along with international pressures from other countries can play a role in the policy making process. Policies in international trade have been crucial to the development of the world’s economy. I’ve learned that the principles of the trading system are to trade without discrimination, improve trades through negotiations, ensure predictability and promote fair competition. Instruments of trade policy...
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