Vietnam Currency Protectionism

Topics: International trade, United States dollar, Currency Pages: 3 (833 words) Published: January 8, 2011
Vietnam's decision to devalue its currency by 5 per cent last week to protect itself from undervaluation of the Chinese renminbi, and the worried response from Thailand and other Asian countries, suggests the move towards global trade conflict may already be unstoppable. As one group of countries seeks to gain or maintain trade advantage by manipulating their currencies, the historical precedent suggests that countries that are not able to devalue will respond with trade protection, especially tariffs and other barriers, and global trade will suffer. In the 1930s many, but not all, major economies imposed draconian constraints on trade which sharply contracted international commerce and almost certainly slowed the global recovery. It was widely understood then that the collapse in international trade would only worsen the crisis, and yet countries, seeking to protect their own positions, collectively engaged in behaviour that left them worse off. American economists Barry Eichengreen and Douglas Irwin recently published a paper examining the roots of the post-1930 surge in protection. They argue that during the 1920s and shortly after the onset of the 1929 crisis, several countries abandoned the gold standard and engaged in beggar-thy-neighbour competitive devaluations. These countries subsequently experienced rapid improvements in their trade balances and suffered much less from the ravages of the global contraction of the 1930s. But others, most obviously the US and European "gold bloc" countries, were sharply constrained in their ability to adjust their currencies. These countries suffered much of the brunt of the adjustment as imports became more competitive against their domestic industries, especially in relation to countries that were less constrained. These were also the countries that were most likely to resort to what the authors call the "second-best" adjustment mechanisms - tariffs, import quotas, exchange controls, and so on. "The exchange rate...
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