Read Online Currency Wars: The Making of the Next Global Crisis by James Rickards - Free Book Online
Authors: James Rickards
Tags: Business & Economics
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the product reaches consumers in Brazil. Each part of this supply and innovation chain will earn some portion of the overall profit based on its contribution to the whole. The point is that the exchange rate aspects of global business involve not only the currency of the final sale but also the currencies of all the intermediate inputs and supply chain transactions. A country that cheapens its currency may make final sales look cheaper when viewed from abroad but may hurt itself as more of its cheap currency is needed to purchase various inputs. When a manufacturing country has both large foreign export sales and also large purchases from abroad to obtain raw materials and components to build those exports, its currency may be almost irrelevant to net exports compared to other contributions such as labor costs, low taxes and good infrastructure.
Higher input costs are not the only downside of devaluation. A bigger immediate concern may be competitive, tit-for-tat devaluations. Consider the earlier case of the €30,000 German car whose U.S. dollar price drops from $42,000 to $33,000 when the euro is devalued from $1.40 to $1.10. How confident is the German manufacturer that the euro will stay down at $1.10? The United States may defend its domestic auto sector by cheapening the dollar against the euro, pushing the euro back up from $1.10 to some higher level, even back up to $1.40. The United States can do this by lowering interest rates—making the dollar less attractive to international investors—or printing money to debase the dollar. Finally, the United States can intervene directly in currency markets by selling dollars and buying euros to manipulate the euro back up to the desired level. In short, while devaluing the euro may have some immediate and short-term benefit, that policy can be reversed quickly if a powerful competitor such as the United States decides to engage in its own form of devaluation.
Sometimes these competitive devaluations are inconclusive, with each side gaining a temporary edge but neither side ceding permanent advantage. In such cases, a more blunt instrument may be required to help local manufacturers. That instrument is protectionism, which comes in the form of tariffs, embargoes and other barriers to free trade. Using the automobile example again, the United States could simply impose a $9,000 duty on each imported German car. This would push the U.S. price back up from $33,000 to $42,000 even though the euro remained cheap at $1.10. In effect, the United States would offset the benefit of the euro devaluation for the Germans with a tariff roughly equal to the dollar value of that benefit, thereby eliminating the euro’s edge in the U.S. market. From the perspective of an American autoworker, this might be the best outcome since it protects U.S. industry while allowing the autoworker to take an affordable European holiday.
Protectionism is not limited to the imposition of tariffs but may include more severe trade sanctions, including embargoes. A notable recent case involving China and Japan amounted to a currency war skirmish. China controls almost all of the supply of certain so-called rare earths, which are exotic, hard-to-mine metals crucial in the manufacture of electronics, hybrid automobiles and other high-tech and green technology applications. While the rare earths come from China, many of their uses are in Japanese-made electronics and automobiles. In July 2010, China announced a 72 percent reduction in rare earth exports, which had the effect of slowing manufacturing in Japan and other countries that depend on Chinese rare earth supplies.
On September 7, 2010, a Chinese trawler collided with a Japanese patrol ship in a remote island group in the East China Sea claimed by both Japan and China. The trawler captain was taken into custody by the Japanese patrol while China protested furiously, demanding the captain’s release and a full apology from Japan. When the release and
Higher input costs are not the only downside of devaluation. A bigger immediate concern may be competitive, tit-for-tat devaluations. Consider the earlier case of the €30,000 German car whose U.S. dollar price drops from $42,000 to $33,000 when the euro is devalued from $1.40 to $1.10. How confident is the German manufacturer that the euro will stay down at $1.10? The United States may defend its domestic auto sector by cheapening the dollar against the euro, pushing the euro back up from $1.10 to some higher level, even back up to $1.40. The United States can do this by lowering interest rates—making the dollar less attractive to international investors—or printing money to debase the dollar. Finally, the United States can intervene directly in currency markets by selling dollars and buying euros to manipulate the euro back up to the desired level. In short, while devaluing the euro may have some immediate and short-term benefit, that policy can be reversed quickly if a powerful competitor such as the United States decides to engage in its own form of devaluation.
Sometimes these competitive devaluations are inconclusive, with each side gaining a temporary edge but neither side ceding permanent advantage. In such cases, a more blunt instrument may be required to help local manufacturers. That instrument is protectionism, which comes in the form of tariffs, embargoes and other barriers to free trade. Using the automobile example again, the United States could simply impose a $9,000 duty on each imported German car. This would push the U.S. price back up from $33,000 to $42,000 even though the euro remained cheap at $1.10. In effect, the United States would offset the benefit of the euro devaluation for the Germans with a tariff roughly equal to the dollar value of that benefit, thereby eliminating the euro’s edge in the U.S. market. From the perspective of an American autoworker, this might be the best outcome since it protects U.S. industry while allowing the autoworker to take an affordable European holiday.
Protectionism is not limited to the imposition of tariffs but may include more severe trade sanctions, including embargoes. A notable recent case involving China and Japan amounted to a currency war skirmish. China controls almost all of the supply of certain so-called rare earths, which are exotic, hard-to-mine metals crucial in the manufacture of electronics, hybrid automobiles and other high-tech and green technology applications. While the rare earths come from China, many of their uses are in Japanese-made electronics and automobiles. In July 2010, China announced a 72 percent reduction in rare earth exports, which had the effect of slowing manufacturing in Japan and other countries that depend on Chinese rare earth supplies.
On September 7, 2010, a Chinese trawler collided with a Japanese patrol ship in a remote island group in the East China Sea claimed by both Japan and China. The trawler captain was taken into custody by the Japanese patrol while China protested furiously, demanding the captain’s release and a full apology from Japan. When the release and
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