Chapter 3: International Trading and Financial Relations
INTRODUCTION In this chapter we examine some of the ideas, doctrines and policies that govern international trading and financial relations and trace their historical origins. These ideas, doctrines and policies are relevant to the current US–China trade dispute. We will consider the concept of “currency war” because the US accuses China of initiating a currency war by preventing the yuan from appreciating, while China accuses the US of indulging in a currency war through quantitative easing. We also consider the related concepts of free trade, protectionism and mercantilism, which acquired renewed interest following the global financial crisis and the Great Recession of 2009. Actually, China has been repeatedly accused of adopting mercantilist, protectionist and anti-free trade policies. However, the fact remains that countries using these terms in rhetoric directed against other countries do not practise what they preach. CURRENCY WARS A currency war is also known as “competitive devaluation”, “competitive depreciation” and what Tim Geithner calls “competitive nonappreciation”, when he once referred to the Chinese reluctance to allow the yuan to appreciate (The Economist, 2010a). It is a state of affairs where countries compete against each other to weaken their currencies, hoping that a cheap currency will make exports more competitive internationally. This action is typically taken with the intention of supporting domestic industry, boosting production and alleviating unemployment; whether or not it works is an entirely different matter. The mechanism is not straightforward: changes in exchange rates are supposed to lead to changes in the prices of exports...
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