April 14, 2021

Cheat the currency to sell more: the keys to the "dreaded" and well-known "currency war"



From the "trade war" to the currency war. The step taken by China this week, from dropping its currency, the yuan, to piercing the psychological barrier of the dollar to seven yuan at a low of 2008, drives trade tensions between the two powers towards a new phase. In the markets and, among analysts, the possibility of a "currency war" that could have global reach begins to be feared. Nor does it help that the president of the United States, Donald Trump, and his government called China "currency manipulator." But what do we mean when we talk about a «currency war?

What is a "currency war"?
A "currency war" or "competitive devaluations" consists of a dispute between countries that try to depreciate or devalue their currency in order to be more competitive abroad, by lowering the products sold abroad. On the other hand, imports become more expensive. "This should help economic growth and unemployment reduction," says AFI (International Financial Analysts) consultant Salvador Jiménez who warns that in this competition there may be some economies benefited and others that do not.

In the case of the current tensions between the United States and China, the professor of the Master in Exchange and Financial Markets of the IEB (Institute of Stock Market Studies) Alberto Blanco has pointed out that those who are going to suffer most with these maneuvers around the yuan are «the competitors exporters such as India or Vietnam, because now the Chinese will sell cheaper and they will have to do the same or devalue ». In this regard, for this expert, China could see its imports of dollar-denominated commodities more expensive "although they will know if what they will gain from exports is more important." In any case, for the IEB professor, "it seems" that the only short-term winner is China who see a problem when GDP growth is below 6%.

What consequences can it have?
On the consequences of a proliferation of «competitive devaluations», that is to say, of more advantageous movements around the value of currencies Salvador Jiménez (AFI) points towards the animosity of financial markets and the real economy due to insecurity. "Uncertainty can lead economic agents to postpone their spending and investment plans, and this could bring the recession over time," concludes Jiménez, who believes he would only delve into the breakdown of economic activity.

For Blanco, the evolution of the current commercial tensions between the two powers towards a "currency war" would lead to a continuous spiral in which an export economy such as Germany – "the engine of Europe", this analyst insists – would not have the capacity for
devalue the euro and would face "a serious problem to compete with China in the mass export segment," says this expert.

Consequences? The damage suffered by the Germans will impact our economies in some way. In any case, if the yen continues to depreciate, "exporters who want to sell to China are going to have a bad time," predicts this expert who believes that Spanish companies that want to sell in the Chinese market will have to give up margins or lower prices If they want to remain competitive.

On the other hand, those who import products from China will have a stronger currency with which "to buy cheaper, at the same price or fattening their margins." That is, perhaps, the next Huawei or Xiaomi phones will come out cheaper if importers decide to impact this circumstance on the value of these products.

Spain, assiduous devaluations in Democracy
Devaluation is a common weapon among different countries and has been used numerous times since the modern monetary system began to be set up, at least since the end of World War II. Blanco (IEB) mentions the example of trade tensions between Japan and the United States in the 1980s and early 1990s. "Trump has elections in a year and the United States has already suffered a currency war against an exporting competitor like Japan," This analyst has recalled who believes that Trump is now trying to re-elect "resuscitating" deep America and placing China in the role that the Japanese played in those years.

Even Spain became a regular at this resource during the first years of democratic regime, before the emergence of the euro in 1999 with the aim of reviving the economy. For example, during the 1993 crisis the peseta was devalued twice, although the country remained within the then European Monetary System (SME) in certain flotation bands. In that year they increased from 3% to 15%. . (tagsToTranslate) war (t) currencies



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