The currency war starts not with a bang, but with buckpassing

The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China pisses off yet another country responds by digging in its heels, and the IMF wrings ...

By , a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.
MANDEL NGAN/AFP/Getty Images
MANDEL NGAN/AFP/Getty Images
MANDEL NGAN/AFP/Getty Images

The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.

If you need to read one article on why things are going down the way they are, it's Alan Beattie's excellent survey in the Financial Times of how countries as responding to this situation: 

Washington is looking for allies -- particularly among the emerging economies, who complain about their own competitiveness and volatility problems -- in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…

The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.

If you need to read one article on why things are going down the way they are, it’s Alan Beattie’s excellent survey in the Financial Times of how countries as responding to this situation: 

Washington is looking for allies — particularly among the emerging economies, who complain about their own competitiveness and volatility problems — in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…

Yet despite U.S. claims of broad support, backing appears sporadic…

[S]ome U.S. policymakers privately complain that European backing is patchy and tends to go up and down with the euro. In the first half of the year the euro was pushed lower by the gathering Greek crisis, by early summer falling 17 per cent below its January level. Focused on local difficulties, and with the German export machine powering ahead, European officials saw little need to take on Beijing over currencies and had little energy to do so… 

Across the emerging economies, the plan of attack seems to be to keep quiet and pass the ammunition. Despite widespread recognition of the distortions China’s exchange rate policy appear to be causing, governments have generally preferred unilateral in­tervention to a public slanging match.

True, in April the governors of the Reserve Bank of India and the Central Bank of Brazil complained that Beijing was hurting their exporters.

But recently Celso Amorim, Brazil’s foreign minister, told Reuters: "I be­lieve that this idea of putting pressure on a country is not the right way for finding solutions." Significantly, he added: "We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer…"

With the prospect of diplomatic progress limited, currency policy in the U.S. and Europe may end up being conducted through domestic monetary policy. If, as seems possible, the U.S. Federal Reserve, the Bank of Japan and the European Central Bank return to quantitative easing in order to boost growth, their currencies are likely to weaken — as the yen briefly did after the Bank of Japan’s announcement of looser monetary policy this week.

So, to sum up: 

1) Every country is free-riding/buckpassing on this issue, hoping that the United States can dislodge China on its own.

2) The international regimes designed to prevent free-riding like this — namely the G-20 and the IMF — are not up to this task. [What about the WTO? — ed. Fuggedaboutit.]

3) The source of China’s rising power is not its hard currency reserves or its command over scarce rare earths, but its burgeoning domestic market.

4) Ironically, the United States and other countries want China to accelerate the growth of its domestic market, which would in turn give it more power. Even more ironically, China doesn’t want to do this right now.

5) The sum effect of all of this will be a series of uncoordinated interventions into currency markets that will increase market volatility, political posturing, and eventually lead to the erection of capital and/or trade controls. 

Developing… in a very disturbing manner. 

Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University, where he is the co-director of the Russia and Eurasia Program. Twitter: @dandrezner

More from Foreign Policy

U.S. President Joe Biden and Chinese President Xi Jinping shake hands.
U.S. President Joe Biden and Chinese President Xi Jinping shake hands.

Xi-Biden Meeting May Help End China’s Destructive Isolation

Beijing has become dangerously locked off from the world.

The exterior of the Russian Embassy in Stockholm, Sweden, is pictured on March 27, 2018.
The exterior of the Russian Embassy in Stockholm, Sweden, is pictured on March 27, 2018.

Sweden’s Espionage Scandal Raises Hard Questions on Spy Recruitment

Intelligence agencies debate whether foreign-born citizens are more targeted.

President Joe Biden gestures with India's Prime Minister Narendra Modi as the two leaders met in a hallway as Biden was going to a European Commission on the Partnership for Global Infrastructure and Investment on the sidelines of the G20 Summit in Nusa Dua, on the Indonesian island of Bali, on November 15, 2022.
President Joe Biden gestures with India's Prime Minister Narendra Modi as the two leaders met in a hallway as Biden was going to a European Commission on the Partnership for Global Infrastructure and Investment on the sidelines of the G20 Summit in Nusa Dua, on the Indonesian island of Bali, on November 15, 2022.

The G-20 Proved It’s Our World Government

At a time of global conflict, world powers showed that cooperation can actually work.

An illustration for Puck magazine from 1905 shows the battle against bureaucracy.
An illustration for Puck magazine from 1905 shows the battle against bureaucracy.

Only an Absolute Bureaucracy Can Save Us

The West will only restore its stability when civil servants are again devoted to the public rather than themselves.