Analyze the debate over currency wars - Essay Example

The country most affected by China’s undervalued currency is the U.S. It is important to note that other countries such as the UK are also affected by China’s low exchange rate. Similarly, China is not the only country that pegs its exchange rate against the U.S dollar. Some Middle Eastern countries do the same (New York Times, 2010). Argument In 2003, while following this policy, China added about $10 billion to its reserves, having an overall surplus on its current account (Krugman, 2010).

Although China made attempts to appreciate its currency in 2005 and 2008, the changes they made were not significant, nor did they satisfy other countries into believing that China’s minute appreciations would serve to reduce the threat it posed to their currency. In fact, China’s weak currency has been seen as a contribution to the slowdown in the global economy, mainly because China is a country that plays a significant role in the world economy. However, in this paper, we will analyze the ongoing debate on such currency wars.

Most countries, such as the U.S, argue that a currency that is valued lower than it actually should be brings many drawbacks to the competing country. Firstly, the fact that another country’s currency is valued lower makes their exports more competitive in the global market. We can see this example in the current world market as well, where China’s exports are cheaper for many countries around the world. But for countries that have a higher exchange rate, their exports remain uncompetitive in comparison, for example the U.

S exports as compared to Chinese exports. Even more so, the low exchange rate of one country, makes importing expensive for them, hence discouraging them from importing from other countries. One country’s imports are another countries exports. This negative attitude toward importing from other countries renders the high valued exchange rate country, at a loss because it will be losing out on exporting if no one is willing to buy. This is damaging to the industries located in such countries and could give rise to unemployment and hinder economic growth; the exact argument that the U.S. presents in light of China’s exchange rate.

A country with a lower exchange rate, like China, could argue that its low exchange rate is to keep its domestic economy stable, where most of its population is employed in industries that thrive on exports. A step of revaluing the currency could prove to be very detrimental since it could lead to the closing down of many industries in the country. By increasing their exchange rate value, countries like China fear that they might face a fall in the demand for their exports. Furthermore, investment depends on the exchange rate vale.

If a country revalues its currency to a significantly higher level, they may face a shortage of investment. This fall in demand, combined with a fall in investment may be detrimental for any economy, creating within high levels of unemployment and even slowing down the rate at which the country grows economically. These effects could not only affect the home country, but could leave an effect on the rest of the world, especially if most countries relied on the cheap exports of this country. But what really should be understood is that revaluing a currency