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David R. Francis

Currency market: Fix the rules. Avoid a trade war.

Currency market adjustments are a major focus of Friday's G-20 meeting of finance ministers and central bankers.

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Some nations – notably Japan and, later, China – exploited that loophole by keeping their currencies artificially low to boost exports and their industries. In 1985, the Plaza Accord negotiated by the US, France, West Germany, Britain, and Japan put an effective end to Japan's currency manipulation. By 1987, the dollar had lost 51 percent of its value against the yen, making Japanese exports much less competitive.

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Has the time come for China to accept a large revaluation? John Williamson, a scholar at the Peterson Institute of International Economics in Washington, calculates that China's yuan is 24 percent undervalued against the dollar; 12 percent against a package of national currencies. This undervaluation has cost the US at least 500,000 jobs, he says.

Mr. McMillion says the yuan is 60 to 70 percent undervalued vis-à-vis the dollar on the basis of purchasing-power parity. But he doubts the Obama administration will do anything substantial about it. Last month, the House passed a bill giving the US Department of Commerce power to assess levies on Chinese imports if it labels Beijing's currency practices an unfair subsidy. The Senate is unlikely to act on the House bill before the midterm election. For months, the White House has pressed China to revalue its currency higher, with only minor success at this writing.

Does that portend a trade war or a competitive batch of currency devaluations to stimulate exports? Probably not, guesses Mr. Williamson. That would hurt all participants economically. And "it's not obvious who would suffer most," he adds.

Global trade flows are recovering from their decline in 2009 during the Great Recession. They are likely to grow 13.5 percent this year, forecasts the World Trade Organization in Geneva.

David R. Francis writes a weekly column.