Currency war? What currency war?
As G20 leaders gather in Seoul Thursday – their first meeting in Asia – to seek to rebalance the world economy, some economists here are warning the United States that it should not worry about China's and other regional currencies being too weak; rather, it should worry if they get stronger.
That runs counter to a consensus in Washington that US economic recovery depends heavily on exports that will grow only if Asian importers let their currencies rise, making US goods cheaper.
But if Asian currencies, notably the Chinese RMB, strengthen, as US officials are demanding, the only way Asian exporters will be able to stay competitive will be through “a real push to increase productivity” that Western firms will be unable to match, says Martin Schulz, an analyst at the Fujitsu Research Institute in Tokyo.
“The emerging economies in Asia will take more and more export markets,” predicts Hiromichi Shirakawa, chief economist at Credit Suisse Japan. “Weaker companies from industrialized nations will be kicked out.”
That bodes ill for President Obama’s goal of doubling US exports over the next five years, targeting the sort of Asian countries he is currently touring.
Fears are rising in some quarters of a “currency war,” a vortex of “beggar thy neighbor” competitive devaluations by governments using exports as an easy engine of economic growth – and wanting to keep them cheap.
G20 Finance ministers agreed last month to “refrain" from such competitive devaluations. But “currency coordination is not easy,” warns Yasunori Sone, a professor of politics at Tokyo’s Keio University. “The G20 can announce" that members will not fight a currency war, "but who will behave?” he wonders, especially at a time when “each country is seeking to defend its own interests.”
A prime example of such a defense, from the Asian viewpoint, is the $600 billion “quantitative easing” that US Treasury Secretary Timothy Geithner announced last week in a bid to jump start the US economy. Whatever its effects on the US economy, say economists in Asia, “QE2” will be bad for this region.
Because cautious US businesses and debt-laden consumers are not borrowing, much of the $600 billion is expected to flow out of the US to countries where higher economic growth rates offer better rates of return.
As investors spend the dollars to buy local currencies, those currencies will rise against the dollar. That will make Asian exports more expensive and thus less competitive in international markets.
The only way Asian countries can defend themselves against such an outcome is to impose capital controls to limit the amount of dollars flowing into their economies, or to print money with which to buy dollars, and thus keep their currencies weak.
Capital controls cannot work in the long-term, however, most economists agree. And printing money is inflationary and leads to unstable asset bubbles in sectors such as real estate that carry the risk of financial chaos when they burst.
“In the end, the US wins the race” to devalue “because they can print dollars for as long as they want for their own economy,” says Dr. Schulz. The overwhelming majority of world trade is conducted in dollars.
“The pressure from the US is inevitable,” adds Mr. Kawai. “For emerging economies, the best way to respond would be to appreciate their currencies.”
That requires China to strengthen the RMB, though, because Asian countries can only revalue their currencies against the dollar at the same pace as China does, if their exports are not to become less competitive than China’s, Kawai points out.
Emerging Asian economies, he adds, “are sandwiched between the US quantitative easing and China’s quasi-fixed exchange rate” that has risen only 3 percent against the dollar in recent months, far slower than Washington is demanding.
The way out of the conundrum for Asian companies, argues Schulz, is to increase their efficiency in the same manner as Japanese exporting firms have done as they have watched the yen rise in value almost five-fold against the dollar over the past 35 years.
Japanese exporters have been engaged in “nonstop rationalization and productivity efforts” during that period, says Shirakawa, and they have launched another round in the past two years as the yen has hit new highs. The result, he points out, is that their profits are back to pre-financial crisis levels.
Other Asian exporters will have to do the same if US monetary policy forces them to strengthen their currencies, Shirakawa predicts. “The real concern for Japan is that Asian countries will become more productive and increase the quality of their goods to compete with Japan,” he says.
The country with the biggest potential for such a productivity boost, Schulz suggests, is China, and as slow growth in the West stunts Beijing’s markets there, Chinese exporters are likely to turn to more vibrant markets in their own region.
Already, Schulz says, the effects can be seen in fast-growing Vietnam. Almost all of China’s exports are machinery – a sector where it has boosted its share of the market from 10 percent to 50 percent in the past seven years.
“That should sound alarm bells for anyone planning to base their exit strategy from the crisis on sales to Asia,” as Obama suggested on the eve of his current Asian tour that he has in mind, says Schulz. “Because China is already there.”