Currency War?....Probably Not.

There was an article posted to the online version of The Economist earlier today called "How to stop a currency war." Apparently Guido Mantega, Brazil's finance minister declared in late september that an "international currency war" had broken out. There has been a lot of discussion about China's undervalued yuan and the implications it bears on international trade, but there is by no means a "currency war" afoot. Now that being said, precautions do need to be made so that one does not start. The House of Representatives passed a law that allows firms to seek tariff protection against countries with undervalued currencies. However, this law has yet to be signed by the senate or the President. I do not know a lot about it, but it seems to me like the president needs to be careful when implementing regulations like this. Obviously this new law is targeted at China. Even though the law states that firms have tariff protection from ANY country with undervalued currency, they mean China. China is a huge trading partner of ours and we need to keep our relations in high standing. Passing a law like this could be construed as a slap in the face. Of course this does not mean nothing should be done. The undervalued yuan is having a serious affect on our economy. If we take no action, it may send a message to China that says they can abuse our strong trade relationship. I also wonder if it would send the message to other countries to try the same tactics. If other trade partners realize the U.S.' s reluctancy to take action they may undervalue their currency as well in order to strengthen their economy.
One thing that I liked about the article was how they mentioned the effects the weak yuan has on other countries. In most U.S. publications they only mention China and the U.S. while the rest of the world sort of gets swept under the rug as though we are the only country who does business with China.
Interesting stuff to think about though. I think it very important to avoid a currency war and keep a good relationship with China.

I liked how in the article the author referred to quantitative easing as a weapon. I had not thought of it that way before.

The link to the article is here

(This was posted by Trevor Murphy-Mannix)