Contemporary liberal economic systems are based on the concepts of free-market and trade. In fact, economies/countries use free trade as an instrument to realize political-economic objectives. The Ricardian concept that international trade benefits all as it is based on the principle of comparative advantage encouraged countries to adopt trade as an economic strategy. This development gave birth to powerful global institutions, such as the World Trade Organization (WTO), which has devised policies to ensure fair trade among the countries. The primary objective of the organization is to ensure and facilitate tariff-free trade; though, it allows countries to take countervailing measures against those countries, which provide a subsidy to their particular industries.
However, the policy pertains to subsidies only, and it does not address the issue of secondary-measures, which countries adapt to increase their advantage in trade (exports). For instance, China uses devaluation of its currency as an economic strategy. The objective of devaluating currency is to intensify economic activity and make Chinese products more competitive in global markets. There is strong evidence that the People’s Bank of China deliberately devalued the currency (depreciated Yuan) to stimulate the economy. It is imperative to acknowledge that China’s economic growth has a positive correlation with exports, which is why the devaluation of currency is a potent economic strategy, which Chinese government is using for an extended period. However, this is also a fact that size of consumption in China has increased, which has reduced the percentage share of exports to GDP (Yuqing).
This deliberate devaluation of the currency is strongly opposed by other countries, especially by those, which are major trading partners of China, such as the European Union and the US.
The United States is of the view that such measures give an unfair advantage to China in trade and because of such measures trade does not remain fair. It is also quite evident from the trade statistics, according to which China has a trade-surplus against the United States, whereas United States face the trade-deficit. With time, the size of the trade deficit has only grown, which is why the opposition to the devaluation of currency has gotten stronger. The United States and other countries, which trade with China, consider the deliberate devaluation of currency as a sort / kind of subsidy that aims to provide an unfair advantage, to China, in trade. As the consequences of unfair trade are immense and catastrophic; therefore, the pressure on China is gradually mounting to shun the policy of devaluation of currency and opt for direct and fair methods to boost its economy.
In Dani Rodrik’s blog too, the Chinese policy of deliberately devaluing its currency has been discussed in detail. Rodrik argues that devaluation of the Yuan is Chinese economic policy, which is equivalent to providing a subsidy. It is subtly suggested that this policy is more potent than providing a subsidy to certain sectors/industries of the economy, as it affects entire economy and not certain sectors/industries of the economy.
In the blog, it was projected by Dani Rodrik (around 11 years ago) that devaluation of the currency, by China, would yield complications and today we are learning that the Chinese policy is yielding not only economic/trade-related complications but also political complications. These complications necessitate immediate addressing of this issue (Rodrik).
This issue can be resolved directly and indirectly. By direct we mean that trading countries can develop a forum or platform, where they can discuss and resolve this issue. Another option is platform provided by the WTO. The WTO can also amend its policies and identify devaluation and such other policies as unfair economic practices and must allow countries to take countervailing measures against such policies and practices.
Statistics, about trade, are gradually destroying positive perception regarding trade. If countries, such as China, continued to exploit loopholes to create an unfair trade advantage, free trade would gradually die.
Work Cited
Rodrik, Dani. “Should the U.S. respond to China’s exchange rate policy by raising its import tariffs?” Dani Rodrik. Dani Rodrik, 14 June 2007. Web. 14 April 2018. http://rodrik.typepad.com/dani_rodriks_weblog/2007/06/should_the_us_r.html.
Yuqing, Ma. “ASIAThe Devaluation of China’s Currency.” The Market Mogul. The Market Mogul 18 April 2017. Web. 14 April 2018. https://themarketmogul.com/devaluation-chinas-currency/.
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