When China’s central bank last week triggered the two biggest single-day falls in the renminbisince the 1990s, plenty of people were keen to proclaim a resumption of the currency warsthat have been a feature of the global economy since the 2008 financial crisis.
But if Beijing’s move prompted a predictable political response from currency warriors inWashington and other capitals, it ignored what many trade economists see as an increasinglywell-documented fact: currencies are not the trade weapon they once were.
In a new study of 46 countries including China, economists at the World Bank found thatcurrency devaluations were these days only half as effective a tool for boosting exports asthey were in the mid-1990s.
Moreover, the World Bank economists found the further countries became integrated into theglobal economy — as China has done in spectacular style since the 1990s — the less theeffect was likely to be of any currency changes on their exports.
For countries that weaken their currencies to seek competitive advantage in global tradethere is a “distinction between the perception of the impact of a depreciation and the actualimpact a depreciation can have”, says Michele Ruta, one of the study’s authors. The realitytoday, he says, is that years of data show the impact is likely to be much less than it used tobe.
There are a number of reasons for that. But the biggest, say Mr Ruta and his colleagues, is thedevelopment of global supply chains in the past two decades and the reality that manyproducts today are agglomerations of parts made in many different countries.
The result is a much more complex calculus for many economies, including China.
Weaker currencies still lower the cost and therefore raise the international competitiveness ofmany goods exports while increasing the cost of imports. For something as simple as a bottleof Australian Shiraz from grapes grown on Margaret river vines, that reality still holds andmatters. A weak Australian dollar will lower the cost of an exported bottle and make it moreattractive to offshore consumers. It will also increase the price of imports into Australia ofFrench or Chilean rivals.
But for more complex products, like many of the electronic items assembled in China, the realimpact is far more difficult to calculate. (www.chinainout.com)
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