The spat between USA and China over adjustments in exchange rate is getting worse. However till now at least, it cannot be termed as a currency war. In the classical sense, a currency war means devaluation competitively by two nations in the external values of their currencies so to capture the market of the other.
Right now the situation is different. The worry is one sided. USA is worried because the country is experiencing monthly deficit of 30 billion dollars in its trading with China. This gap in trade has been a reality for over 20 years. The pile of dollars China holds (it being representative of the amount USA owes to China) has increased by trillions of dollars. If China decided to play truant and suddenly ask for redemption then the plight of USA would be no different from what happened to Greece and Spain. What is more worrying is that because the reserve currency in most of the countries is the dollar, the crisis would suck them all down!
Thus backstage diplomatic moves are on full swing. The Chinese are being asked to be reasonable. It is being explained that in the case of an international turmoil if the dollar plummeted not only would the economy of USA go haywire, it would also harm the economy of the Asian giant.
China has reached the point it has today because of its brilliant export policy. The biggest slice of it depends on goods and services that are exported to America. Thus China is being told that it should not kill the hen that lays the golden egg. It is self preservation that should convince the Chinese leader to take steps to reduce the trade gap. This would increase the price of goods imported from China that the Americans purchase. But unless this is done they will purchase less goods and services from China forcing the trade deficit of USA to be lowered.
The Chinese have a ready reply for such talk – since basically it is an American headache it should be dealt with by America itself. Through many decades America has had a hand in piling up through many decades huge trade deficits not only with China but with other countries in East Asia, Europe and Latin America.
Today America is preaching economic discipline, mouthing needs for balancing budgets and seeing to it that balance of payments with others would be free from deficits. But is America, even today, practicing what it is preaching?
Kevin Simpson is a consultant with experience in http://www.cheaphomeslistings.com/. With his knowledge in the real estate market, he provides information over the best investments in California cheap homes listings for future owners and sellers.
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