Currency Manipulation Has Limits

Reading many analyses of China's export performance today, I always wonder that everyone has an opinion on the merits maintaining a low exchange rate as part of trade policy. to my mind, many people are probably misreading China's export competence as entirely driven by currency manipulation and this may lead to a policy disaster before long. Ttrue, maintenance of a low exchange rate vis-a-vis the US$ has allowed China to maintain a trade surplus for a long time. Opinions are understandably divided whether the US should try and coerce China to revalue its currency appropriately or whether as Anatole Kaletsky states in the NYT here, this is part of the new Asian model of growth and development that the US would be well advised to learn to accommodate.

While I have not studied currency pegs much, it is clear to me that the copy cat tendency of mostly Asian countries in competing in currency manipulation so as not to lose export opportunities can only work for so long. For all China's capabilities, it is unlikely that a low currency alone will ensure all anticipated growth for all time because of the ability of other competing nations to engage in the race to the lowest currency. Tim Webb of the Guardian newspaper states that Brazil has already thrown out an alert to the possibility that further aggressive manipulation could result in a "currency war". Brazil may not be China but given the copy cat effect of currency manipulation and the rush to ensure exports, this policy will not be effective for most of these players for long because it is far too easy to copy.