Open Markets and Currency Flow

The flow of goods and services around the world depend on currency flows and exchanges. What are some threats to this system? Do you agree that some countries use ‘currency manipulation’ to advance their economy at the expense of others? Research and give specific examples (not from the eText) and cite your work.

Various factors affect currency flows and exchanges, which is an aspect that supports global trade. Firstly, inflation, which is a decline in the value of a domestic currency, can affect importers directly and adversely. It increases the cost of imports, making it difficult to conduct trade across borders or source goods cheaply. Secondly, changes in interest rates affect the currency’s value. For instance, higher UK interest rates are likely to attract more deposits. Other currencies are affected negatively as the Sterling Pound remains more attractive. Thirdly, the growth of the economy affects the currency flows and exchanges variably. During a recession, the rates of interest fall, making trading with the affected currency expensive. Other factors that affect global trade include government interventions, the competitiveness of goods in the international market, the balance of payments, and the strength of a currency relative to others (Pettinger, 2019).

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Currency manipulation occurs to increase a country’s competitiveness in the international market and increase trade surplus, employment creation, and domestic production at the expense of other countries. China has been accused of manipulating its currency largely by the USA. While these accusations remain unconfirmed, the effects of currency manipulation were encountered in the 1920s and 1930s. Each country sought to value its currency as it wished. As a result, the cost of exports increased significantly. Each country did this to achieve its economic agenda. However, the result was a broken international market as the economic recession set in. The Chinese currency, the renminbi (RMB), has been constantly undervalued in comparison to the US dollar. This value is assumed to be higher if the currency is subjected to market forces. In 2000 and 2010, China accumulated trade surpluses amounting to $1.8 trillion, while the USA accumulated $7.6 trillion in deficits. The rapid growth of China’s economy may be responsible for the imbalances. However, suspicions of manipulation of the Chinese currency remain afloat (Howard, 2021).

References

Howard, L. (2021). Chinese Currency Manipulation: Are There Any Solutions? Emory International Law Review, 27(2).

Pettinger, T. (2019). Factors which influence the exchange rate.

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