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Currency meddling not solution to deficits
2005-09-23
China Daily
Twenty years ago yesterday, finance ministers from the world's then biggest economies - the United States, Japan, West Germany, France and Britain - announced the Plaza Accord.
Joint currency intervention had been conducted to allow a fall of the US dollar against other major currencies.
The plan succeeded in devaluing the US dollar to reduce the US trade deficit with Western European nations, but it largely failed to alleviate the US trade deficit with Japan. Worse, the Japanese economy witnessed asset price bubbles in the late 1980s and suffered a lost decade in the 1990s.
The bitter lesson highlighted by the case of Japan has horrified many in Asia, and set them reasonably against foreign pressure to revalue.
Coincidently as China's finance minister and central bank governor are heading to meet their counterparts from the Group of Seven industrialized nations in Washington later this week, it may be time to review what lessons can be drawn from it.
For the United States, any fantastical desire to press others to revalue a currency will actually do nothing to resolve its economic woes.
Any simplistic view of the currency agreement would only cost the world opportunities to reduce the imbalance resulting from underlying changes in the global economy.
The year of 1985 will not be repeated even if the United States currently faces a similar problem with an over-valued US dollar.
The currency issue is a result, not a cause, of differences in economic structure domestically and internationally. Hence, the cure should be found within the economy itself, but not in the pricing system of the currency.
After the yuan was revalued in July for the first time in a decade and the foreign exchange regime was made flexible, the challenge of properly handling aftermath of the appreciation has become realistic.
In the face of negative impact the appreciation has on Chinese domestic export sectors with razor-thin profit margins, the important thing for them to do is enhance productivity and control costs with altered foreign exchange rates.
The United States should not look abroad for a quick currency fix for its deficits. Its success in pulling itself out of trade and fiscal deficits in the late 1990s is largely attributable to its capacity for making the most of information technology.
Japan's structural restrictions on imports could be cited by some Americans as an excuse for the failure of the Plaza Accord to narrow trade imbalance between Japan and the United States. But the fast growth of imports to China and the degree of China's openness leave no reason for those Americans to believe the imagined effects of currency intervention.
To sharpen the competitive edge of its economy during the era of accelerated economic globalization, the United States needs to further embrace the spirit of innovation with which American companies have secured their dominance in the information economy.
Resorting to a so-called second Plaza Accord or other protectionist measures would only delay necessary industrial restructuring and increase costs for all.
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