Countries Compete To Keep Currencies Low

G-20 nations agreed this past weekend to refrain from competitive devaluation of their currencies. Treasury Secretary Timothy Geithner wanted the agreement to be more specific but other countries resisted.

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The heads of the world's 20 leading economies will gather in South Korea next month. High on the agenda will be growing tensions over currency values. The United States and other developed countries say their economies have been weakened by China's efforts to keep its currency artificially low. And some, including the U.S., are taking steps to address the issue, as NPR's Jim Zarroli reports.

JIM ZARROLI: Each day, China goes into the currency markets and buys a billion U.S. dollars. Its aim is to keep the dollar strong so Americans can keep importing Chinese products.

Mr. FRED BERGSTEN (Peterson Institute for International Economics): They had intervened massively in the foreign exchange markets to keep their currency weak. That has further improved their competitiveness and strengthened their trade position.

ZARROLI: And Fred Bergsten of the Peterson Institute for International Economics says more and more countries have begun taking China's lead. As the world economy has slowed, countries like Taiwan and Malaysia have tried to protect their export markets by keeping their currency undervalued. And they're not alone.

Mr. BERGSTEN: Many countries like Brazil, like Korea are now limiting capital inflows in order to keep their currencies from rising.

ZARROLI: And they are those who say the United States is not without sin, either. The Federal Reserve is about to embark on another round of quantitative easing, a way of pouring money into the economy to stimulate spending.

Dr. NARIMAN BEHRAVESH (Chief Economist, IHS Global Insight): And that clearly means more U.S. dollars in the marketplace, which the predictable effect of that is to lower the value of the dollar - more dollars, less value, as it were, in very simplistic terms.

ZARROLI: Nariman Behravesh of IHS Global Insight says all of these moves by different countries have raised a troublesome specter of a competitive currency devaluation in which countries compete with each other to keep their currency value low. He says this can be tremendously destabilizing because no one wants to buy anything.

Dr. BEHRAVESH: For example, if I know that the price of, let's say, a Sony television is going to drop another 20 percent because of a potential devaluation, let's say by the Japanese - why would I buy now?

ZARROLI: Over the weekend, finance ministers from some of the world's leading economies met in South Korea and issued a statement promising to avoid currency devaluations. For developed countries like the United States, much is at stake. Many Western countries are plagued with tepid growth and high unemployment. To recover, these countries need to export more.

But U.S. Treasury Secretary Tim Geithner said this weekend that currency manipulation makes recovery much harder.

Secretary TIMOTHY GEITHNER (Department of the Treasury): And if we're going to be able to continue to expand opportunities for trade and preserve an open trading system, then we need to work to achieve more balance in the pattern of global growth as we recover from the crisis.

ZARROLI: To Fred Bergsten, the G-20 will have to write up rules barring countries from the kinds of currency manipulations that China and others are guilty of.

Mr. BERGSTEN: If it fails to do so, then these national tendencies to beggar-thy-neighbor policies may accelerate, and that would be very dangerous for the world economy.

ZARROLI: But Bergsten also believes that developed countries like the United States need to get tougher with China. One idea he proposes is to match Beijing's currency manipulations. If China buys U.S. dollars to protect its currency value, the U.S. should immediately sell an equivalent amount.

Mr. BERGSTEN: There is some risk. Any of these steps do entail some risk. One has to trade that off against the risk of letting the Chinese and the other manipulators continuing to get away with it.

ZARROLI: Bergsten concedes that this could lead to a kind of ugly trade war with unpredictable consequences, but that may ultimately be what it takes to bring down the massive trade gap with China.

Jim Zarroli, NPR News, New York.

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