Exporting nations like the United States are finding that weaker currency spells stronger trade opportunities. That is, if their monetary moves don't first lead to a trade war, say two Purdue University agricultural economists.
At least three major exporting countries — the United States, China and Japan — have made direct or indirect moves to depreciate their currencies, which might make their exported goods less expensive in foreign markets. Brazil could soon follow suit.
The United States likely will see record agricultural exports in the year ahead, say Philip Abbott and Chris Hurt. So far for the year, the United States is running a $600 billion trade deficit.
Some nations view weak exchange rates as a way to stimulate export activity and, thus, their general economies. It could backfire, however, if more countries jump on the currency devaluation bandwagon, they add.
"Once everybody does it, it doesn't work and it becomes costly," Abbott says. "You get the effect of prices of goods going up and higher inflation without the benefits of greater economic output and job generation. In the long run, everything becomes more expensive and you lose the gains from trade."
Hurt says, "There's the danger of getting into trade wars. Now that countries are trying to get a competitive advantage by manipulating their currencies, it could result in retaliation from other countries. We must not go in the direction of trade wars, which could reduce economic activity for the entire world."
The World Trade Organization does not specifically prohibit currency manipulation, although some trade experts consider it a form of export subsidy, which is forbidden by the WTO, Abbott explains.
The U.S. dollar has lost 40 percent of its value since 2002. In just the past three weeks alone, and more significant, Abbott says, the European euro gained about 16 cents in value to the dollar. One euro is now worth about $1.40.
"This will tend to increase U.S. exports to the Euro zone," Hurt says.
Loose monetary policy by the Federal Reserve has pushed down the dollar's value, Abbott said. The Fed has taken action to keep interest rates near historic lows to get the economy moving, he says.
Japan attempted to weaken its yen to bolster its exports and overall economy. The Japanese cut short-term interest rates to zero percent and long-term rates to 1 percent. The island nation also sold yen and purchased U.S. dollars on the open market.
China has used a weak yuan for years as an economic development strategy, Abbott says. Beijing purchases U.S. Treasury bills with its export surplus as an investment instrument, in part because it lacks investment alternatives within China's domestic economy.
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