Posted by: Dirk | December 2, 2009

Will devaluation become the 21st century tool for protectionism?

During the Great Depression protectionism ruled. Tariffs were enacted and while they did not cause the collapse of world trade seen above they blocked its revival, according to Barry Eichengreen.

The same might happen today, but instead of tariffs devaluations are the instrument of choice. Here is the FT:

Vietnam’s decision to devalue its currency by 5 per cent last week to protect itself from undervaluation of the Chinese renminbi, and the worried response from Thailand and other Asian countries, suggests the move towards global trade conflict may already be unstoppable. As one group of countries seeks to gain or maintain trade advantage by manipulating their currencies, the historical precedent suggests that countries that are not able to devalue will respond with trade protection, especially tariffs and other barriers, and global trade will suffer.

This is bad news for those hoping that an export-led recovery would take place. This is especially bad news for Germany.

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