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سوموار، 22 نومبر، 2010

From Star War to currency war

The American president, having failed to persuade the Chinese to allow their ( Yuan ) a free float in the currency market, blamed them for using Yuan as a weapon. The country, in his words, " prospers by exports to the United States" The US`s industry and jobs suffer.
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By Saleem Khan

During the Soviet time, the world was divided on East-West lines. The division was fierce and brought into play an unprecedented race in arms. Since the quality of a weapon is traditionally measured with the yardstick of destruction it inflicts, both sides developed arms that can destroy the world “several times”. That is the offence capability. In case of defence, the strategy was to survive first strike. Hence, plans in US went up the drawing board to develop an airborne missile system that would destroy enemy missiles before they reach their intended targets. As the activity, when played out, could generate a meteoric show in the night sky, it was dubbed “star war”.
Costs of developing such systems were exorbitant, but taxpayers took the bill. Millions in the West (out of a population of 300 million in the US alone) voted leaders pledged to promote the industry. In the USSR, such rituals were unnecessary. Soviet leaders took it upon themselves to spend away everything in their coffers to meet the threat. As a result, the Union fell under its own weight.
With the fall of Soviet Union, "history reached its end". The world came under a single superpower. It was now easier rearranging it in the capitalistic model: hence globalisation.
Put simply, in the context of trade, it meant free trade. Only consumer and free market are to be the prime drivers.
Trade is as old as history, but free trade means putting investors on the loose. They invest where and when the return is high. That process has multiple effects. It brings investment, technology, and employment opportunities into areas that have previously seen little of either. Nevertheless, investors, at times, were seen aborting the process leaving countries in states of near anarchy. Collapse of Asian economies in the 90s; Dubai, Greece and now in Ireland are examples.
China, Malaysia, Indonesia, India, Thailand and Vietnam are success stories in varying degrees in this part of the globe. China leads the pack. It witnesses prosperity of magnitude unthinkable before globalisation. It is one of the largest exporters with a trade surplus (for twelve months until August 2010) of 180 billion dollars. Their GDP has galloped across all except the US. The West blames the Chinese disproportionate share in world cash (one trillion dollars in reserves) on wrong trade practices by China.
What makes the said surplus unacceptable is that it benefits China hugely by exporting cheaper goods. Yet China does not play by the market rules: it saves rather than invest the accumulated wealth.
Secondly, it keeps its currency weaker than it needs be. Weaker currency gives China an artificial edge over other competitors in exports.
According to the US, the sum of both these effects chokes growth in the developed world.
The Obama Administration in Washington faces uneasy times at home. Unemployment is as high as 10%. The rebound from recent recession in the economy has not been as robust as hoped, though the current administration pumped seven hundred billion dollars into the economy. Poor show in economy resulted in poor show in midterm elections and the Democratic Party lost their control of the US House of Representatives. Still menacingly, the current state, if allowed unabated, can threaten Obama's second term bid for the office.
The US, though not an export-based economy, yet badly needs growth to reduce unemployment. In the face of a 604 billion dollars deficit in trade, that looks unlikely. Hence, at the G-20 meeting in Seoul this month, a suave Barak Obama at last turned bellicose.
The American president, having failed to persuade the Chinese to allow their (Yuan) a free float in the currency market, blamed them for using Yuan as a weapon. The country, in his words, "prospers by exports to the United States". The US's industry and jobs suffer.
Will China budge or the US would resort to protective measures, is difficult to tell. However, it is easy to tell that stakes in either of the giant countries are high.
China needs their exports to continue. They need it for one billion-plus of its population. They also need it to sustain their single party rule, too brittle to survive shocks that democracies are equipped to do. Lastly, they need it to retain investors at home with the current level of return.
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