Devaluation of the currency is a widely known scenario in the market for quite a long time now. China is one of the major players in the market which used the currency as a tool to boost their exports and their economy by devaluating their currency to make the price of Chinese good artificially low.
In recent time where the trade tensions between China and The United States is blooming and the U.S. had already imposed the tariffs on Chinese good now China is also set to retaliate against that by every means possible in economic form now only they are going to impose tariffs on the U.S also but there is a very prominent possibility that they will use their currency as a tool to fight back the U.S.
The past had shown evidence of currency devaluation by China many times. China often accused by the U.S. for devaluating there currency in order to get unfair advantage on exports although China always denied that but it is a well-known fact now that the currency devaluation helped them in giving their economy a positive boost time in time which makes us wonder that what are the reasons behind the currency devaluation by a country and how it helps that countries economy.
In this blog, we will explain the major reasons behind a country’s decision to devaluate their currency. We will also discuss the negative and positive impact of currency devaluation on that country and the effect of the other countries as well.
This is one of the major reason behind a country to decide to devaluate their currency. In this global market, the competition between the companies working in different countries is real. The globalization brings the whole world on one table and that makes the competition between the countries and their multinational companies a growing concern where everyone tries to get the largest market share and to achieve that goal the companies and countries must keep their price and product quality check to offer good value for the money a consumer spends.
In terms of global business where the domestic companies not only sell their products within the country but they also export the good to another country their the case where the foreign exchange comes in the picture.
Export-oriented economies use their currency as a tool to give an advantage to the domestic export-oriented industries from their competitor in the importing country. For an example if a Chinese company exports a mobile phone to the U.S. and if the value of Yen decreases against the U.S. Dollar then the effective price of that imported goods will be less for a U.S. consumer as he has to pay less for that same product but on the other hand the exporter is getting the exact same amount it used to get which give this a win-win situation for the exporting country and the consumer.But this is bad of the domestic mobile manufacturers as this will hamper the sales number and that decrease in the sales will result in a slower growth which will impact the domestic economy which is, in this case, the U.S. economy a disadvantage over the Chinese economy which is benefiting from this currency devaluation.
To Shrink Trade Deficits
By devaluating the currency en export-oriented country not only gets an advantage on the overall export increase but they can also settle their trade deficits form different countries as the export to those countries with whom they have a trade deficit will increase and in turn, the trade deficits will decrease. Increase in exports and decrease in imports because of the cheaper exports to and costly imports a country can balance their trade deficits and level it up.
However, there are a few disadvantages to this process. As this will hurt the other countries economy as well as if the county which devaluated their currency holds some debts in other currency then it will widen the gap. For developing nations, a currency devaluation in order to achieve a balance of payment is not a wise decision because on one hand it will increase the exports and decrease the trade deficit but on the other hand, it will shrink the foreign exchange reserve and increase the value of foreign debt.
The Bottom Line
Currency devaluations is a very powerful tool a country can use to balance their trades deficits and to regulate the import and export but it also has the potential to give a significant damage to the country’s economy if it is not used with caution. A careful and well-researched step to devaluate a countries currency has a potential to improve the overall economic growth and help the domestic producer to survive in this highly competing global market. But it should be treated as the last resort to save the domestic market as the access use of currency devaluation may result in a currency war where every economy tries to use their currency as a weapon to take down the other country.