International Monetary Fund (IMF) warns countries to stop relying on monetary policy easing. Especially, after currency devaluation move has become a trend for global trade tension. In early August, the U.S. formally accused China of currency devaluation.
Countries usually also do currency devaluation by cutting the interest rate. The slow global growth and low inflation have driven central banks to cut their interest rate. By cutting interest rates, the cost of borrowing will be decreased. Thus, central banks hope that consumers and business encouraged to invest and spend more.
Also read: Alibaba’s Increasing Revenue Amid China’s Slowdown
Disadvantages of Currency Devaluation
However, experts from the IMF mentioned that the surge of monetary easing may bring disaster. Especially with the recent surge of monetary easing in both advanced and emerging market, the disaster will be massive. The experts concern over ‘beggar-thy-neighbor” and currency war.
Beggar-thy-neighbor is international trade policy. Countries enacted the policy will get aids. Yet, at the same time, the aid harm its neighbors or trade partners.
Besides, monetary easing will also bring other harm known as ‘expenditure switching’. It is when the monetary easing stimulates domestic demand and other countries get increasing demand for their goods. Thus, exports are more competitive. At the same time, it reduces demand for other countries’ imports as their prices increase.
Also read: China’s Central Bank Digital Currency
Counterproductive tariffs
The IMF report also took aim at what it deemed counterproductive policy options taken by policymakers. The option is taken to mitigate currency overvaluation. For instance, imposing tariffs on imports from countries perceived to have undervalued currencies.
In early 2018, the average U.S. tariff on goods imported from China has increased by about 10 percent. Moreover, it would increase by another 5 percentage points if recently announced plans to impose additional levies are carried out.
Many suggest that the impact of higher tariffs on Chinese imports will result in a stronger dollar as Chinese goods become cheaper. Yet, the reality is that U.S. importers and consumers are bearing the burden of the tariffs.
