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When Currencies Fall, Export Growth Is Supposed to Follow—Until Now
By Christopher Whittall and Mike Bird
June 11, 2017
This article is found in The Wall Street Journal, it tells the story of the United
Kingdom as the background, the pound since 1992 continue to depreciate and brings
different effects.
For decades, many people and books argued that currencies fall is a good news
because they make a country's exports more competitive or profitable in the
international business, it not only developing domestic production but also increase
employment opportunity.
Adam Posen, president of the Peterson Institute for International Economics, says
the effects of currency moves on exports have faded over time, and after the 2008
financial crisis, the devaluation of the pound did not lead to the emergence. When the
pound took another beating after the Brexit vote, car maker Aston Martin, which
number of exports not only did not reduce but also has increased. When the pound
traded at $1.50, the sports car sold in New York for $ 150,000 will bring £ 100,000.
But when pound is $ 1.27, this sale brings an extra £ 18,000. The pound’s fall has also
been good news for some exporters such as Scotland’s whisky industry, they say
exports increased 4% last year to over £4 billion.
However, since 2015, most UK manufacturing industries can no longer rely on
domestic supply chains. Therefore, with the decline in manufacturing in the UK, the
service sector grew and now accounts for 79% of GDP. Now there are more than 60%
fish need to import in Britain. It causes some processing company cost more £ 15,000
per week. Therefore, some restaurants or food manufactures are passing on that
increased to consumers. Fish and chips will become more expensive that before.
From this article, we can clearly find that the devaluation of the currency has both
positive and negative effects. When the pound devalued, other countries for the pound
exchange rate will rise, so they for the British commodity purchasing power will also
increase, there will be more people to buy British goods. So, this is an absolute good
news for British exporters.
The devaluation of the pound will also have a negative impact. When the
manufacturing declining and service industry dominate, there will be more and more
goods need to be imported such as foods, machinery, and other resources. So, people
will cost more than before. For example, UK do not have much areas, they are
constrained by the availability of trees. Around 80% of the timber used in UK
construction is imported. No matter how the pound devalued, they have to pay more
for the purchase of timber from other counties.
We already know the advantages and disadvantages of currency devaluation, but
how do we expand its strengths and shrink its weakness?
In my opinion, first is how to shrink its weakness. When currencies start falling,
the country should decrease their imports, so it needs to make the industry diversified
because it will not increase employment opportunities but also can reduce the number
of external demand. But this method will not adopt to all countries. For example, if
you are a relatively small country that have 75 million people, they can't manufacture
every type of product it uses. And generally, the small population of country's
geographical area and resources are also less, so they are more dependent on imports.
So, when a currency falling in a small country, the negative effect will be strong. If it
happens in a larger country that have more than 300 million people. The country just
need more labors to work in different industrials. So currency falling has less of
negative effect in larger country.
Second is how to expand its strengths. I remember an example from the video
which is Japan and South Korea have different productivity of TV and DVD. They
have to do is to export their own productive products, and import their own weak
products. I think this example is similar to this case. Because of currencies fall will
help exports and it also as an opportunity to expand companies, the country can focus
on the development of export industries. There is an example from the article, Mark
Driver is setting up Rathfinny Wine Estate on England's southeastern coast. Although
the price of equipment he needs to import has increased since pound depreciate, this
equipment increases the profit of the product's exports far greater than the money
spent on imports.
I think the problem with currencies is complex. This is only talked about the
influence of currencies in the sample international trade such as exports and imports.
In fact, there are many currencies problems such as speculation, arbitrage, two-points
arbitrage and three-points arbitrage. Because global trade does not means a country
just trade with only another country, it means a country will trade with two or three
countries or even more countries. But most countries have their own currency, and
different countries are not the same currency exchange rate. For example, there are
UK, U.S. and China three countries. The usually exchange rate is
$1= 6.8Yuan= £0.9, it also means when people have £1, it will worth $1.1 and
7.56yuan. Now the dollar is devalued with yuan is $1= 6.0Yuan, and dollar still have
same exchange rate with pound. Then £1 will also worth 7.56yuan, but 7.56yuan will
worth $1.26. Finally, people use dollar exchange to pounds will have more than £1.
This example shows that currencies fall not only effect the imports and exports but
also causing other problems in global trade.
For this article, I think its analysis is not enough because it ignores loss of global
wealth as a currency and loss of global purchasing and investment capabilities to
