Economics Buffet: Currency Pegs in 5 Minutes

Currency pegs are one of the basics of understanding how currencies interact with each other. The most notable of these is the gold standard. Everyone pegged the worth of their currency to how much gold they kept in reserve, leaving merchants to do what they did best and facilitated trade with terms everyone could understand and rely on. It created a simple system that helped to increase international trade. 

Definition of 'Currency Peg'

A country or government's exchange-rate policy of pegging the central bank's rate of exchange to another country's currency. Currency has sometimes also been pegged to the price of gold. 

Also known as a "fixed exchange rate" or "pegged exchage rate." 

However, now that we've move away from the gold standard, currency pegs can be more confusing and carry many political and trade ramifications with them. Here is the (very) quick and dirty on what an overvalued or undervalued currency peg may mean and some famous examples. Click on the linked text for source documents. 

Click for source

Undervalued Currency Peg

China pegged their currency against the US dollar in a fixed exchange rate. With currency markedly low, this opened up Chinese exporting to a very large scale and audience, allowing China’s economy to grow at a remarkable pace. This has caused complaints from foreign competitors that they lose business due to the low prices of Chinese goods. However, many other foreign businesses have profited from the low cost of good and through them consumers have gained as well.

A 2011 article in Reuter’s claimed: The department said it concluded China did not meet the U.S. legal definition of a currency manipulator due to the appreciation of its currency -- known as the yuan or renminbi -- since June 2010 and recent Chinese statements that it would continue to promote exchange rate flexibility.

It did not escape these accusations in 1992 or 1994 when the US did give them a currency manipulator label, making them one of the last countries to receive that label more than 18 years ago. As of April 2013, the renminbi hit a record high against the dollar, yet their currency is still significantly undervalued and they are under political pressure to rectify this. With Chinese currency appreciating, the cost of their goods is expected to rise and they may lose an advantage to their exporting sector. With costs of exports rising, it is also affecting importers of good with increased prices. More flexible currency exchange would start to position the renminbi as a true world currency given the growing strength of the Chinese economy which will have a number of unknown affects for global trade and policy.

Overvalued Currency Peg

An overvalued currency is one where the exchange rate is higher than others. A strong currency reduces the appeal of exporting to other countries due to goods being more expensive. However, it lowers the cost of imports allowing people to benefit from a strong currency to gain access to foreign products at attractive prices. Domestic demand for certain goods might be lower due to the consumer cost being higher than comparable imports, again giving the advantage to foreign firms at the expense of domestic companies. There is a conflict at times between people who want a strong currency, yet also want their local businesses to thrive. Many times, these two things cannot coexist. 

An example of a developed country currently suffering ill effects is Australia. Right now the Australian dollar is seen to be one of the most overvalued in the world. When hard economic times hit, it is harder to recover with such a strong dollar. Australia is starting to take action to depreciate their dollar to come more in line with international standards (Greber, 2013). By doing so, they will be able to increase internal growth and hopefully bolster their slowly struggling economy.

Wednesday Links 8-14-2013

Since I'm still wading into the deep end of foreign exchange markets and international trade, I decided to round-up another best of for small businesses looking to go international. Did I miss anything? Tell me in the comments!

• Interested in working abroad or finding groups to help connect with once you're overseas? The U.S. Department of State has a huge list. 

• According to the SBA (Small Business Administration), 97% of the United States' exporters are small businesses and 96% of the world's market reside outside of the U.S. They provide tips and a brochure to help you take your business international.

• Here, the Washington Post gives you a brief 5 step guide to expanding into international market. According to them (as of 2012), small and medium-sized businesses only account for 70% of those exporting which is still a huge number. Go get your share.

• And in case you missed it, get a crash course in the history between Japan and China in case you were looking to invest, and another one in the history of exchange rate schemes. Great for looking like you were aware during class or actually watch the news. 

China V Japan: A brief history of conflicts and how it affects trade

Today, we're going to have a little history lesson. In the last few weeks, I've reviewed extensive articles about China as they are a great topic to discuss international business for my classes. However, one of the assignments we had was to review the history between China and Japan to analyze their current trade relations. Now, I don't know about you, but I really had no idea about the difficulties and even animosity sometimes displayed between the two. Guys, it's there and it's a bid deal.

If you know your international politics and history, feel free to go make a latte. If you're like me and didn't have a clue, let me give you a very brief overview of the framework. In a nutshell, Japan was a dick during WWII and China remembers, especially since Japan keeps bringing it up in the most insensitive ways possible. Add to that they are still fighting over islands, trade restrictions and whatnot and you have some very unhappy campers. So here is your PSA because I'm willing to bet that other people are just as clueless as I was.

China furious as Japan reopens war wounds - click for article

It is sometimes hard to see anything but the problem directly in front of your eyes. However, many are reminded, sometimes at the worst possible moment, that the past is never dead. The repercussions of history still have a hold on relations between people long after they are done. Such is the case between Japan and China. World War II marked a period of aggression between the countries that is still affecting political relations as history is being interpreted through modern times in regards to the past.

During World War II, Japan occupied parts of China. While there, they murdered thousands of people and some were buried in mass graves. The Chinese built memorials on these spots to commemorate and honor their dead whilst remembering the atrocities committed during the great war. Some refer to it as the War of Japanese Aggression, much like the war of northern aggression in the US referring to the Civil War. The specter of WWII still hangs over the relations of China and Japan despite the time that has passed. Many in Japan are torn on their views of the war. While some believe that Japan is still militaristic in their views, others believe that Japanese youth are raised to view their society in a negative light. Growing up and being told that you are responsible for the past is a heavy burden to bear. You may be more familiar with the German struggle, as was I, where many don't feel responsible for the past but yet they carry it on their shoulders and in their society. This puts the younger generation is a tough spot.

Alternately, the Chinese are dealing with being the “losers” of history. With Japan being a large partner of Western countries, much of their involvement in the war is lost to Western societies, many of whom may not have been aware of the extent of the dealings between the two countries. Decades later, many Chinese have come to terms with history, but many others are reluctant to entirely forget. This point was resurrected again with the implementation of new textbooks in Japan. The part of Japan was greatly downplayed in regards to participation in the war, and many Chinese take great offense. They have no control over these textbooks and are looking at the beginnings of a generation that will never know the full extent of the Chinese casualties and the lasting impression it made on their society. This is certainly not the first time that history has been written by the victors and the Chinese are another in a long line of forgotten victims in history.

How does this rift affect them now? In both cases, most would agree that another war is unthinkable as would be discontinuing trade. Neighbors in such close proximity help to boost each other’s economies as Japan has profited from China’s extreme rise during their decade long recession. Nevertheless, trade between the two countries could be as difficult as political relations have been. There have been a number of incidents between the two trade partners over the years. With China at such an advantage as far as the economy, Japan is in an awkward position. China is one of their main export partners, more than tripling in trade since 2000, and any trade disagreements hurt their economy. In addition to these historical challenges, China and Japan also have geographical and elemental rights disputes to contest with. Finding some common ground seems to be one way to start moving in the right direction.

In this video, they discussed a textbook that combined the history of three major Asian countries into one cohesive unit. As they said, it is not the history of one country but of all of them that is what really happened. I think being more aware of the impact to the region as a whole and trying to navigate these sensitivities is a step towards working together. Businesses are nothing more than a group of people with a common goal and economic interest. It is important to play to the human aspect of that in regards to these political and historical incidents. However, business also has the advantage of having a common goal for both the Chinese and Japanese businesses on both ends: making money. With this common goal, they have more incentive to work together favorably to achieve mutual satisfaction. This also opens the door to relating to each other on other levels. By utilizing this advantage, firms can start to overcome these issues on an isolated basis until their respective governments can move towards mending them on a larger scale. Or one would like to think.

China And Japan Are On The Brink Of War; Beginnings of WWIII? - Click for article.

Not only are there problems on a larger scale between politicians and larger businesses, but on the consumer level as well. If you read this article, you will see that consumers are also taking a stance and in some cases boycotting products (here over geographical rights). This hurts businesses, relations, and ultimately the economies in both countries. I don't think holding hands and singing is likely, so these problems will probably need to start from the top. As history has shown us around the globe, governments are not great at getting over themselves and learning how to work together.

I feel that there is still a lot of rocky ground to cover before any kind of solutions are attempted. But what do you think? Do you have additional insight into trade or historical relations that you'd like to pitch in? Have an opinion? Let me know down in the comments and be sure to send this to anyone who either needs a shot of international know-how or who actually knows what's going on and would like to contribute.

Wednesday Links 7-24-13

It's been a while, huh? I have been doing quite a bit of good reading here lately, but much of it is textbook-related which is a little harder to share. However, I'm ready to come back to Wednesday Links! This week is all about tips for getting your business up and running on the net and how to take it global!

Actually, I had to watch this video below for a class. Granted, it's a bit dry, but I didn't know the U.S. Commercial Service even existed, let alone what they did. I thought this was some great information to pass on if you are thinking of going global because this is a great resource. Make sure to check it out and let me know what you thought!

• What is the U.S. Commercial Service and how can they help you go international? (video above)
• Dropshipping: The Easiest Way to Sell Online and some tips to get you started
• 42 Timeless Ideas for Attracting More Visitors to Your Website - Think Traffic consistently gives great advice that you can act on today
• 3 Steps to Getting Started With Social Media - The Social Media Examiner is a go to blog for marketing professionals and you can learn a lot just by surfing around for a few minutes, so here's something to get you started.