International relations - Essay Example

? International Relations Research Paper Table of Contents I. Introduction 3 II. The Currency War in the Context of International Relations Theory and Practice 5 III. Proposed Solutions, Ways to Solve the Currency War/Crisis. Alternative Courses of Action 8 Works Cited 10 I. Introduction This paper discusses the currency war that has been in the center of discussions of the major economic powers of the world in the context of international relations and the impact of policies and actions by the different parties on the global economy and the global political order. The discussions relating to the currency war cannot but take on a heavy slant in economics and economic policy, even as one cannot argue that trade is a major force that knits or destroys relationships among nations, something that has been discussed in much detail in many theoretical discussions in international relations. The latest round of efforts by the major powers in particular by the United States and Japan has been hailed as efforts that have come to be identified with a budding currency war. For instance, efforts to keep interest rates low are in keeping with the two country economies’ interests in spurring borrowing and economic activity from such lowered interest rates, but the net effect of the actions tied to this have been a downward pressure on their currencies, leading to a currency devaluation in practice if not in direct fact. The consensus even among the major central banks in Europe is that indeed the currency war is at hand, with Japan, for instance, deliberately setting the stage for a weaker yen on the back of announcements to pump massive amounts of liquidity, to the tune of US 1.4 trillion dollars, into the Japanese economy for the next 24 months. This has led to the yen depreciating by 14 percent after the announcement versus the US dollar. A weaker currency helps countries like Japan because it allows them to export their products at lower prices compared to competitors in other countries. At the same time, a weaker currency allows a country to shore up its investment base, owing from the way the weaker currency reflects the efforts of government, such as Japan, to infuse liquidity and to keep interest rates low, all in the name of priming the country economies for growth (Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan). Of course this state of affairs is not lost on China, which has said likewise that the move by Japan to infuse massive amounts of liquidity into the Japanese economy is, as others have noted, tantamount to launching a currency war. Already, Chinese economists have pressed the panic signal owing to the fact that the infusion has resulted in the massive weakening of the value of the Japanese yen, which in effect is also a devaluation of the currency done through the liquidity infusion rather than by direct means. In retaliation, the Chinese economists have urged the Chinese government to launch its own moves aimed at devaluing the yuan, The interconnectedness of world trade and the way trade has become so intertwined that it has come to dominate discussions in international relations more than war is being demonstrated in the way the move by Japan is causing a cascade of effects through the global economy and potentially hurting many players. For instance, in China, the prognosis is that the de facto devaluation of the Japanese yen would cause a diminishing of the competitiveness of Chinese exports. Moreover, the move by Japan to infuse money into the system while keeping interest rates down is being seen as encouraging speculative activities across borders. Speculators may use low interest rate loans from Japan to borrow money that they can then use to speculate in Chinese securities and investment instruments, causing havoc in the Chinese equities and financial markets. It is in these terms that the Chinese are viewing the currency devaluation in Japan and the United States, and it is along the lines of Japan waging an economic war that the Chinese economist are justifying drastic and counterproductive measures to shore up their own economy and devalue the yuan versus the dollar (Stephen; Zhang; Peacock). Again, in the context of international relations, trade issues such as these are cause for concern, even as the actions of the individual governments reflect the various possible scenarios in the field of international relations contexts, from cooperation, in the case of countries abiding by certain rules of trade and economic activities, to competition and to viewing state actors as essentially fending off from themselves. In this case, the actions of Japan are on the one hand internally necessary to prop up its own economy and to keep itself economically sound, but at the same time those actions have international repercussions. The remainder of the paper discusses these considerations in the context of how the currency war as has been discussed above illuminated by the insights, learnings and theories derived from the international relations class (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan). II. The Currency War in the Context of International Relations Theory and Practice The initial take from the discussions and the rhetoric from all sides with regard to the reactions of nations to the moves of Japan to shore up its economy and to let its currency effectively lose value versus the US dollar is that the actors are talking along the lines of realism being the dominant force in the state of affairs. The rhetoric from China veers from a view of the global economic system as cooperative, and paints Japan as an adversary whose moves are hurtful to others, and certainly to China for instance. The view is that the currency war, as it is being called, is a war in the sense that there is no trust among the concerned parties, and that the nations are to be left fending for themselves in the aftermath of the perceived “selfish” and unilateral moves from Japan. Japan’s weakened currency is good for Japan, and so is that weakened currency in the context of the continued low borrowing rates in the country. On the other hand, this is bad news for the other players in the world economy, especially China, whose currency has suddenly effectively appreciated versus the Japanese yen. In the world of realist perspectives on international relations, this is power speaking to power, in the sense of Japan wielding economic power that can cripple others in its wake. (Slaughter; (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan; Beavis). Certainly if one looks at the analyses relating to the dynamics of currency exchange rates, devaluations, and the impact of those to country economies, one looks at a picture of a global economy that is ruled less by cooperation and more by forces that are aligned with the realist vision of state actors acting on their own, without guidance from other parties, and purely out of selfish self-interested motives. In the world of economics, the dynamic of lowering interest rates and pumping liquidity into the economy is countered by another dynamic within the country, and that is increasing interest rates. In the case of Japan, what makes the moves to prime the economy through measures that effectively devalued the yen is that such massive inputs of new money into the economy is not seen as causing the inflation in Japan to spike. In other words, the Japanese economy seems to be able to adapt well to a regime where interest rates are low and the currency is devalued. On the other hand, what makes the prospect of a currency war less appealing to countries like China is that there are indications that going in lock step with Japan in terms of lowering interest rates and infusing large amounts of new money into the economy is not as feasible. This is owing to the fact that there are signs that the Chinese economy may overheat, as has already happened. This means that if China follows the course of Japan, then it would be risking higher inflation, a trouble sign for the economy moving forward. In other words, what Japan has done is to put into peril the growth of other economies within its neighborhood, and in other parts of the world. Simply put, Japan’s move is anarchist and in keeping with the realist perspective of international relations, in that it has acted unilaterally, for its own benefit, but without regard for other countries (Slaughter; (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan; Beavis). Moreover this is not the end of it, as the moves by Japan have other negative impacts on other economies. In a more cooperatives state of affairs, one can argue that Japan would have taken the impact of its moves on other economies. One can see that in the short run this works for Japan, but in the long run, if other economies are undermined, then Japanese export markets generally are undermined too, resulting in lowered exports for Japan. There are many ways in which the move by Japan are seen as undermining China’s and other emerging markets’ economies. Prompted by lowered interest rates, borrowers may massively take out funds from Japanese lenders and infuse them in risky and speculative bets into emerging markets. These undermine developing markets in the long run, because they sabotage the economic fundamentals of the country through the risky bets that improperly inflate the values of the assets of those countries. The wave of instability that the Japanese devaluation therefore is a threat to the long-term viability of its trading partners. In more cooperative international relations perspectives, Japan would ideally look at tempering its own devaluation in order to not totally undermine its neighbors, chief among them being China. On the other hand, where realist perspectives take root, fear, distrust, unilateral actions aimed at self-preservation, and rhetoric that includes labeling the actions of Japan as amounting to waging a war on the currency of other countries is the result. This is a surprising turn of events that is to be considered as short-sighted ,given that in a protracted war where all nations try to one-up each other via several rounds of devaluation, everyone suffers in the end. The realist perspective may be winning out at present, but another more cooperative perspective sees that the fate of Japan is tied to the fate of its trading partners. It may be that Japan can take more by way of devaluations to its currency without risking its economy overheating and being subject to high inflation, but in the long run it will suffer from the diminished economic prospects of the world around it (Slaughter; (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan; Beavis). III. Proposed Solutions, Ways to Solve the Currency War/Crisis. Alternative Courses of Action There are no short-term solutions to the on-going currency war, which is termed as such by many state actors in Europe and in Asia, and by prominent trade powers like China. Japan has a vested interest in seeing its initiatives to restore the health of its economy bear fruit, and from indications and assessments by its economists and international experts, it has a shot at succeeding. Lowered currency value for the yen versus the US dollar also devalues the yen versus the Chinese yuan, because the Chinese currency is pegged to the US dollar. This means that where the value of the yen goes down versus the US dollar, then the fixed peg guarantees a similar de factor devaluation of the yen versus the Chinese currency. What makes this interesting is that Japan seems to have some leeway in this regard, because the indications are that the country can take it without overheating the economy. On the other hand, the same cannot be said for China. In the short term therefore Japan can reap the benefits of a devalued yen, in terms of stronger exports competitiveness versus exports from China and elsewhere. This can boost the Japanese economy unilaterally at the expense of hardship for others. In the long run though, the recommendation is for Japan to temper its devaluation and to consider other approaches that lift other economies too. This can mean, from the point of view of international relations, shifting from a realist, anarchist stance towards more cooperative and institutional modes of dealing with other nations (Slaughter; (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan; Beavis). In the concrete, alternative courses of action focusing on spurring growth through means that do not involve tweaking the amount of money in circulation and manipulating interest rates will have to be taken by Japan and other actors. These alternative courses of action would have to be more cooperative too, from the point of view of international relations, and build on rather than destroy the gains already made in making countries more cooperative and interdependent through trade. There are moves for countries involved in the currency war to sit down and to sort out mechanisms for a more sustainable currency regime, based on mutually agreed mechanisms that are still to be determined. By continuing to talk in this way, some progress may be possible moving forward (Stephen; Zhang; Peacock; Chavez-Dreyfus; Popplewell; Morley-Freer; Tan and Noonan; Beavis). Works Cited Beavis, M. “IR Paradigms, Approaches and Theories”. The IR Theory Knowledge Base. 2012. Web. 24 April 2013. < http://www.irtheory.com/know.htm> Chavez-Dreyfus, Gertrude. “The realities of a currency war”. Reuters. 23 April 2013. Web. 24 April 2013. < http://www.reuters.com/article/2013/04/23/us-fx-summit-currencywar-idUSBRE93M17320130423> Morley-Freer, Marc. “Opinion: The currency war has started in earnest”. Fresh Business Thinking. 22 April 2013. Web. 24 April 2013. < http://www.freshbusinessthinking.com/news.php?NID=18015&Title=Opinion%3A+The+currency+war+has+started+in+ernest#.UXkram--qK4> Peacock, Louisa. “China ‘fully prepared’ for currency war”. The Telegraph. 2 March 2013. Web. 24 April 2013. < http://www.telegraph.co.uk/finance/china-business/9904512/China-fully-prepared-for-currency-war.html> Popplewell, Dean. “G20 Encourages an Intellectual Currency War”. Forbes.com. 19 April 2013. Web. 24 April 2013. < http://www.forbes.com/sites/deanpopplewell/2013/04/19/g20-encourages-an-intellectual-currency-war/> Slaughter, Anne-Marie. “International Relations, Principal Theories”. Princeton University/Max Planck Dictionary of International Law. 2011. Web. 24 April 2013. Stephen, Craig. “Why China fears currency wars”. Market Watch. 10 March 2013. Web. 24 April 2013. < http://articles.marketwatch.com/2013-03-10/commentary/37599740_1_currency-wars-china-inflation-industrial-output> Tan, Amanda and John Noonan. “Currency Wars”. IFR Asia- Asian Development Bank. 2013 Web. 24 April 2013. Zhang, Moran. “Currency wars 2013: China Takes Aggressive Stance On Currency Tension with Japan, As Yen Sinks to New Low Against the US Dollar”. International Business Times. 8 March 2013. Web. 24 April 2013. Read More