Policy makers and investors have been facing the spectrum of global currency wars due to the fear of a spiral of competitive devaluations following the second quantitative easing (QE2) that is expected to take place in the United States shortly. Currency wars through devaluations are viewed as a protectionist tool to ensure a country’s international competitiveness and its export advantage at time of serial devaluations.

Exports-based economies like the BRIC countries (Brazil, Russia, India and China) are highly sensitive to the values of their currencies relative to the US dollar and to each other’s currency. They try to keep those currencies undervalued and anchored to the dollar to maintain or gain additional export advantages. Foreign currency inflows into their financial sectors in the form of short-term investments would lead to appreciation of their currencies and may make them lose their competitive edge to each other. Many experts have initially warned of currency wars due to serial devaluations by these countries as a result of the expected QE2 which should bring more short-term capital to their economies and exert upward pressure on their currencies. Currency wars lead to trade wars and curtail the volume of international trade which has been considered an important source of the recent global economic growth.

But it seems that the BRIC countries and others in East Asia are heading towards currency controls as a defensive measure against short term capital attacks by currency speculators, instead of launching currency wars as a retaliatory measure. These countries can use currency controls such as imposing taxes on foreign capital investments in their bonds and other securities and managing interest rates to reduce the demand for their currencies and prevent them from appreciating relative to their competitors’ currencies. The BRIC countries all watch what their own member, China, is doing as they compete with this rising superpower in the same markets using similar tools.

China is now pursuing monetary and currency policies that are different from those in the United States and is attracting global economic jealousy, particularly among the BRICK countries and the United States. It is pursuing a restrictive monetary policy to raise interest rates with the objective of fending off inflation, while the United Sates is following an expansionary monetary policy at the expense of the weakening greenback. At the same time, China is using currency controls to keep its renminbi (yuan) undervalued relative to the dollar to maintain its competitive export advantage. I believe this dual policy is highly advantageous for China in light of its own high growth economy and the slow growth and weak currencies in most of the developed countries. Other BRIC countries are imitating China. Strongly-growing Brazil is also pursuing currency controls while raising its interest rates to fight inflation. Like China, it wants the best of both worlds: strong exports with no high domestic inflation. In South Korea, regulators will audit lenders working with foreign currency derivatives. The objective is to decrease the financial instability and currency appreciation caused by the capital inflows associated with these transactions [1]. In Peru, reserve requirement tax which is a type of control on capital inflows has been increased three times between the months June and August of this year. In Thailand, the government initiated a 15 percent withholding tax on capital gains and interest payments on foreign holdings of government bonds.

Currency controls like currency devaluations and controls are distortions to free trade. They retard global trade that brings dynamic growth to both developed and developing countries. They both have causalities and if they become serial they become deadly to all countries. But the big causality could be the dollar as countries sidestep the greenback, which is possibly the price of QE. These policies are also signs that the world financial system needs repairs or a replacement by a more suitable system. Maybe, the G-20 will eventually replace the IMF and introduce the needed repairs. This group which accounts for 85 percent of the global economy has called for a "refrain from competitive devaluation of currencies." The needed change in the aging financial should be coming.

One may ask if the GCC countries should at times of strong oil markets resort to capital controls and impede the inflows of the opportunistic short-term capital from entering their economies. The answer is that currency controls against foreign speculators are not as relevant to GCC countries as they are for the BRIC countries. The GCC countries mainly export oil and this commodity is priced in dollars, while their non oil exports are marginal. Therefore, to impose currency controls to keep their exports competitive is not that relevant to the GCC countries. What’s relevant to those countries is to let their currencies move within a comfortable band around the dollar to head off inflation, without sacrificing the economic and political peg to the dollar. A single peg to the dollar is not in the best interest of the GCC economies. The GCC countries should also make changes as the G-20 will.

[1] Illene Grabel, “Capital Controls, "Currency Wars" and New Global Financial Architecture”, October 19, 2010. https://www.truthout.org/capital-controls-currency-wars-and-new-global-financial-architecture64338