The trade war between the USA and China, How falling their own currency can help China and its impact? Should India also descent its currency intentionally for UPSC CSE/IAS mains and prelims.

Contributed by
Username akashaky
on 09/08/2019

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From a long time in India, there has been an argument that should the Indian Government let the Indian rupees fall down?? This argument is taking place as China has done the same thing to deals with its trade war with the USA.

Let's understand how falling their own currency can help any country?? We will take an example of the trade war between the USA and China.

A trade war between USA and China

  • Initially, the USA applied a tariff to Chinese goods of worth US$250 billion, China retaliates on this step and applied a tariff of worth US$110 billion.
  • But on 1 Aug 2019, US President says that the US will impose another 10% tariff on Chinese products from 1-September-2019.
  • This will lead to a further increase in the price of Chinese products in the US market and ultimately the demand for Chinese products will decrease in the US market.
  • To overcome this problem, China decided to fall its currency.

How falling their own currency can help China and its impact?

  • The decrease in currency value will lead to the availability of their goods at a lower price in the USA despite the tariff imposed by the importer country
  • This lead import more expensive while it makes exporters earn more money. This process will decrease imports.
  • Hence this technique is valid only if, a country does much more export than import.

How CHINA descends its currency?

  • By spreading their currency in the market. This can be done by printing more currency.
  • Exchanging money in FOREX(Foreign Exchange Market): Country like China makes fake companies and Donates $billions of fund to them and this company supplies the Chinese currency in the FOREX market. This lead to the fall of the Chinese Currency.

Is INDIA is ready for the same???

In March 2019, India's goods and services export touched to $540 billion and in comparison to this, the import is much lesser. So some economists are suggesting the Indian Government to descend the Indian Currency intentionally.

Hope it helps

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