Skip to main content

Currency Wars, Argentina and Brazil Style

By | [email protected] | February 17, 2015 3:26pm


The global economy is going through something that has been dubbed by the international media as “turmoil”, consisting of plunging commodity prices, recession, and deflationary spirals. This is in sharp contract to the “crisis” we recently emerged from, marked by spiking commodity prices, recession, and inflation. And so the sensational Goldilocks that is international media has termed the trend towards devaluing ones currency so as to make exports more competitive a “currency war”.

Currency wars sounds a bit extreme, so let’s take a brief look at monetary history and exchange rates. Exchange rates can be tweaked and fiddled with by governments as a monetary policy tool in order to realize some secondary objective. For example, an emerging market government seeking to attract foreign investors can peg, or fix, their currency against that of a more stable market like Argentina did in the 1990s via a currency board during the famed “1 to 1” era of President Menem. Alternatively, a government can allow their currency to float, or fluctuate, within a fixed band around another currency. From 1945 until 1973 when the Bretton Woods system was in place, the US dollar was linked to gold at US $35 per troy oz and all other currencies fluctuated in a band around the value of the dollar.

Since 1973 the world’s central banks have been more or less free to pursue a wide variety of currency arrangements to their hearts’ contents. And while, yes, the past forty years have seen their fair share of economy-walloping currency crises, we have all floated on OK.

But international exchange rates deserve the spotlight they garner because even though the only time the majority of people directly encounter them is when calculating how much that bitchin’ vacay in the Greek Isles is going to set you back (spoiler alert – wait six more months and probably a lot less), in reality exchange rates hit your wallet every time you purchase an imported good.

One of the first thing they teach in economics is that “trade makes everyone better off,” which is the idea that if Bianca has only Fernet Branca (an popular aperitif) and her reader has only Coca Cola, we can trade and both have Fernet and Coke which is refreshing, intoxicating, and delicious and thus we are both better off. On the level of the consumer, free trade theoretically results in a situation whereby all actors are incontestably better off. This is why we have institutions such as the World Trade Organization (WTO) solely dedicated to providing a framework upon which sovereign nations can come together and systematically dismantle barriers to free commerce. It’s a beautiful world in which we live.

But now consider a world where I have Fernet, you have Coca Cola, and China has off-brand brown liquid with fizz they have the audacity to call “cola”. They come and sell me all the cola I need to go with my Fernet and since I’m cheap and tasteless, I don’t bother to know the difference because hey, hooch is hooch and a cheaper alternative to satiate my drinking problem solution makes me richer at the end of the day. You’re now left without a market for your Coca Cola. Institutions like the WTO work to solve group action problems and keep countries from competing with each other to find markets for their exports, while closing themselves off to imports.

say it again...

say it again…

The strategy of maximizing exports while preventing imports was quite the savvy move back from the 16th to the 18th centuries. This throwback economic theory is called mercantilism and has its ideological roots in the idea that trade is a zero-sum game. If I give you some Fernet in exchange for Coke, I lose because I have less Fernet, the deliciousness of Coke be damned! Adam Smith called this “beggar thy neighbor,” and it didn’t work out too well because rather than having trading partners, countries had economic adversaries and it made going to war a much more appealing concept. And we all learned from Jackie Chan and Chris Tucker that war is good for absolutely nothing.

So even though it’s generally accepted by non-hippies that trade is a good thing even though there are some negatives, nations still work at the sovereign level to promote their exports. By finding markets for domestically produced goods, you create employment and put money in your population’s pockets which makes people generally happy and more likely to vote for the person viewed as the cause of such economic bliss. Which is why politicians often cite negative trade deficits with other countries, which is just the amount exported minus the amount imported, as if their opponent were selling the sovereignty of the nation to the nazis rather than just getting a good deal on imported food.

Currency war refers to the idea that in economic hard times, countries will compete for export markets by devaluing their currencies in a “race to the bottom” to beat out other sellers of their exported goods. It’s like putting the entire store on sale and gaining instant competitively. The last major round of “currency wars” played out during the interwar period and is credited by some cool monetary economists as one of the most important factors instigating the outbreak of World War II. But many economists are referring to the Central Bank quantitative easing programs and devaluations being seen from Japan to Europe to Latin America as a new currency war. No comment, except that I’m working on the patent for the “uses war/turmoil/collapse to get clicks and sell books” drinking game.

Brazil and Argentina are Latin America’s largest and second largest economies, respectively and are important trading partners.

UN Comtrade Data

UN Comtrade Data


Brazil top four trading partners 2010-2013

UN Comtrade Data


But as the global situation has gotten tougher for these two net exporters, their mutual trading relationship has very recently eroded.

Foreign Minister Hector Timerman met his Brazilian counterpart Mauro Viera in Buenos Aires last week to address concerns raised by a 2014 Argentine Chamber of Commerce report that trade within Mercosur was down 10.6 percent in the third quarter of 2014.  The report further laid the blame on Argentina, stating it’s activity inside the bloc declined 16.3 percent in the third quarter of 2014. This was interpreted as evidence that Mercosur may be losing relevance and failing to accomplish its goal to increase regional trade.

Argentina’s Central Bank has been sporadically erasing the supply of dollars to pay for imports, and in 2014 imports from Brazil decreased 25 percent.

Brazil has responded to global conditions by either permitting or actively devaluing its currency the real, which fell to a ten year record low of 2.87 reis to the dollar. While not a direct response to Argentina’s casual reticence to trade in general, this will make Brazilian goods more competitive than their Argentine counterparts.

The pair failed to produce a deal to ease complaints over trade barriers and instead simply agreed to continue trying to reach a concrete deal.  And while both parties claimed that their respective increasing ties to China, especially from a trading standpoint, in fact strengthens regional cooperation, common sense would lead to an alternative conclusion.

Argentina’s president recently completed a diplomatic trip to Beijing with the sole purpose of “strengthening economic ties”, or in layman’s terms securing loans to pay for infrastructure projects and hard currency to keep the peso somewhat afloat. Argentina and China’s economic ties include the currency swap whereby Argentina receives Chinese yuan, for which the best use is purchasing Chinese goods. Argentina is clearly prioritizing its relationship with a partner who forks over cash in advance, regardless of what that might do to regional partnerships or other relationships

That being said, a glance at the numbers shows that for Brazil, China is a far more important import partner than neighboring Argentina. So when it comes to prioritizing regional trading relationships over opening up for China, Brazil does not have much of a pedestal from which to preach.

Calling this a currency war errs on the side of being a bellicose overstatement, and while these neighbors are not yet beggar-ing each other, both are guilty of having a narrow-minded and monocular view of their trading relationship. They are quick to point to trade deficits to enflame public opinion rather than understanding the mutual benefits these partners gain from access to each others’ market.

And as for the current “currency wars” and the possibility of descending into a depression that results in World War III? All I can say is that if mercantilism really does come back into fashion, I hope it brings with it gun-boat diplomacy before we descend into an all at war, because it would be an interesting twist on the modern cruise industry.