Is a Global Currency War Still Possible? More than two dozen noted experts offer their analyses.

In 1985, with the U.S. dollar soaring in strength particularly against the yen, industrialized world policymakers saw the elements forming for a dangerous allout trade war. They agreed on what became known as the Plaza and Louvre Accords, efforts at international cooperation to contain currency pressures. Global financial markets responded positively to this emerging international financial statecraft.

With the Trump Administration's imposition of tariffs, that statecraft has all but collapsed. To complicate matters, tariffs, trade, and the financial policing of international capital flows (backed by the dollar's role as the reserve currency) have all become major weapons in America's foreign policy arsenal.

In this new go-it-alone era, the question is whether the world's major non-U.S. central banks, under pressure from their governments, respond with aggressive monetary policies designed precisely for the purpose of weakening their currencies with the hope of making their exports more competitive. After all, the Bank for International Settlements has just proclaimed that monetary stimulus in and of itself can no longer be the "main engine of economic growth." In a world already experiencing tepid economic growth despite negative or close-to-negative real interest rates, what are the chances that currency devaluation (disguised or otherwise) becomes the preferred policy instrument for growth? And how will U.S. policymakers respond if the dollar strengthens significantly as other nations engage in aggressive global monetary stimulus led by the European Central Bank? Will the end result be a twenty-first century currency war?

And will lowering a currency's value even guarantee greater prosperity? What would be the effect of a currency war on global financial markets? On emerging markets? To what extent has the world's prosperity of the last forty years depended on a successful international economic and financial statecraft, the foundation of which now appears to be at risk?

More than two dozen noted experts offer their analyses.

ALEJANDRO DIAZ DE LEON

Governor, Bank of Mexico

Trade tensions have become a major obstacle to global economic growth, with significant effects on manufacturing production, investment, and business confidence. Current purchasing manager surveys show that a contraction in manufacturing may already be underway. Disruptions in global value chains have affected the most globally integrated processes and dampened business investment. These adverse impacts have been more severe in economies more open to trade and with large export volumes to the United States.

Markedly weak investment stands out as one consequence of a highly uncertain environment due to trade and geopolitical tensions. In the last few years, particularly in Mexico, these factors have triggered a strong pushback on investment, directly in manufacturing, but also, indirectly, in services.

The baseline scenarios for global growth have already been affected and large downside risks prevail, as a more hostile environment to trade and investment seems to be more permanent. This is especially so since recent trade tensions are related not only to bilateral trade deficits, but also to technology supremacy and immigration issues, as is the case with Mexico regarding the latter factor.

The multilateral institutions, strategies, and approaches put in place since Bretton Woods seventy-five years ago face deep structural challenges. Arguably, globalization and multilateralism are in crisis, both from the heightened pressure from protectionists and nationalist agendas and from the accumulated costs and tensions derived from global imbalances, associated in part with some countries' use of managed exchange rates and export-led growth strategies.

To attain growth and development, market economies need to engage with each other in a mutually constructive, predictable, and evenhanded way. History and theory show that national interests are best served by international cooperation. Multilateralism seeks to find solutions to global externalities through cooperative approaches that improve both national and global outcomes. This can be considered as an effort to procure much-needed global public goods, not only to address old challenges such as an evenhanded and balanced approach to trade, flexible exchange rates, foreign direct investment, and the international financial architecture, but also new ones, such as climate change and more inclusive growth and development.

An issue that has gained increased attention is the role of monetary policy and its implications, spillovers, and tradeoffs for foreign exchange dynamics, trade performance, and growth. An extreme and narrow view considers competitive devaluations, race-to-the-bottom policies, and even so-called currency wars. These arguments misunderstand currency markets and the role of the exchange rate, and may lead to the confusion that monetary policy should set real exchange rate objectives for competitive purposes.

In this regard, history and theory provide ample evidence that monetary policy should focus on attaining low and stable inflation, hence contributing to output smoothing and financial stability, and not on targeting the exchange rate. To this end, central bank independence is of paramount importance in attaining a well-focused, medium-term-oriented monetary policy, with ample and much-needed distance from political cycles.

We must not forget that on the road to development, at both the national and global levels, we need to reconcile individual (national) interests with the common (global) good. History has taught us that short-sighted approaches lead to mirages at best, or extremely painful lessons at worst.

TADASHI NAKAMAE

President, Nakamae International Economic Research

Currency strength, or weakness, is no longer a bellwether of economic performance for developed economies. The global economy is less dependent on trade than it was forty years ago. Exchange rates matter far less than they used to, especially in developed countries.

Take Japan's automobile industry, its top export industry. In 1985, overseas production by Japanese automakers was almost non-existent. In 1990, they produced 3.3 million units overseas, less than a quarter of the 13.5 million units they produced domestically (16.8 million units in all), while selling around 7.5 million cars at home and exporting 4 million.

By 2018, Japan's automakers were producing 20 million units overseas and only 9.7 million units at home (of which only half, 4.8 million units, were exported).

This means currency matters in different ways now. Today a weaker yen bolsters Japanese automakers' yen-based profits from overseas production. But it does not stimulate an industry's (or country's) exports, raise production, or create lots of new jobs at home as it did in the 1980s.

A weaker yen did lead to higher stock prices and asset inflation, although this did not stimulate consumption or investment the way Shinzo Abe, the prime minister and the leader of the Liberal Democratic Party, had hoped.

Consider the three years between 2009 to 2011 (inclusive), when the Democratic Party of Japan was at the helm, and the Bank of Japan was run by Masaaki Shirakawa. During this time, the yen strengthened (at an annual rate of -5.2 percent) and prices dropped (the GDP deflator was -1.5 percent). Nominal GDP growth was 0.4 percent, but real GDP growth was much higher at 1.9 percent. Dollar-based GDP grew 5.8 percent (from $5.2 trillion to $6.2 trillion).

By contrast, between 2012 and 2018, after the LDP was back in power, the Bank of Japan, led by Governor Haruhiko Kuroda, loosened monetary policy aggressively as part of "Abenomics." During this period, the yen weakened 5.6 percent. As a result, prices rose 0.6 percent. Nominal GDP grew 1.7 percent but real GDP growth was only 1.1 percent, lower than the preceding years. Dollar-based GDP shrank to $5 trillion from $6.2 trillion in 2012. Meanwhile, per-capita wages and labor productivity stalled.

A weaker currency only works to stimulate or revitalize an economy (at least in any significant way) in emerging countries undergoing rapid industrialization. Even China's dependence on trade has fallen to 18 percent in 2018 from 33 percent in 2007, now that it is near the end of its era of industrialization. These days, China, saddled as it is with cross-border debt, is unlikely to welcome a weaker yuan as it once did.

The real conflict over currency is no longer between countries. In developed countries, a weaker currency no longer helps the economy in the meaningful ways it once did. But the (outdated and inaccurate) perceptions of its benefits still help politically, through promises of raising exports, production, and new jobs. It also helps distract from real, thorny economic issues that are troubling local communities.

There is a growing conflict over weaker currencies, but it is an internal (domestic), and largely invisible one. On one side are the interests of local communities, businesses, and consumers, who, at best, derive little benefit from a weaker currency, or worse, are hurt by currency or trade wars. On the other side are the executives of multinational companies, whose wealth is tied to higher corporate profits and share prices, and thus a weaker currency. The way in which "currency wars" is framed is flawed and distracts from the real and immediate problems of economic polarization, inefficiencies, and inequity within countries today.

DAVID C. MULFORD

Former U.S. Ambassador to India, and former Under Secretary for International Affairs, U.S. Treasury

The Plaza Accord of September 1985 marked a high point in cooperation and policy coordination between the G5 countries in the evolution of global financial markets. At that time, a consensus was achieved between both surplus and deficit countries in the G5 to cooperate in depreciating the dollar by 40 percent over a...