Aftab Zaidi Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry. A more depreciated currency provides protection to domestic production and makes domestic goods and services cheaper for foreign buyers. It is advantageous for countries running a trade surplus to keep their currency at a low rate. This term is brought to the fore in a column published in the Financial Times, in which Brazilian Finance Minister Guido Mantega declared: Were in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness. Currently, China is being blamed excessively by the US for currency manipulation. During the financial crises, most currencies fell against the US dollar and investors bought it, as it was seen as a safe haven. However, with the weakening dollar, investors started disposing of their dollars for other currencies. In addition, the US interest rates are almost zero making it even less attractive. Certainly, the US wants to recover from the economic downturn by boosting its exports, but the high rate of the dollar compared to the Chinese yuan makes its products more expensive in the international market. The Chinese re-pegged their currency to the dollar in 2008, and stuck with the peg throughout the crisis. The Peoples Bank of China bought up trillions of dollars in order to keep its currency weak against the dollar. So, the US was not happy because it helped keep Chinese exports artificially cheap. According to leading economists, the Chinese yuan is actually 20 percent lower than its actual market value. This gives China a tremendous advantage in exporting against other countries, even other emerging markets that have low wages and, therefore, fairly cheap merchandise to sell on the world markets. For years, China and the US have clashed over the value of Chinese yuan. The US Congress even threatened it with trade barriers, which eventually led China to revalue its currency by 2 percent in 2005. This was before the fall of the US giants like Lehman Brothers and the subsequent financial collapse. Today, things are far more difficult. The worlds economic pie is not growing fast enough, and contests over the slices are increasingly vicious. Emerging powers like China have an insatiable appetite and are not content with relative gains; rather they want absolute hegemony. At the same time, no country wants to irritate China, as it is a big investor in every government bonds. China is also the biggest customer of iron ore, corn, soybeans, steel, you name it. On the other hand, yuan has been rising since the 2008 crisis hurting Japanese exports and pushing the country towards recession. The zero interest rate policy adopted by the Japans central bank always made it seems like an attractive currency for speculators to borrow and sell. However, now it has lost its charm as the US and other main European countries have almost nil interest rates as well. Thus yen has lost this advantage. Last September, the Japanese did intervene to deprecate the yen. However, this relief was short lived and it has since then strengthened against the dollar. The G-20 Summit in Seoul Korea also failed to solve this conundrum, raising concerns of its escalation. The US was supposed to present China as a villain for manipulating its currency. However, the tables were turned on the US when the other countries accused the US of following a similar strategy. Just last week, the Fed announced its plans to print $600 billion to jolt the economy back to life. The Fed says its plan to buy treasury bonds was designed to lower-long term interest rates, spur economic growth and create jobs. But the foreigners see a more sinister plot. The flooding of market with dollars will drive down the value of the dollar. Consequently, American products will become cheap in the international market. Hence, this will give the American exporters undue competitive advantage and a price edge. The final G-20 statement endorsed the idea that emerging market should protect them by imposing controls on the flow of capital, which until recently used to be a violation of free trade principles. The fear is that countries will take even stronger steps to give themselves undue advantage, creating the risk for intensification of this trade war. The US House of Representatives has already passed legislation that would let the government impose punitive tariffs on Chinese imports in retaliation for the weak yuan, though the Senate has not followed through on the legislation. Similarly, China is most likely to impose tariffs and duties and subsidise its exporters through cheap bank financing or tax credits. During 1930s, a similar policy of protectionism started by the US led to a collapse of trade which proved to be the catalyst for the Great Depression. The future looks bleak unless the G 20 countries take a unified stand agreeing to reform their financial system and reject protectionist policies. The writer is a freelance columnist.