FIXED EXCHANGE RATES AND

IMPLICATIONS FOR GLOBAL

TRADE
Intermountain world all countries have economic relations with other countries. Mainly they
related through foreign trade. Here is the importance of exchange rate. An exchange rate is the
price of a country’s currency in terms off another country. As each country has its own currency
say India has Rupee, America has Dollar and Japan has Yen etc.

Domestic currency cannot be used directly in any other country. It must be converted into
currency of the other country and then to be used in transactions. The rate at which currency of
one country is converted into currency of the other country is called foreign rate of exchange or
foreign exchange rate

There are these types of foreign exchange rate system:

1) Fixed Exchange rate system

2) Flexible exchange rate system
3) Managed Floating rate system

Here we are going to discuss about only Fixed Exchange rate system and its implications for
Global Trade. Under Fixed Exchange rate system, the rate of exchange for a currency is fixed by
the government. Here government is responsible to stabilize the exchange rate. Under fixed
exchange rate system each country maintains value of its currency fixed in terms of gold, silver,
other precious metal, or another country’s currency etc.

History of economic shows that the first exchange rate system popularly called Gold Standard.
Under this currency of different countries were tied to gold or fixed in terms of gold or a certain
quantity of gold. Thus, the Gold Standard represented fixed exchange rate system. There are
two system of fixed exchange rate. They are:

1) Gold Standard system of Exchange rate

2) The Belton Woods system

Merits of Fixed Exchange rate system

Fixed exchange rate system promotes exchange rate stability. It is necessary for orderly
development of the international economy and rapid growth of Global Trade. If the exchange
rate is variable create uncertainties of price. Therefore, the exports and imports will not have
adequate knowledge about exchange rate. These uncertainties make risks for them. This leads
to harm for Global Trade. On the other hand, under fixed exchange rate system eliminates the
possibilities of such uncertainties and promote foreign trade or Global Trade.

From the part of a developing country a fixed exchange rate system has a special
advantage. This prevent the countries from the continuous tendency for depreciating of
their currencies.

Fixed exchange rate system does not allow speculations in Foreign Exchange Market.

This facilitates capital movement within the economy. It also attracts foreign capital
investment also because foreign private firms would not be interested in making
investment those countries whose currency is not stable. Therefore, it promotes rapid
growth of the developing nations, by prevent capital outflow.

This system forces the government to adopt measures to check inflationary situations in the
economy. We know that inflations will cause BOP deficits.

This also promote economic integration of the world and growth of capital market.

Demerits of Fixed Exchange Rate System

The fixed exchange rate system facts to gloss over the international competitive environment
leads to harm in Global Trade.

Under the system, the countries with a BOP surplus will be providing in national currency and in
return the get foreign assets. The increase in foreign assets leads to inflations.

There is possibility of under or over valuations of the currency.

Government must maintain 100% Gold reserves.

In Conclusion

Providing greater certainty for exporters and importers leads to flourish foreign trade. Also
provide positive long-term benefits to Government.
I also want to provide some research based on aforesaid.

The Chinese counterparts recently devalued its Yuan and pegged it against US Dollar to make
exports competitive and cheaper for buyers like US to import aluminum and steel and other
commodities. This led to strong dumping within US and caused massive trade deficit with China
and thus US imposed tariffs creating a penultimate Trade war where both imposed tariffs on
each other.

Thus, we see fixed exchanges rate is unsustainable and causes huge pressure on exchange rate
to float and solve global trade dynamics.

The biggest issue been surfaced is US China Trade War, Immigration Laws, US National Debt,
Foreign Relations policy  

US and china have great history of trade wars however recent times has been largely due to
sanctions been imposed on china by USA.

Recently, USA slapped tariffs on 40% of Chinese goods. which has caused prices of US goods to
go up substantially because cheap imports from china have been stopped. USA has also
stopped cheap imports of steel and as a result Chinese government too has imposed
substantial tariffs on USA goods.

As a result, there has been currency devaluation in China to make it goods look cheaper and
more attractive and has started selling Goods in emerging markets. US goods however have
become more costlier and hence sales have decreased.

Chinese government has aggravated trade war by imposing fresh round of tariffs, however
before G20 summit which will be held in 2018, such issues will be resolved.

Since, China has imposed tariffs we see there has been lack of entry of Chinese workers and
visas in USA which has nullified the clear-cut winner. Because of trade war, India has managed
to export steel and aluminum to US markets and hence has been the greatest beneficiary.

Given the Presidential Power following economic strategies need best case implementation:

Resolution of NAFTA deal with negotiation as well as maintenance of great relationships with
South Korea on denuclearization by maintaining an eye on all developments
US China pact and removal of tariffs signing of MOU and economic cooperation
Immigration laws been relaxed by allowing H1B for Indians who look to create startups IN USA
and generate more employment
Debt refinancing and additional taxation on corporates with large market Capitalization to
decrease debt in short term.
Increasing interest rates to appreciate dollar and control inflation and money supply in market  

References:

 Bailey, Martin Neil, What Happened to The Great American Job Machine!? The impact
of trade and electronic Offshoring.
 Cline, William R 2004. Trade policy and Global Poverty. Washington: Institute for
International economics
 Goldman Sachs, 2003. Dreaming with BRICS: the path to 2050. Goldman Sachs Global
Economics paper 99
 Zoellick, Robert B 2001. American Trade Leadership: What is at Stake? Speech before
Institute of International Economics Washington, September 24.
 Schott, Jeffrey, 2004. Free trade agreements: US strategy and Priorities. Washington:
Institute for International economics