As expected, the Ministry of Finance announced on Monday that Taiwan’s total export value for last month dropped by 44.1 percent year-on-year. The NT dollar dropped NT$0.045 against the US dollar on Friday and another NT$0.211 on Monday. Recently, tycoon Winston Wang (王文洋) has suggested that it be devalued to NT$40, while others have suggested that it be devalued by 20 percent. Both suggestions hint at a similar value.
These suggestions to save the economy through a currency devaluation are a result of the current economic crisis, which is causing many companies to lose orders and which caused Taiwan’s exports for December to drop by 41.9 percent year-on-year. Another reason is that there were only 18 working days last month as a result of the Lunar New Year holiday, which led to a further drop in exports.
A devaluation could increase price competitiveness. In particular, the depreciation of the NT dollar over the past few months has been insignificant compared to that of the South Korean won. Although devaluation would be one way to regain market share, it would be a risky move.
More deliberation and further options for execution are therefore needed.
First, a devaluation would cause immediate price increases for imported goods and raw materials. Rising production costs and falling purchasing power would be a serious blow to the national economy and public wellbeing.
Next, complementary measures are necessary for companies to be able to benefit from a devaluation. Even if the prices of Taiwan-made products became more competitive, the question is whether Europe and the US would still be capable of importing them given the economic environment. In other words, there is no certainty that Taiwanese companies would receive more orders.
In the past, European and US importers used to demand price cuts when the cost of Taiwanese products decreased in foreign currency terms. Hence, for Taiwanese companies to make a profit, factors such as time and bargaining ability played an important role.
Finally, in any devaluation, the greatest worry is the “interest arbitrage” that can follow. Some may buy foreign currencies using NT dollars and profit from the exchange-rate difference after the devaluation by buying back the Taiwanese currency, thus causing pain to the central bank’s foreign reserves. To avoid this, the central bank would have to carry out a devaluation quietly and unexpectedly.
Besides, if the Taiwanese currency really were devalued, Taiwanese would not want it to lose its value for too long and would expect a rebound soon afterwards. However, once a consensus forms around the lower value, it will be very difficult for the currency to appreciate.
If government efforts manage to increase the exchange rate, speculative hot money — US dollars — could pour into the market to profit from exchange rate differences. The cost to the central bank would be incalculable.
An exchange rate policy is always a double-edged sword. Used well, it may conquer the market. Used badly, it can cause great trouble.
If Taiwan wants to save its exports through a currency devaluation, it must on the one hand respect market supply and demand to maintain its balance and, on the other, move swiftly to preclude speculation.
These are all factors that must be considered if one wants to control and manipulate the exchange rate.
Lin Chien-fu is a professor in the Department of Economics at National Taiwan University.
TRANSLATED BY EDDY CHANG
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