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Facing the greatest currency war in the 21st century: Yuan vs dollar
âCurrency warâ is a popular term in the context of the international political economy
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'Currency war' is a popular term in the context of the international political economy.
However, currency wars itself have been occurring for many years and since it is related to national interest, direct government intervention is an essential element in such a war.
When it comes to national interest, a country will do anything to survive. This is reflected in the idea of the 'struggle for survival' as interpreted by Nicholas J. Spykman, an American geostrategist, acknowledged as one of the founders of the classical realist school in American foreign policy.
In terms of competition, numerous instruments have been used by the so-called major powers. Listed among these is the currency war; defined as part of the common apparatus in an existing economic war. For their own benefit, major powers such as the US and China have tried to create an environment that will help them promote their respective currencies.
For decades, the US dollar, for instance, has been promoted as one of few valid international currencies and the majority of countries throughout the world have now accepted the US dollar currency as an official means for transaction and investment.
By dominating the currency war, the US has enjoyed a variety of advantages, including prolonged economic stability. To some extent, by maintaining such a form of dominance, it is possible for the value of the US dollar to increase or even multiply in other countries, in particular those that may be suffering under the weight of economic downturn.
Indonesia, for instance, experienced a very difficult economic situation during the late 1990s. Prior to the fall of the Soeharto administration in May 1998, a single US dollar was valued at the same rate as Rp 2,000 to Rp 3,000.
However, as the country descended into chaos and later became temporarily uncontrollable, the value of one US dollar rocketed up to seventeen thousand rupiah, nearly six times its earlier value.
The situation entrapped Indonesia in a very harsh scenario and as a consequence, the country's debt multiplied enormously during that time.
To minimize any impact that could result from the enforced use of foreign currency, is it any wonder that every country attempts to encourage the use of its own currency?
Within the last decade, the currency war has transformed into a global trend and the rising of new major powers, like China, has challenged the hegemony of the US. This includes the competition to acquire financial dominance among the international community. In recent years, China's Yuan has been introduced in many countries as an alternative payment for both debt and investment.
Several African countries have elected to become China's strategic international partners. The latest is Zimbabwe, accepting an offer to terminate its foreign debt to China, a total amount of around US$40 million, in exchange for accepting Yuan as one of its valid currencies.
This is demonstrative of the smart strategy, a soft power maneuver, adopted by the Chinese Government. Should this same 'international debt trade off' scheme be offered to other countries, it is highly likely that China would achieve the same positive response. If this trend continues, then it could indeed indicate increasing dominance of Yuan in the international arena.
The advantages of eliminating a debt to China in exchange for such an offer are unmatched. This is valid and fruitful, especially for those countries that are struggling with their economic affairs.
In the near future, the currency war, particularly, the competition between Yuan and US dollar is likely to become extremely harsh and unbearable. It seems that this beneficial strategy will be exercised by the Chinese government in the long run so as to take dominance over US dollar in the international market.
Who will win the war and become the ultimate champion? At present, this remains unpredictable. There are still many factors that may impinge on the competition.
In regard to such phenomenon, the primary concern for Indonesia is the survival of the rupiah. At the end of 2015, Indonesia began to fully participate in the ASEAN Economic Community and this may, in future, pose a challenge for the rupiah. Thus, a proper strategy should be formulated to deal with such phenomenon. Defense economy should be given high priority and consideration. In this case, interagency cooperation between ministries including the Ministry of Defense is pivotal.
The Indonesian Defense University (IDU), which has a defense economy program, can initiate an academic forum that is able to invite and collaborate with other related stakeholders to discuss and suggest policy recommendations relating to the currency war phenomenon.
Having to deal with the greatest currency war in the 21st century, the competition between the US dollar and Yuan, Indonesia has to prepare some counter measures. The rationale is to survive any potential damage that may arise.
As a country that has good relationships with both these two major powers, Indonesia has to develop a smart strategy. As implemented by Indonesia in its defense strategy, smart power is perceived as a key component that may drive the success of the country's national defense strategy.
Therefore, the involvement of civilian economic experts, chiefly those with in-depth knowledge of currency war, in the Ministry of Defense, is mandatory.
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The writer, an Army lieutenant colonel, is a lecturer in the Defense Management and the Defense Diplomacy Program at Indonesian Defense University, Bogor. The views expressed are his own.
