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An employee at a currency exchange store counts Chinese one-hundred yuan banknotes in Hong Kong, China, on Wednesday, Aug. 12, 2015.Xaume Olleros/Bloomberg

Until now, most experts have been reluctant to use the term "currency war" to describe this year's global arms race in foreign exchange markets. But China certainly fired a big shot over the bow this week.

By formally cutting the government-managed value of the yuan, China raised the trend of increasingly competitive currency devaluations to a new level. In a world where struggling economies have been adopting policies that have driven their currencies lower in not particularly transparent attempts to stimulate export growth (30 central banks have cut interest rates this year), the world's biggest exporter went to a new extreme to defend its turf. Other export countries – including Canada, which has cut rates twice since January and is banking on an export recovery to revive its flagging economy – will surely feel the heat. So will the global financial markets, which look more fragile with every new volley in the currency battle.

There's no reason to think all this will end well. About the best we can hope for is that it will all prove pointless.

Let's consider how this is going to work. If everyone drives their currency down, then no one is gaining the desired big export advantage, at least not for any significant time. Basically, nobody wins.

At the same time, currency wars fuel financial market volatility. Devaluations sap buying power from domestic consumers. They discourage consumption and investment. They spark international trade feuds. Ultimately, currency wars hurt global growth.

Of course, individual countries are wrapped up in their own problems and aren't easily convinced, at a time when their domestic economies are stagnating, that a low-currency policy isn't the best medicine to uncover the demand they so desperately seek. The logic that leads to a currency war seems to be the naive expectation that your country can act in isolation, that everyone else isn't thinking the same thing. That is, until everyone else clearly is.

Well, everyone except the United States, in the current scenario. Because of the nature of the foreign-exchange market, it's impossible for all currencies to go down at the same time – because in order to sell one currency, you must buy another. As investors flee the raft of currencies being held back by weak economies, slumping commodity prices and devaluation-promoting policies, they are piling into the U.S. dollar, which is supported by an increasingly robust economic expansion and a central bank that could start raising interest rates as soon as next month.

As the U.S. dollar appreciates, that will weigh on U.S. export competitiveness, hurt profits for U.S. multinationals and generally become an albatross around the neck of the U.S. economic recovery. Which, given that the U.S. economy is about the only positive the world has going for it, isn't the most constructive thing for the global economy at the moment.

But there is a counterargument that suggests the current devaluation race may provide much-needed stimulation for the struggling global economy. That's because in most cases, the battle has been fought with monetary policy, lowering borrowing costs and lubricating a rusty economy with cheap cash. (Indeed, for most countries, including Canada, this is a lot closer to the stated objective; the currency declines are, at least officially, more a consequence than a goal.) As this has spread to a general international trend toward easier credit conditions, it has resulted in what is essentially a co-ordinated global monetary stimulus – even if it did happen by accident.

This week's devaluation by China, though, is a different beast – a unilateral slashing of the pegged value of the currency. (China allows the yuan to float only in a small range around the fixed level set by the Chinese central bank.) What's worse, China may have to buy up major foreign currencies, primarily U.S. dollars, and sell yuan in order to maintain a devalued peg, as it has in the past when it wanted to keep its currency artificially low. In that case, the currency sitting in China's foreign-reserve vaults represents a reduction in global money supplies, which would actually tighten global monetary conditions and detract from global growth.

Things haven't deteriorated yet into a full-out, destructive currency war. But given the plethora of devaluation-friendly moves around the world in the past nine months, it wouldn't take much more to send us down that road.

Perhaps, then, it's time for cooler heads to prevail and for the world's leaders to consider working together to co-ordinate the kind of currency re-positioning that looks increasingly inevitable. It's been done before. In the Plaza Accord of 1985, the five biggest free-market economies (the United States, Britain, West Germany, Japan and France) agreed to a co-ordinated market intervention to devalue a dangerously bloated U.S. dollar. The Louvre Accord two years later (in which Canada joined the group) created a co-ordinated intervention to halt the dollar's decline and stabilize the global currency market.

It has to be better than this race for the bottom that a growing number of countries seem bent on pursuing. We can work together to address the global economic turmoil – or work separately and risk deepening it.