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I'm reading Steven N. S. Cheung 's "Economic Explanation" (2001). In vol 2 ch 2 section 2, he mentions Comparative Cost, or "the law of comparative advantage".

after quoting the britain/spain clothes/wine example of D. Ricardo, he says,

... each country has its own comparative advantage, however, this presumes barter or same currency. If there're different currencies and the exchange rate is regulated, in some situation the so-called "Purchasing Power Parity" would not work. ... for example during the 1997 Asian Financial Crisis, almost all Asian countries' currencies depreciated, while HKD was tied to USD, so Hong Kong lost quite some Comparative advantage.

What I don't get is, why currency exchange rate regulation would disable the comparative advantage? Currencies are just agent of trading, exchange rate won't disable the comparative advantage, so exchange rate change shall also not disable it, right?

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    $\begingroup$ Currencies are just agent of trading What about pegged currencies? $\endgroup$
    – chrisaycock
    Nov 11, 2013 at 2:58
  • $\begingroup$ HKD is pegged (fixed) to USD at that time. but how would that make Comparative Advantage disappear? barter could always be arranged, say, by a back-to-back trading contract, to change clothes with wine? $\endgroup$
    – athos
    Nov 11, 2013 at 3:56
  • $\begingroup$ The author is half right, half wrong. Right in that PPP does not cause currencies to adjust for different purchasing power when currencies are pegged. Wrong, in that comparative advantage does not disappear just because currencies are pegged. Look at China and the US. A large driver of the persistent trade imbalance is the artificially weak yuan. It presents a persistent comparative manufacturing advantage to China. $\endgroup$
    – Matt Wolf
    Nov 11, 2013 at 8:01

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I haven't read the text you mention, but I'd note that the text says that Hong Kong lost some comparative advantage, not that exchange rate regulation disabled the comparative advantage. So after the Asian currency crisis, the dollar price of goods and services from Indonesia was lower because of the currency devaluation whereas the dollar price of those goods and services were unchanged in Hong Kong (excluding price changes from economic impact of the crisis). While trade balances are influential, short and long term financial flows can have an overwhelming impact on exchange rates. Currency regulation can reduce exchange rate volatility, but there are related costs.

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