The WTO recently released a report on the possible linkage between exchange rate and international trade. The issue of fluctuating exchange rates on international trade has been a topic of serious discussion.
Undervaluation of one's currency benefits one's exports since it would be cheaper to export and the good becomes more competitive in the international market. Similarly it adversely affects imports.
Recently Brazil made a strong case for the WTO to study the relationship between exchanges rates and international trade, with an oblique reference to China. Brazil's Ambassador to the WTO, Roberto Azeverdo said,
"What we’re looking for, in temporary circumstances, is the effect or the impact that certain currency misalignments may have on particular segments of one country’s economy,” he said today in a phone interview from Geneva. “In the future we may have an agreement on what the problem is, whether this kind of problem needs some kind of remedy, whether we already have the remedy in the WTO agreements.”
Issues of which international institution will deal with this complicated matter have also been raised. the IMF as an international institution deals with exchange rate issues between countries. The WTO needs to engage with the IMF on issues of exchange rate matters. A fairly insightful analysis of the issue was made here. A Congressional Research Service Report on this matter also throws some light on the competing jurisdictions of the IMF and WTO and suggested amendments to the Agreements to address the issue.
Would undervaluation of one's currency and hence helping one's exports amount to export subsidies that are violative of the obligations under the WTO relating to subsidies? Opinions that the issue of alleged currency devaluation of the Chinese Yuan cannot be addressed "legally" in either the fora of the IMF or WTO, but has to be tackled "politically". A very effective piece on this is by Christoph Hermann.
The WTO report is a detailed, comprehensive one and concludes on the issue as follows:
"76. On the issue of the level of exchange rates (misalignments), theoretical and empirical studies over the years show that the relationship between the level of a currency and trade is so multi-faceted and complex that it is hard to take a firm line in any particular direction. Economic theory suggests that when markets are free of distortions, an exchange rate misalignment has no long-run effect on trade flows, as it does not change relative prices. But long-run effects are predicted in models that assume market distortions, such as information problems or product market failures. In the short-run, when some prices in the economy can be sticky, movements in nominal exchange rates can alter relative prices and affect international trade flows. These short-run trade effects, however, are not straightforward, as they are likely to depend on specific characteristics of the economy, including the currency in which domestic producers invoice their products and the structure of trade (for example, the prominence of global production networks). On the empirical side, the complexity of the relationship between exchange rate misalignments and trade yields mixed findings. For instance, a currency undervaluation is sometimes found to have a positive impact on exports, but the presence, size and persistence of these effects are not consistent across different studies."
Does this strengthen China's case? ...