Sunday, January 27, 2013

Currency undervaluation - 2013's big trade dispute?

I had recently blogged about a possible currency dispute at the WTO. Does currency undervaluation merit a trade remedy? Is it disguised protectionism? Does it unfairly benefit the exports of the country devaluing it's currency? While many have argued that currency undervaluation does not fall under the domain of the multilateral trade regime (the IMF being the right forum), there is considerable literature emerging that a possible WTO action cannot be totally ruled out. Recent moves by Brazil to raise the issue at the Committees of the WTO also underlies the criticality that members view the issue to be.Nevertheless, others argue that there may not be any credible link between undervalued currency and trade flows at all.

This Bloomberg report highlights the growing disquiet within the EU and Russia on the policy of Japan in managing its currency at a low rate. The murmurs are slowly getting louder. While the Chinese renminbi has been the target of undervaluation normally, this time it is the Japanese yen facing the brunt. The Economist and Voxeu had these comments in recent times.

Irrespective of the desirability of managed exchange rates to further one's domestic macro-economic policy agenda, the criticality of currency undervaluation to trade related issues is here to stay. This may manifest itself in increased opposition at the WTO or at dispute settlement proceedings. 2013 may indeed see the initial impact of those murmurs. The implication this has on domestic policy space, monetary policy independence and interpretation of trade rules (in terms of interpreting what constitutes an actionable or prohibited subsidy - currency undervaluation most likely being labelled as a prohibited subsidy under the ASCM or a violation of other GATT/WTO provisions) are questions which have no easy answers.


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