Saturday, February 23, 2013

Currency undervaluation - Simmering tensions

I have blogged about the issue of currency undervaluation and international trade here and here

Robert Zoellick in a recent piece titled "A New US International Economic Strategy" outlining what he thinks should be the international economic strategy of the US brought to the fore the increasing possibility of currency misalignment as one of the most contentious issues in the coming years for international trade.
"...the extraordinary monetary policies of late, led by the Federal Reserve's continued near-zero interest-rate policy, are taking us into uncharted territory. Central banks have tried most every tool to stimulate growth; if Japan is any warning, the next tactic is competitive devaluation, which risks a new protectionism. "Currency manipulation" could become a danger that reaches far beyond the debate about Chinese policies. The world economy will need at some point to withdraw the drug of cheap money and negative real interest rates. The United States should anticipate these dangers. 
The International Monetary Fund (IMF) also could help set standards about exchange-rate policies and serve as a referee that blows a whistle, even if it cannot penalize. The IMF and the World Trade Organization (WTO) should anticipate this risk and give effect to the existing WTO agreement that economies must "avoid manipulating exchange rates... to gain an unfair competitive advantage."
How can the existing WTO agreement be given "effect" to? Probably by a dispute settlement proceeding? Are we increasingly looking at such a possibility?

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