The ideation of currency manipulation

A paper that goes beyond the roles of the WTO, IMF and determination fo what constitutes currency manipualton is Caitlin Conyers "The Ideational Dimension of Currency Manipulation" which charts the boundaries of the roles of the WTO and IMF, the complexity of defining what currency msalignment really is and what are the underlying motivations for the debate to come to the foreground as a trade barrier.

The paper touches upon the jurisdictional limits of the IMF, WTO to address currency manipulation, the attempts so far to address teh issue and what is in store in terms of international norm setting with mega trade deals. 

The paper would need to be revisited in the context of the countervailing steps being taken now, the strengthening of the Treasury Reports on currency manipulation as well as formalisation of legal rules in mega-regionals as a standard for the debate.

Interesting read nevertheless.

Countervailing action and currency manipulation - Has the dice been rolled?

Just when I thought currency manipulation was off the radar, this PIIE opinion by Joseph Gagnon re-emphasizes the danger of currency manipulation and how little the world is doing to address the probelm.The strong view that countries are manipulating currencies to encourage exports and disincentivize imports seems to be derived from foreign exchange interventions.

When countries have more than adequate levels of foreign exchange reserves, the only purpose of acquiring further reserves is to hold down the exchange value of the domestic currency. The reason to do that is to maintain competitive prices for one's exports and prevent a flood of imports. For countries that already have an excessive trade surplus, such behavior constitutes currency manipulation. The US current account deficit widened by $166 billion in 2020; a significant fraction of that widening is likely attributable to the increase in foreign currency manipulation last year.

Fred Bergsten and Gagnon have written an entire book on it titled "Currency Conflict and Trade Policy: A New Strategy for the United States" which argues for more decisive action against currency manipulation. In conclusion, apart from a series of strategies recommended, the authors suggested the countervailing of currency manipulation.

The recent countervailing action against Vietnam on the grounds that it's currency is undervalued and is subsidizing exports has been reported here and here. A more detailed Congressional Reserach Study report on countervailing duties and currency manipulation is found here.

Has the dice been rolled?

Currency manipulation - warning bells ringing?

Currency manipulation and trade law have often crossed paths but have never created a huge storm in terms of being n the agenda either in the ngotiating space or in the judicial fora of a panel proceedings or now defunct Appellate Body.

I have blogged about the issue pretty often over the years - here, here, here and here. My more detailed paper on the issue (has to be updated I admit) is here.

hat caught my attention this time was a piece in the The Mint by Daniel Moss stating that one must not underestimate the threat of currency undervaluation and the impending action against it. However, the piece does admit that the present steps against currency manipulation hardly proves to be a disincentive for currency manipulators.

Why is this? That is because there is still no clarity on what constitutes currency manipulaton for benefiting once exports or to take advantage in trade. A recent Congressional Research Study paper in 2020 on currency manipulation has asked some of the right questions fo rwhich there are no eay answers:

The United States has deep and liquid foreign exchange and capital markets, and trillions of dollars are exchanged for foreign currencies daily. To what extent can other countries successfully lower the value of their currency relative to the dollar? 

Many economic policies can impact exchange rate levels. Is it possible to differentiate currency manipulation from “legitimate” economic policies? 

Even though U.S. producers generally find it harder to compete when other countries have weak currencies, U.S. consumers generally benefit from less expensive imports. What are the net effects of currency manipulation on the U.S. economy? 

In addition to U.S. commitments on currency at the IMF and the G-7/G-20, U.S. laws and regulations contain multiple definitions of currency manipulation. Is the United States sending a clear signal to its trading partners about what constitutes currency manipulation and what the consequences are? 

Does a unilateral approach help the United States gain traction on currency issues? What are the retaliatory risks? Should the IMF play a stronger role in resolving currency disputes? 

 Are trade agreements an effective tool for addressing currency issues? Should currency manipulation be addressed if Congress renews TPA in 2021?

These questions have been at the heart of the debate of the intersection between currency manipulation and international trade law. The issue of currency manipulation and the consequences of it keeps arising due to the semi-annual US Treasury report on macro-economic and foreign exchange policies of its major trading partners. The Report is a detailed analysis of whether a trading partner who satisfies the three conditions (significant bilateral trade surplus, material current account surplus and persistent one-sided intervention in the foreign exchange market) is manipulating currency for trade. Another interesting aspect of the report was the varying degrees countries employ in publishing data on their foreign exchange interventions - some are open about it while for others it is shrouded in secrecy. Some of the recent trade agreements have tried to address this issue with the transparency clause on foreign exchange interventions.

The debate would perhaps continue - but was is evident that there is more scrutiny and discussion on this issue. Though multilaterally we have not seen any appeal for this issue to be taken up as a negotiating agenda, it may be sooner than later when CVD are imposed and the measure challened at the WTO. Who would bite the bait first is the issue.

What next for the negotiating agenda?

The future of the WTO's role in the present trade and investment norm setting has often been a subkect of intense debate amongst trade law aficionados. Will it be relevant n the context of 21st century business realities? Can it match up to the pace of change in global value chains and technology? Can the 160-odd members strike a consensus at all. Will there be more multilateral trade deals in this era of nationalist, populist policies? What would come out of the Appellate Body impasse and the politicozation of the crown jewel of the WTO?

Petros C. Mavroidis seeks to answer some of these challenging questions in an interesting article in the The Journal of World Investment and Trade titled "Who's Minding the Store?" referring to the collapse of the decision making function of the WTO and what needs to be done.

On the need to revitalise the negotiating function in the WTO to ensure rule-making is brought back to track, he states:

One thing is clear: unless the legislative function of the WTO has been revitalized, any improvements in the judiciary risk being of marginal value. We risk rearranging the furniture on the deck of the Titanic, doing nothing to divert the ship from its course and the consequential direct collision with the iceberg.

What is striking is perhaps, there is no longer "two to tango" in the context of the US and EU setting the agenda at the WTO. In a multipolar world, emerging economies have begun seeking a voice tempered by domestic pressures and constituencies.Rule takers are seeking to be rule shapers if not rule makers.

Up to the Uruguay round, the old two-step would do: as long as the European Union and the United States shared a worldview, and were dancing in the same direction, the world trading community would follow. It is not the case anymore. We have now moved to a multi-polar world. Voices are multiplying, and worse diversifying. We are experiencing a cacophony when a single tune is required. This is no cakewalk, but one key piece of the jigsaw puzzle seems to be abandoning its previous centrifugal tendency and moving towards the orbit in a centripetal manner this time...

So what should the agenda for reform at the WTO be? Low-hanging fruit to set negotiations rolling or deep, festering issues that require closure? Who sets the agenda to be taken forward? What coalitions will emerge and what power play will set the agenda? How do members see the WTO in terms of their national interest as well as the global community.

The question is not whether WTO requires a negotiating agenda and rule making back on track - the question rather is what that agenda would be and who would be the one's pushing for it. 

Joint Interpretative statements - another tool in the ISDS saga?

Several years ago I had read the book by Lauge Skovgaard titled "Bounded Rationality and Economic Diplomacy" where he highlights how developing country governments underestimated the risks of bilateral investment treaties in the 1960s and 70s.I would recommend the book to all those on either side of the ISDS debate to read.

Much water has flown since then and there has been a major churning in the investment arbitration regime worldwide - both developing and developed countries are having a relook at their fundamental approaches to investment treaties as well as ISDS. Most of the approaches have tended to focus on how new treaties should be crafted and how state regulatory power must be balanced with investor rights. Some approaches like the Brazilian model have rejected ISDS completely. The EU approach is to soften the ISDS blow with an appellate mechanism. However, all these have a common trait - new treaty negotiations.

Lauge Skovgaard and George Gertz in this succinct paper titled "Reforming the investment treaty regime - A backward looking approach" ask the inevitable question - the new treaty approach does not take away the survival clauses in most of the existing treaties - which means the flaws in the current system is still available for investment claims for years to come. So while new approaches (like the model Indian BIT or the Brazilian CIFAs) chart out a path for the future, claims under existing treaties continue to be a threat.

They then suggest that the best way to tackle this threat is through the concept of join interpretative statements by treaty parties as to the scope and intent of the existing provision. This could clarify some of the existing ambiguity as well as provide some succour against unfair ISDS claims.

There is, however, a third option available to states, which could be a cheaper and quicker alternative – or at least a complement – to termination and renegotiation: the use of interpretative statements by governments. Under international law, states have the right to constrain how international adjudicators interpret treaties, including after the treaties have been ratified. The Vienna Convention on the Law of Treaties requires tribunals to take such statements into account, and in recent years a number of domestic courts have affirmed the status of interpretative statements as well. The effects are greatest when statements are made by both (or all) treaty parties. State interpretative statements provide a viable way for governments to bring their concerns, already clearly expressed when discussing new investment treaties, to the far more important world of existing treaties without going through the pains of terminations or renegotiations.

However, the road to joint interpretative statements are not easy for many reasons. First, there is not much experience in doing so post the treaty signing.Developing countries do not have much capacity to engage in treaty management - they do manage to sign of treaties but to engage as per the treaty terms on a continual basis is a serious capacity issue. Second, agreeing on a joint statement on FET or scope of investment or the right to regulate is not an easy affair. Third, what if joint statements "amend" the scope of the existing provisions - how wuld arbitral tribunals react?

However, the paper does bring out an important point - the need to explore this avenue, chart out a roadmap to engage on tthese lines as well as prepare a set of join interpretative statements that could see the light of the day.