Targeting exchange rates for competitive purposes

While currency undervaluation has not yet caught the imagination of WTO members grappling with multilateral negotiations and it's next chief's selection, the issue continues to simmer in the background. Reports from China and Japan continue to trickle in of concerns and relevance of the debate.

The recent G 20 communique  of April 2013 reaffirms the concern with this statement:

" We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments. We will refrain from competitive devaluation and will not target our exchange rates for competitive purposes, and we will resist all forms of protectionism and keep our markets open. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. Monetary policy should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks. We will be mindful of unintended negative side effects stemming from extended periods of monetary easing."

Targeting exchange rates for competitive purposes - that is what is the issue here. Does it promote exports unfairly? No WTO dispute in sight yet but the kernel is still boiling.

Protectionism - Any end in sight?

Protectionism has been a recurring theme on this blog. In recent times, calls for reducing protectionism have become louder. We saw that at the 8th WTO Ministerial, at the G-20 Meeting in Mexico, BRICS Conference in Delhi recently. While declarations against protectionism have been easy to come by, actual non-protectionist measures on the ground seem to be lacking. Countries declare their resolve against protectionism and renewed faith in a fair, transparent, rule based multilateral trading system but we continue to see disputes centred around "protectionist" and trade restrictive measures. Further, what complicates the matter is what constitutes "protectionism" and the lack of transparency in many measures of countries in terms of the form and intent of their national level programs. The global economic downturn, it is argued, constitutes one of the main causes of protectionist tendencies.

Deputy Director General of the WTO Valentine Rugwabiza recently reiterated the dangers of protectionism here:

"National economic concerns inevitably gain visibility during times of recession and economic uncertainty, and the political will to open markets to foreign goods and services wanes with the escalation of fears regarding job losses and the livelihood of domestic industries.  In such times, the temptation to resort to protectionist measures becomes stronger....

Consider that 3% of world merchandise trade has been lost to trade-restricting measures introduced since 2008.  This is equivalent to the trade of the entire African continent.  It means that despite their repeated pledges to hold back from protectionism, some G-20 nations have continued to introduce new trade-restricting measures and have been slow to remove measures introduced earlier, even though past experience has shown that protectionist measures only make us all worse off by deepening the economic downturn."

Action speaks louder than words? A reading of various proceedings and declarations does give the impression that countries are resolved to fight trade restrictive measures. But are domestic compulsions so high that one doesn't see honest compliance? I had blogged about the gap between words and deeds here.

Another interesting point raised by Valentine Rugwabiza was of "green protectionism". She said:

"In recent years, we have seen a wide range of measures adopted under the green economy banner by both developing and developed countries.  These measures may in some instances impact international trade.  Through its system of rules and transparency mechanisms, the multilateral trading system of the WTO is a uniquely powerful instrument to help minimize the risks of protectionism and trade tensions.

WTO rules seek to achieve a crucial balance:  on the one hand, they support the right of members to take measures to advance legitimate goals such as protection of the environment;  on the other hand, they ensure that such measures are not applied arbitrarily and are not disguised protectionism."

Was this an indirect reference to the EU ETS on aviation as well as the various green subsidies implemented across the world? 

Global Trade Alert in its latest annual report reiterates the general concern on increased protectionism. It has a country comparison of protectionist analysis of measures since 2008 about which Business Beyond the Reef brought my attention to here. Asserting that G-20 is responsible for the bulk of protectionist measures it states:

"What is more, the evidence presented in this report casts doubts on the strength of international restraints on the resort to protectionism by governments, in particular by G20 governments. There are two pieces of compelling evidence here. First, the share of the worldwide totals of protectionism implemented by the G20 countries has risen year-in and year-out. In 2009 sixty per cent of protectionism was implemented by G20 governments—that percentage has risen in the year to date in 2012 to 79%. Findings such as these cast the repeated 

G20 commitments to eschew protectionism in a particularly bad light. Some observers of the G20 have noted that these commitments have been demoted in the respective summit declarations and the GTA’s evidence reveals just how little priority the G20 countries have actually given to maintaining an open world trading system. 

Second, while there has been a sustained increase in the use of trade defence measures since the last G20 summit, resort to the traditional forms of protectionism that are relatively-speaking better regulated by the WTO account never exceeded 42% of measures implemented in any recent year. During the crisis era, then, governments have circumvented tougher WTO rules and used beggarthy-neighbour policies subject to less demanding or no binding multilateral trade rules. Much of that discrimination is pretty non-transparent—that is, it is murky protectionism."

Ways to get over this impasse have been suggested by various proponents to include the completion of a multilateral Trade Facilitation Agreement that helps developing and less developed countries' businesses to take part in a global economy by reducing procedural hindrances and integrating into the world trading system easier. Whether this would reduce protectionism is debatable but the benefits of a Trade Facilitation Agreement are nevertheless undoubtedly welcome.

Protectionism - Fact or Fiction?

In yesterday's post I had depicted the level of protectionist measures in G 20 countries. The focus of the G-20 Summit which recently concluded in Mexico was on a plethora of pressing issues  concerning the global economy I found the declarations on trade, protectionism and WTO, not entirely surprising, but interesting.

The Los Cabos Growth and Jobs Action Plan reaffirmed its resolve against protectionism in a brief reference:

We reaffirm our commitment to resist protectionism in all forms and promote open trade, and will take active measures to reduce the number of WTO inconsistent trade restrictive measures and resist financial protectionism.

The more detailed analysis of the issue of trade, protectionism and multilateral trade was found in G 20 Leaders Declaration after the Summit:

"Trade

26. We are firmly committed to open trade and investment, expanding markets and resisting protectionism in all its forms, which are necessary conditions for sustained global economic recovery, jobs and development. We underline the importance of an open, predictable, rules based, transparent multilateral trading system and are committed to ensure the centrality of the World Trade Organization (WTO).

...

28. We are deeply concerned about rising instances of protectionism around the world. Following up our commitment made in Cannes, we reaffirm our standstill commitment until the end of  2014 with regard to measures affecting trade and investment, and our pledge to roll back any new protectionist measure that may have arisen, including new export restrictions and WTO inconsistent measures to stimulate exports. We also undertake to notify in a timely manner trade and investment restrictive measures....

...

30. In line with the Cannes Communiqué, we stand by the Doha Development Agenda mandate and reaffirm our commitment to pursue fresh, credible approaches to furthering trade negotiations across the board. We will continue to work towards concluding the Doha Round negotiations, including outcomes in specific areas where progress is possible, such as trade facilitation, and other issues of concern for least developed countries. We urge progress  in streamlining WTO accession procedures for the world’s poorest countries.

31. We support strengthening the WTO through improving the way it conducts its regular business, and its dispute settlement system. We also direct our representatives to further discussions on challenges and opportunities for the multilateral trading system in a globalized economy."

The many "positives" from this Declaration:

1. The recognition that rising protectionism is an issue and it needs to be tackled within the multilateral trading system.

2. The reaffirmation of the principles of multilateralism and a rule based, open transparent system which promotes growth and jobs. The fear of reversion to "trade wars" and "tariff wars" seem to be allayed if the declaration is any indication. The severe economic crisis being faced by the major economies has not led to a formal recognition to raise protectionist walls and this was reflected in the tenor of this declaration.

3. A glimmer of hope for the Doha Round and an indication that the "single undertaking" approach may be replaced by a more pragmatic, outcome based approach in areas where progress is possible. The views on the WTO website of Joost Pauwelyn on a five point formula to revive multilateralism which included reconsidering the "single package rule" echoes similar views.

4. Recognition of the importance of transparency and notifications in the WTO. This would enhance the detection of WTO inconsistent measures considerably. Today, there are countries that are extremely transparent in depicting their laws, rules and notification even in terms of access on the internet while others are not so open. A standard of transparency that enhances compliance has to be brought in.

5. The resolve of strengthening of the WTO in the midst of protectionism is encouraging. The G 20 does not see the WTO as a threat to domestic, sovereign decision making even in the face of increasing pressures to turn protectionist. They see the WTO as an ally in an open, multilateral system.The mandate here seems to be to find ways to strengthen the  WTO including the way it would meet challenges of a globalised economy.

However, there are a few concerns in this context. Are these declarations translated into action? We heard similar proclamations after the 8th Ministerial Conference of the WTO but protectionist tendencies did not subside thereafter. Is it easier to proclaim one's allegiance to free trade, reduction of barriers and multilateralism but in actuality practice protectionism? Is it just "politically" correct to stand by multilateral trade rules, reduction in barriers and transparency but extremely difficult to implement? This is compounded by the fact that the interpretation of what constitutes protectionism is highly contested. Countries justify their measures as being non-protectionist and in conformity with WTO rules. It enters into the quagmire of complex judicial interpretation of the labyrinth of WTO rules and dispute settlement. This is often time consuming and ineffective. As disputes proceed, countries continue to have these measures in force. Then, there is the issue of compliance and what constitutes compliance to a decision of the Appellate Body which has decided against a measure. Hence, at times, countries do get away with protectionist measures which are antithetical to WTO obligations.

One would have to wait to see if the spirit of this Declaration translates into credible action.