Currency manipulation issues in trade agreements - To be or not to be?

Fred Bergsten's latest Peterson Institute's Policy Brief titled "Addressing Currency Manipulation through Trade Agreements" arguing for currency issues to be taken up in regional trade agreements is found here.

For a contrarian view, that currency manipulation issues should not find place in trade agreements, read this piece in Mireya Solis in the Brookings Institution blog.

"For the many reasons highlighted above, TPP countries are unlikely to agree that the current proposals in the United States on currency manipulation are a faithful interpretation of the IMF principles to which they already subscribe. Demanding that American trade negotiators introduce such a chapter at this critical stage in the negotiation process is akin to throwing a wrench in the works of the single most important trade initiative under way: one that will determine whether the United States is a key actor in shaping an Asian regional economic architecture or not, and one that will also affect the fate of negotiations with Europe. It would also mean that the United States is prepared to forego the possibility of a future Chinese entry into the TPP and give up the sizable benefits of promoting greater market reform, regulatory transparency, and compliance with intellectual property rules, to name just a few. All of this, for the sake of an unworkable proposal on currency manipulation."

Currency manipulation provisions in trade agreements - Imminently feasible or unreasonably optimistic?

The latest on Hyperglobalisation

Arvind Subramanian and Martin Kessler's latest piece titled "Hyperglobalisation of Trade and Its Future" on globalisation and the way forward looks like an exhaustive account of the present nature of globalisation. A must read for a comprehensive account.

It highlighted 7 important ingredients of present day globalisation:

•   hyperglobalization (the rapid rise in trade integration)
  
  
•   the dematerialization of globalization (the importance of services)
  
  
•   democratic globalization (the widespread embrace of openness)
  
  
•   criss-crossing globalization (the similarity of North-to-South trade and investment flows with flows in the other direction)
  
  
•   the rise of a mega-trader (China), the first since Imperial Britain
  
  
•   the proliferation of regional trade agreements and the imminence of mega-regional ones
  
  
•   the decline of barriers to trade in goods but the continued existence of high barriers to trade in services.

The piece has a bit about undervaluation and trade, an issue I have touched upon constantly in this blog.

"Currency wars or the resulting global imbalances are a systemic problem only if one or a few large countries pursue them. The possibility of collective action to prevent them must take account of this reality. 

Exchange rates and foreign exchange intervention are centrally implicated in mercantilism. The international monetary system, under the auspices of the IMF, is therefore the best forum in which to find a solution. The prospects for any serious reform remain slim, however, because of the inherent limits to international monetary cooperation."

A trade dispute, perhaps, will find a solution? My dear friend, Gulzar, had earlier commented on this issue thus:

"If forex mkt policies have to be regulated, by WTO or some other agency, then what form should it take? 

I am asking this because, unlike directly trade related issues like tariffs etc, exchange rate policies are very closely inter-twined with monetary policy and policies that regulate external capital flows (the impossible trinity). these three form the three pillars of any macroeconomic stabilization policy that open economies follow.  

Regulating one, would effectively (in a very direct sense) mean regulating the other two. it is a very small distance for us to be talking about regulating monetary policy itself. we need to remember that currency devaluations (which by definition has a beggar-thy-neighbour dimension) have been a commonly used critical policy instrument for regaining external competitiveness by countries. in fact, the biggest criticism of the eurozone experiment is that it denied countries the flexibility to devalue their way out of a sovereign debt and external competitiveness crisis. 

By the same logic, we should be arguing even more vehemently about regulating monetary policy itself, since the extraordinary monetary accommodation that the developed economies have been following for the past five years has done much more damage to the world economy (it has had strongly destabilising influence on emerging markets) than anything in the forex markets..."

No readymade answers on this one, but more food for thought. 

  

Currency wars - When will the bell toll?

Currency manipulation has been a subject of this blog for sometime. I have written about it here, here and here.

For those following the currency wars debate in international economic law and policy, this lecture by Fred Bergsten is quite illuminating. Giving an exhaustive account of an US perception of the currency undervaluation issue "Currency Wars, the Economy of the United States and reform of the International Monetary System" offers, inter alia, some approaches to address the issue:

"Two changes should also be made in the rules of the WTO. The simpler would be to explicitly add “manipulated currency undervaluation” to the list of proscribed export subsidies against which countervailing duties can be levied by member countries. This could be quite potent if a “coalition of the injured” then used the new authorization to countervail in a variety of their sectors that are injured by the manipulation. 

The second, and potentially even more significant, change would be to amend or re- interpret Article 15(4) to clarify that manipulated undervaluation by individual countries justifies the erection of across-the-board barriers against their exports by all members of the organization that choose to do so (Mattoo and Subramanian 2008). As under its current rules, the WTO would under both remedies first ask the IMF for a judgment as to whether a currency is “undervalued” and “manipulated” and then apply its own standards to the trade measures that were proposed in response.  

These changes could be made either through amendment of the charter or (more likely) via developing a consensus on the issue.The latter approach, following standard WTO practice, could be achieved initially by a plurilateral group that fell short of the full membership of the organization as laid out in detail by my colleagues Gary Hufbauer and Jeffrey Schott. Another tactic would be to begin including such mechanisms in bilateral or regional trade agreements, rather than or in addition to the WTO itself, that would suspend the benefits of the agreement to countries that were found to be manipulating their currencies; the United States should seek to add such chapters to the TransPacific Partnership, which already includes several current and former manipulators, and the Transatlantic Trade and Investment Partnership, where the negotiating agenda is still to be determined and the participating countries are more like- minded."

Are we seeing a trend of increasing calls to address the currency issue within the WTO framework? Are we going to see this discussion more in bilateral or regional trade agreement negotiations?

Thank you Vera Thorstensen for bringing this piece to my notice.

 

 

Peterson Institute discussion on currency exchange rate manipulation

For those interested in the currency exchange rate manipulation issue and its relation to trade rules, Peterson Institute held a conference in April 2013. Leading scholars who have contributed  in this field were present. The economic and legal aspects of the currency debate were prominently discussed.

The video links of the Panel discussions are found here, here and here.  

Multilateral action and currency manipulation

A recent op-ed carried in the Peterson Institute for International Economics website by Robert Zoellick in the context of the next WTO chief raises 5 agenda items for the new DG to address. While I am not dwelling into all of them, the last one struck me as particularly interesting:

"Finally, will you agree to launch a discussion with the International Monetary Fund (IMF) about the application of the existing WTO and IMF rules requiring that exchange rates shall not be manipulated to gain unfair trade advantage? Given the extraordinary monetary policies spawned by the financial crisis—and the risks of competitive devaluations of currencies—multilateral bodies should not abdicate responsibility on these questions. If multilateralism fails, unilateralism may prevail. Brazil has already urged the WTO to discuss these questions."

I have blogged about the issue of currency manipulation and WTO rules compatibility here, here, here and here. Is this gradually finding its way to the centre stage in the discourse in international trade law and policy? What are the implications of this for monetary policy domestic space, interpretation of international trade rules and jurisdiction of international institutions? Complex questions with no easy answers.

Regionalization vs. Globalization

An interesting Working Paper titled "Regionalization vs. Globalization" comes to the conclusion that the importance of the regionalisation of business cycles in a globalized world should not be underestimated.

"We have analyzed the evolution of global and regional business cycles over the past five decades. Our results indicate that regional business cycles have increasingly become more pronounced especially in regions where intra-regional trade and financial linkages have registered rapid growth since the mid-1980s. In particular, the regional factor has explained a larger fraction of business cycle variation in the North American, European, Oceanian, and Asian regions over the past twenty-five years. Surprisingly, the importance of global factor has declined over time. The total contribution of common factors (global and regional) has not registered a significant change implying that there has been no change in the degree of international business cycle synchronicity during the past quarter century. 

These results present a different interpretation of the impact of globalization on the synchronization of business cycles. Most commentators argue that globalization of trade and financial linkages have led to the globalization of business cycles as well. Contrary to these popular arguments, regional factors, rather than global ones, have become the driving forces of business cycles during the recent era of globalization. This has led to the emergence of regional business cycles.

A wide range of developments at the regional level can explain the emergence of regional cycles. For example, the dramatic increase in intra-regional trade and financial flows fueled by regional integration initiatives can promote a higher degree of business cycle synchronization across countries in a region. Regional business cycles can also emerge because of the prominent role of region-specific shocks driven by the implementation of similar policies in a region. Moreover, cross-border spillovers of disturbances originating in a large country in a region can translate into more synchronized national business cycles in that region."

I am not an expert in trade policy but I found this paper interesting since it highlighted the complex nature of globalization as well as the multiple factors impacting it. 

 

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?