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?

More research on exchange rate mainpulation

For those following the currency exchange manipulation debate, a recent Congressional Research Study (CRS) analyses some of the important issues involved. Pointing out the debate on possible intervention in the WTO, the author states:

"Given the relationship between exchange rates and trade, some have argued that the World Trade Organization (WTO) has a role to play in responding to currency disputes. Some analysts and lawyers have examined whether WTO provisions allow for recourse against countries that are unfairly undervaluing its currency. 

One aspect of the debate is whether WTO agreement on export subsidies applies to countries with undervalued currencies. The WTO Agreement on Subsidies and Countervailing Measures specifies that countries may not provide subsidies to help promote their national exports, and countries are entitled to levy countervailing duties on imported products that receive subsidies from their national government. Some economists maintain that an undervalued currency lowers a firm’s cost of production relative to world prices and therefore helps encourage exports. Some argue, then, that an undervalued currency should count as an export subsidy. It is not clear, however, whether intentional undervaluation of a country's currency is an export subsidy under the WTO's specific definition of the term, and thus is eligible for recourse through countervailing duties under WTO agreements. For example, the subsidy must be, among other things, specific to an industry and not provided generally to all producers. There is debate over whether intentional undervaluation of a currency is “industry specific” because it applies to everyone.  

Another aspect of the debate relates to a provision in the GATT (the WTO agreement on international trade in goods), which states that member countries “shall not, by exchange action, frustrate intent of the provisions” of the agreement.Some analysts argue that policies to undervalue a currency are protectionist policies, and thus should count as an exchange rate action that frustrates the intent of the GATT. Others argue that the language is too vague to apply to undervalued currencies. Specifically, they argue that the language was written to apply to an international system of exchange rates that no longer exists (the system of fixed exchange rates, combined with capital controls, that prevailed from the end of World War II to the early 1970s).  

No dispute over exchange rates has been brought before the WTO, and whether currency disputes fall under the WTO's jurisdiction remains a contested issue."

I have blogged on this quite a bit. For the moment, there seems to be no immediate appetite for a WTO intervention, either at the negotiating table or at dispute settlement. However, one can never rule out possibilities in international law and politics.

Currency issues in regional trade deals?

For those following the currency manipulation debate in international trade, a recent WSJ piece may seem interesting where the issue of provisions seeking to address the issue of currency manipulation in trade agreements was discussed.

I have blogged about it here, here and here. 

A possible entry of provisions relating to currency manipulation in regional deals?

Currency Reform Bill gains ground?

Is the Currency undervaluation and trade debate going to take centre stage again? I have blogged about it here, here and here.

Trade Reform has this interesting take:

"Because of your emails to Congress, we are now at a new high of 106 co sponsors to the House currency manipulation bill (HR 1276 - Currency Reform for Fair Trade Act).  We’re getting closer."

A distinct possibility? What impact would this move have on proposals at the WTO regarding currency misalignment and trade?

Currency manipulation and trade agreements

In trade policy circles currency manipulation, undervaluation as well as exchange rate mismanagement are not strictly seen as issues that are to be dealt by the multilateral trading system, especially the WTO.I have blogged about it here, here and here. 

I was struck by this Reuters report of currency manipulation issues making its way into regional trade agreement negotiations.

"Nearly 200 U.S. lawmakers have signed a letter urging President Barack Obama to insist on new rules against currency manipulation in a proposed trade agreement with Japan and 10 other countries in the Asia-Pacific region. 

"As the United States continues to negotiate the Trans-Pacific Partnership, it is imperative that the agreement address currency manipulation," the letter said, according to a copy obtained by Reuters on Thursday."

Currency issues gradually making their way into international trade law and policy?

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.  

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.

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.

Vera Thorstensen on currency manipulation and world trade

I have written about the growing significance of the currency question in international trade law here, here, here and here. Though there does not seem to be any immediate dispute at the WTO around this critical issue, Vera Thorstensen and others have summarised the issues in this CUTS paper. Titled "Trade and Exchange Rates: Effects of Exchange Rate Misalignments on Tariffs" the paper argues that the WTO must play a more active role in addressing the concerns that a devalued or manipulated currency could adversely impact a country's rights under the international trading system. 

Persistent exchange-rate misalignments cannot but create potentially infinite variations of market-access conditions among WTO members. This situation is directly the opposite of what the multilateral system sought with the establishment of the MFN principle, that aimed to assure that no particular country would have a commercial advantage in its trade with another contracting party, which otherwise could raise tensions and divert trade

The effects of misalignments are also distorting many other rules and instruments negotiated under the WTO, such as antidumping, subsidies, safeguards, rules of origin, GATT articles I, II, III, and XXIV. 

The WTO can no longer ignore what is happening behind its magnificent structure of complex trade rules. The persistence of opposite exchange-rate misalignments, of countries with overvalued currencies and others with undervalued ones, for long periods is eroding the objectives of the rules-based multilateral trading system.

The core principles of WTO construction - transparency, predictability and confidence - are under question. The strengthening of trade rules, with the negotiation of instruments to neutralise the effects of exchange rates, is fundamental to the existence of the WTO. Otherwise, the WTO might become a diplomatic-juridical fiction - void of economic reality. 

Historically currency exchange issues have been dealt with by by the IMF and this jurisdictional barrier has kept the WTO from intervening. Will the WTO members allow this topic to gain centre stage at the multilateral body? Will Brazil's submissions be discussed in more detail at the Committees of the WTO? Will a dispute settlement case be initiated by a WTO member against a persistent manipulator of currency? How will the Panel and Appellate Body react? Will ti get included in future trade negotiation rounds as an addendum? Is the situation as serious as made out to be that the WTO would become void of economic reality if it does not recognize and address the issue of widespread currency manipulation? What impact does this have on domestic policy space, multilateral rules and barriers to international trade?

The complexity of currency manipulation

A few days ago I had blogged about the possibility of a trade dispute around currency undervaluation to probably be the biggest one in 2013. Though no clear signs of a dispute brewing are evident, murmurs are gradually getting louder on the extent currency manipulation can impact trade. Recent news reports found here and here highlight the growing trend of currency devaluation as a national policy tool. 

This latest Project Syndicate piece titled "Beggar Thy Currency or Thyself" highlights the growing complexity and concern of intentional currency devaluation to serve national agendas.

"In today’s world, no significant group of countries is looking for currency strength. Some resist appreciation actively and openly; others do so in a less visible manner. Only the eurozone seems to accept being on the receiving end of other countries’ actions. 

None of this is unprecedented, and there is a lot of scholarship demonstrating why such beggar-thy-neighbor approaches result in bad collective outcomes. Indeed, multilateral agreements are in place to minimize this risk, including at the International Monetary Fund and the World Trade Organization. 

Yet, when push comes to shove, country after country is being dragged into abetting a potentially harmful outcome for the global economy as a whole. Worse, this process has not yet registered seriously on the multilateral policy agenda."

The Economist had this to say on the issue of currency undervaluation in a piece many months ago:

" Having spent much of the past year fretting about their currencies' rise, central banks across the emerging world have now intervened in the markets to slow their currencies' fall. In a currency war, where each side fights to gain competitiveness against the others, these tumbling exchange rates presumably count as victories. But they are Pyrrhic. A cheaper real, zloty and rupee will help emerging economies win a bigger share of global spending, but that is small consolation if global spending declines.

The complexity, increasing usage and inevitability of currency manipulations make it central to the debate in the coming years. Questions about what actually constitutes currency undervaluation in the context of trade agreements, what impact it has on national policy making independence as well as the impact it has on trade continue to have many unanswered ends. To what extent countries understand the complexity and engage with the problem is an entirely different question.Will the WTO be the forum for this dialogue?