Sunday, October 27, 2019

Currency misalignment - Barking up the wrong tree?

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Currency manipulation and trade rules have a contentious link. For long the debate has been whether the IMF is the right arbiter of the complex issue of currency manipulation. However, recent bilateral trade negotiations as well as trade narratives have tended to argue that currency manipulation should be covered by strong enforcement mechanisms in trade rules.

I have blogged about it herehere and here. I almost thought there would be a currency dispute at the WTO in 2013!

recent piece by Stephen S.Roach in the Project Syndicate seems to indicate that the push on currency manipulation doesn't seem to be particularly effective.
Promises of a currency agreement are equally suspicious. This is an easy, but unnecessary, add-on to any deal. While the renminbi’s exchange rate against the US dollar has fallen by 11% since the trade war commenced in March 2018, it is up 46% in inflation-adjusted terms against a broad constellation of China’s trading partners since the end of 2004. Like trade, currencies must be assessed from a multilateral perspective to judge whether a country is manipulating its exchange rate to gain an unfair competitive advantage.
 That assessment makes it quite clear that China does not meet the widely accepted criteria for currency manipulation. Its once-outsize current-account surplus has all but disappeared, and there is no evidence of any overt official intervention in foreign-exchange markets. In August, the International Monetary Fund reaffirmed that very conclusion in its so-called Article IV review of China. Although the US Treasury recently deemed China guilty of currency manipulation, this verdict was at odds with the Treasury’s own criteria, and Mnuchin is now hinting that it may be reversed. Far from essential, a new currency agreement is nothing more than a feeble grab for political bragging rights.
While debates about whether currency manipulation and undervaluation do fall under the ambit of trade rules still continue, does reality offer a different picture?

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