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.

 

 

A currency dispute at the WTO in 2013?

Currency manipulation/undervaluation/misalignment has not yet attained centrality in WTO disputes or discussions except for a proposal made by Brazil at the WTO to take it seriously. There is abundance of legal literature, however, on the WTO compatibility of currency misalignment and the possible course of action under WTO law.The IELP blog  had a blogpost on it recently here. Does currency manipulation violate Article XV(4) GATT (frustrating the intent of GATT provisions) or is it a prohibited subsidy under the ASCM? I have written a paper on this which I will share soon.

The Peterson Institute for International Economics recently had a Policy Brief that highlighted the seriousness of the problem and recommended that a WTO case be brought against the major manipulators. the Policy brief titled "Currency Manipulation, the US Economy, and the Global Economic Order" gives an exhaustive account of what could constitute currency manipulation and contrary to popular belief that a few countries practice it there seems to be evidence that a large number of countries, both developing and developed, practice it.

 Recommending a WTO case, the brief highlights:

"We nevertheless believe that the status quo produces a gaping hole at the heart of the global economic order, that the bifurcation between the monetary and trading systems must be overcome, that the economic costs of inaction on this issue are extremely high during a prolonged period of slow growth and high unemployment such as the present and possibly the foreseeable future, and that multilateral remedies are highly preferable to unilateral actions. Hence we recommend that the United States and its allies bring WTO cases against the most egregious manipulators as part of a broader action program, all of whose other components would be at least arguably compatible with the existing international rules. If they won the case, it would strengthen their hands enormously in prosecuting all their other remedies and would, in a second WTO step to determine permissible remedial action, add to the arsenal of policy instruments available to them. If they lost, it would dramatize the need for reform of the WTO rules themselves and thus almost instantaneously place the issue on the agenda for either a future round or a stand-alone negotiation. Whatever the outcome, the coalition would have made every effort to use the existing rules and institutions and thus demonstrated its fealty to the international system."

While the legal arguments in favor of a WTO action in case of currency misalignment are not that sound, will 2013 see the first dispute settlement case where an undervalued currency is challenged on the grounds that it is violative of GATT or is a prohibited subsidy under the ASCM? Who will take the plunge?