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?

WTO dispute settlement and China-US trading relations

The dispute settlement mechanism of the WTO has been hailed as the crown jewel of the multilateral system providing an avenue for trading partners to resolve intricate and complex trade disputes within a rule based system. It is often compared to the more 'political' power based negotiation process wherein relative economic strengths and other factors influence decision making.

A good insight into China-US trading relations in the context of their disputes at the WTO is found in this piece by Ka Zeng which essentially argues how the dispute settlement mechanism of the WTO has averted any major trade war between the two trading superpowers.It has also been used by both the countries effectively to pursue their national interests.

"All this suggests that the WTO DSM has become the primary means for handling politically salient issues for both countries.  If this is the case, the growing utilization of the DSM in the past decade may have helped to channel the tensions surrounding the bilateral trade relationship and prevented intense interest group pressure from impairing overall U.S.-China trade relations. In the absence of the DSM, it is possible that major bilateral trade disputes resulting from China’s ever-growing trade surplus with the U.S. and allegations of the undervaluation of the Chinese currency could have generated far more acrimony and tensions in bilateral economic relations."

Her full article on this interesting aspect of China-U.S trading relations is found here. 

Joseph Stiglitz on trade wars

Joseph Stiglitz writing in the Project Syndicate has shed light on the tension between China and the U.S. on the issue of currency misalignment or manipulation. The U.S. has over the years accused China of deliberately undervaluing its currency in order to boost exports and create a trade surplus. There is a plethora of literature on the issue of currency manipulation and WTO law about which I am not discussing here. Stiglitz's piece titled "No Time for a Trade War" touches upon two aspects that I found relevant: the role of the WTO in curbing the rise of protectionism and the futility of trade wars.

"When the Great Recession began, many worried that protectionism would rear its ugly head. True, G-20 leaders promised that they had learned the lessons of the Great Depression. But 17 of the G-20’s members introduced protectionist measures just months after the first summit in November 2008. The “Buy American” provision in the United States’ stimulus bill got the most attention. Still, protectionism was contained, partly due to the World Trade Organization."

Raising the issue of the futility of a trade war by labeling China as a currency manipulator and risking retaliatory trade measures, he feels that a trade war serves nobody's interests.

"No one wins from a trade war. So America should be wary of igniting one in the midst of an uncertain global recovery – as popular as it might be with politicians whose constituents are justly concerned about high unemployment, and as easy as it is to look for blame elsewhere. Unfortunately, this global crisis was made in America, and America must look inward, not only to revive its economy, but also to prevent a recurrence."

I guess these are points that are quite evident but coming from Stiglitz it definitely requires a mention.