The prospect of a U.S.-China clash over currency controls next month when the U.S. Treasury Secretary is supposed to pronounce on China’s ‘currency manipulation’ has prompted hyperbolic fears (Martin Wolf, in the FT says he “wonders whether the open global economy is going to survive…”!) and at least two feeble plans.
One is from the IMF, which wants a new mandate—although it admits that’s not really necessary—to undertake explicit multilateral surveillance of Systemic Stability (i.e. imbalances in external accounts). But the Fund does a bad job of justifying its claim for a new role. The Conclusions (on page 12) of the current proposal from the Fund management offer no better reason that that it wants to feel important as the manager of a new ‘peer review’ process. Ho hum!
A much worse idea comes from Arvind Subramaniam in today’s Financial Times. He wants the WTO not only to engage in surveillance but also to enforce the ‘right’ value for currencies.
“The World Trade Organisation is a natural forum for developing new multilateral rules. First, undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs…:”
Even if we accept that there is an equivalence between currency management and trade measures, we have to ask so what? You’d imagine, wouldn’t you, that a trade economist would recall that, in WTO, neither of these trade instruments is necessarily “protectionist” and that neither is illegal (or even deprecated)! This is not much of an argument for WTO intervention.
Second, the WTO has a better record on enforcement of rules. Its dispute settlement system, although not perfect, has been reasonably effective in allowing members to initiate and settle disputes…What is needed is a new rule in the WTO proscribing undervalued exchange rates.
Uh-huh. But does Prof. Subramaniam recall what is needed to add a ‘rule’ to the WTO? If not ‘consensus’ (or ‘explicit consensus’ in the Doha negotiating mandate), then a very strong qualified majority (⅔ of Members according to Article X of the Marakesh Agreement). Furthermore, a new rule adopted by a majority vote applies only to Members that accept it; unless a further another strong majority (¾ of Members) decides to expel any Member that does not accept the new rule.
Now think for a second or two what sort of mess a proposal to penalize persistent trade surpluses would create in WTO. Remember, we’re talking about an Organization that—for the present at least—can’t decide which way is up (in the Doha round), let alone what constitutes an “undervalued exchange rate”
Imagine, too, that horrible wrangle ending up in a majority vote on the new rule, which will inevitably be aimed at China and possibly Germany. But will also potentially hit a lot of others; Thailand and Vietnam, for example. What we have here is a recipe for a hecatomb of the WTO.
The IMF would continue to be the sole forum for broad exchange rate surveillance. But in those rare instances of substantial and persistent undervaluation, we envisage a more effective delineation of responsibility, with the IMF continuing to play a technical role in assessing when a country’s exchange rate was undervalued, and the WTO assuming the enforcement role.” Extract from FT.com / Comment / Opinion – The weak renminbi is not just America’s problem
Fat chance! Even if the IMF could actually discover the ‘correct’ international price of a currency, the WTO would break if tasked with enforcing it.