Peter Gallagher

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.