Abstract
Two aspects of global imbalances - undervalued exchange rates and sovereign wealth funds (SWFs - require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund (IMF) has not been effective in dealing with undervalued exchange rates. We propose new rules in the World Trade Organization (WTO) to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The WTO would not be involved in exchange rate management, and our proposals do not entail the WTO displacing the IMF: Rather, they would harness the comparative advantage of the two institutions, with the IMF providing the essential technical expertise in the WTO enforcement process. On SWFs, there is a bargain to be struck between countries with SWFs, which want secure and liberal access for their capital, and capital-importing countries that have concerns about the objectives and operations of SWFs. The WTO is the natural place to strike this bargain. Its services agreement, the General Agreement on Trade in Services (GATS), already covers investments by SWFs, and other agreements offer a precedent for designing disciplines for SWFs. Placing exchange rates and SWFs on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups, many of whom are currently disengaged from the round.
Highlights
In the protracted Doha Round of multilateral trade negotiations of the World Trade Organization (WTO), countless negotiating hours have been expended on realizing outcomes in agriculture and manufacturing that would have minimal trade effects
The argument proceeds in three steps: Why is there a role for the WTO in dealing with undervalued exchange rates? Why is the International Monetary Fund (IMF), the natural forum for discussions on exchange rates, not effective on its own? And, what should be the contents of new rules on exchange rates in the WTO?
We argue that (1) exchange rates have serious trade consequences and unlike trade interventions, which are being phased out all over the world, episodes of undervaluation are likely to recur; (2) the Fund, the natural forum for regulating exchange rates, has abdicated its responsibility and is unlikely—for political reasons and its own traditions—to be able to remedy this; (3) the WTO could possibly fill this gap by creating new rules on exchange rates to parallel those on export subsidies and import taxes; and (4) these rules—as many others on trade—could become the subject of disputes in the WTO, with the Fund providing inputs on technical matters as it has in relation to trade restrictions for balance of payments (BOP) reasons
Summary
In the protracted Doha Round of multilateral trade negotiations of the World Trade Organization (WTO), countless negotiating hours have been expended on realizing outcomes in agriculture and manufacturing that would have minimal trade effects. Between end-2001 and July 2007, real oil prices increased by about 250 percent During this period, five of the eight countries (the United Arab Emirates, Kuwait, Saudi Arabia, Bahrain, and Venezuela) have seen their real exchange rate depreciate by about 20 percent on average. We argue that the WTO could reenergize multilateral trade negotiations by expanding the bargaining space in a manner that offers opportunities for all groups of countries All, addressing these new issues could rekindle serious private-sector interest in the WTO system, the absence of which has immobilized and derailed the Doha Round. Oil exporters are not major suppliers of goods and services to other countries Their undervaluation operates by reducing their imports, leading to a loss of export opportunities for trading partners.
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