TWN Info Service on WTO and Trade Issues (Apr12/07)
3 April 2012
Third World Network

WTO concludes its debate on exchange rates and trade
Published SUNS #7341 dated 30 March 2012

Geneva, 29 Mar (Kanaga Raja) -- The WTO Working Group on Trade, Debt and Finance on Wednesday concluded its debate on the relationship between exchange rates and international trade, with the working group Chair saying that the two-day seminar saw a "healthy diversity of views" and raised awareness on the complexity of the issues.

The seminar (27-28 March) was held following a request by Brazil for a debate on the issue with a view to better understanding the issues involved and their implications for WTO members.

The question of whether disciplines should be developed with respect to subsidies being provided to the financial services sector that amount to some $1-2 trillion was reportedly not discussed at the two-day seminar.

The seminar was divided into four sessions: a private sector session and a public sector session on 27 March; and an international organisations session and an academic session on 28 March.

Speaking to journalists following the conclusion of the two-day seminar on Wednesday, Ambassador Roberto Azevedo of Brazil said, "We thought it was extremely useful these last two days. [We] learned a lot."

He added that several different perspectives emerged.

"I think one positive thing is that everybody agreed that there is a relationship between trade and exchange rates. I don't think they could reach any other conclusion," he further said.

The question is what kind of relationship it is and how deep it goes, he noted, adding that it varies a lot depending from country to country and from sector to sector.

"So I think that's all expected and our hope is that this will be the basis for the continuation of our conversation, and pretty much every delegation that spoke at the end said that they found it useful to continue this conversation," Ambassador Azevedo said, pointing out that Brazil had said that, as did the United States, the European Union and Japan.

"As far as we are concerned, mission accomplished," said Ambassador Azevedo.

Asked if there had been a discussion to modify the GATT to try to address the concerns that had been raised, the Brazilian envoy said, "That is one possible outcome as far as we see it but we are not at that point yet. We are still framing the discussion that could develop into something where we look at WTO disciplines and how adequate or inadequate they are, and whether we need to evolve. I think that's a subsequent point in the discussions. We're not quite there yet."

In his concluding remarks at the end of the two-day seminar Wednesday evening, the outgoing Chair of the Working Group, Mr Martin Glass of Hong Kong-China, said that the relationship between exchange rates and trade is not a new subject in the WTO, (but) an area of concern since the late 1970s when the Bretton Woods system disappeared. Since then, the trade community has sought greater exchange rate stability.

The last two days have seen a frank exchange of experiences and a healthy diversity of views on the impact of exchange rate volatility and misalignment on trade, he added.

The meeting raised awareness of the complexity of the issues and was held in a constructive spirit. Members are well aware that firstly, exchange rates are part of the WTO external environment and could be seen as an irritant in trading relations, and secondly, that every Member could, at different times, be on either side of the spectrum when it comes to currency values, said the Chair.

In the private sector session, the Chair said that representatives of industry from different countries spelled out the challenges they face in dealing with exchange rate volatility and misalignments. Most participants talked about the challenges facing small and medium sized enterprises.

"Some entrepreneurs emphasized the uncertainty costs associated with volatility, while others focused on the more permanent difficulty of competing with countries which 'benefit' from under-valued exchange rates. Some of these entrepreneurs said that in the absence of adjustment, raising tariffs would be a 'last resort'."

According to the Chair, others said that in a strong currency environment, the solution is to be constantly ahead of the markets in terms of innovation, investment, and training of workers. Companies needed, they said, to have both the best levels of productivity and the best mix of domestic production and imports. The best policies, they maintained, were those which open markets, not close them.

The public sector session discussed the policy challenges involved in dealing with exchange rate misalignments. Many Members acknowledged that erratic exchange rate shifts constrained policy makers because they undermined the perceived level of protection negotiated in the WTO.

"However, they said, trade policy measures were not an appropriate response to non-trade policy concerns. They said governments had to address the root causes of exchange rate misalignments, including the management of monetary policies, the handling of short-term capital flows and the lack of structural reforms in certain countries."

However, the Chair said, countries are bound by other international obligations, including in the IMF, not to oppose the normal adjustment of their exchange rates, which should facilitate the reduction of global imbalances at the international level.

With respect to the third session, the Chair said that international organisations also recalled the relationship between exchange rates and trade was not a two-way street. It came in the wider context of current efforts to rebalance the world economy towards sustainable growth, with a need to "deleverage" in developed economies and be more reliant on domestic demand in emerging economies.

The exchange rate would only be part of the adjustment, and hence a trade policy response to some of these mechanisms was clearly a second or third best answer - if at all, he added.

The session with academics suggested that the exchange rate channel was not the main driver of the recent turnaround of current account and trade balances, partly because exchange rates operate more through financial impact than trade. Exporting firms affected by exchange rate shock will tend to adjust export volumes rather than price, the Chair said.

"On the exchange rate change versus tariff change question, the latter is more influential. But volatility of exchange rates is an important factor influencing firms' decisions."

Cases in which exchange rate policy is directly aimed at exporting more are rare. Should systematic trade policy responses be developed around this problem, is the final question that was dealt with today, the Chair concluded.

According to trade officials, a number of members welcomed the fact that a number of issues had been raised and discussed within the space of the two days. The general feeling was that the whole issue of exchange rates and its relationship to trade is extremely complicated and requires very careful consideration at some length.

Everyone acknowledged that there is some impact of exchange rates on trade, but there is a degree of difference as to how big that impact actually was depending on the circumstances, such as what type of company, what type of product, and what type of tariffs etc.

According to a source close to the two-day discussions, the question of whether specific countries' currencies were deliberately being misaligned provoked a couple of heated exchanges, but by and large the seminar was held in a very positive atmosphere.

There was an exchange between China and the US on people living above their means and the need to save more and spend and consume less. The question of unfair trade practices was raised against China, said the source.

Confirming an exchange between the President of the Exim Bank of China and a US Treasury official during one of the sessions, the source said that it is no secret that the US is concerned about what it perceives is China's policies and the impact that they have on the current account imbalance.

But what was seen over the last two days from a number of speakers is that it is not as simple as that, and that it is a lot more complex, the source added.

According to another source, Venezuela said that the idea of special and differential treatment should apply to macroeconomic policies, and that a country at the level of development like China, which has a lot of needy, should not necessarily have the same currency policy as the US.

On the follow-up after the conclusion of the seminar, it is learned that the issue will go back to the formal meeting of the Working Group, with consultations to be held by the new Chair (Ambassador Hisham Badr of Egypt) with the main actors; on the basis of these consultations, the Chair is expected to convene a meeting of the Working Group to discuss the follow-up to the seminar. +