TWN Info Service on WTO and Trade Issues (Dec12/04)
19 December 2012
Third World Network

Brazil tables new paper on exchange rates and trade
Published in SUNS #7474 dated 7 November 2012

Geneva, 6 Nov (Kanaga Raja) -- Brazil has submitted on Monday a new paper on the relationship between exchange rates and international trade, as "one more contribution" to the ongoing debate on this issue in the World Trade Organisation (WTO) since last year.

The communication - in the form of a conceptual note - on "Exchange-Rate Misalignment and Trade Remedies" has been submitted to the Working Group on Trade, Debt and Finance (WGTDF).

At a press briefing at the Brazilian mission here on Monday, noting that the paper is one more contribution by Brazil to a debate that has been underway in the WTO since last year, Ambassador Roberto Azevedo said that the paper will be taken up at the next meeting of the Working Group at the end of this month and that the meeting will be the first opportunity for a "meaningful and in-depth interaction among members" since the March 2012 Seminar on this matter.

(The WTO held a two-day seminar on the relationship between exchange rates and international trade on 27-28 March, with the Chair of the WGTDF concluding at the end of the two-day session that the seminar saw "a healthy diversity of views" and raised awareness on the complexity of the issues. See SUNS #7340 dated 29 March 2012 and SUNS #7341 dated 30 March 2012.)

At his press briefing on Monday, Ambassador Azevedo said that the Brazilian paper attempts to facilitate discussions in the Working Group by focusing on the specific role that the WTO could play in dealing with distortive trade effects of "significant and durable exchange rate movements."

The Brazilian envoy stressed two key points that he said became quite clear from the discussions in the two-day seminar.

First, "the seminar confirmed what we already knew: which was that the relationship between exchange rates and trade and trade flows is quite evident and cannot be denied. In fact, the exchange rate misalignment and volatility tend to also negatively affect investment and production decisions."

Second, he said, "the seminar showed that the WTO is not the forum where we should evaluate the forces and policies that drive exchange rate movements. Neither does it have the jurisdiction nor the expertise for establishing optimal or equilibrium currency levels. In the WTO, exchange rate misalignments and fluctuations should be taken as a given. What is, in fact, under the purview of the WTO, is confronting the trade effects that derive from the currency dynamics."

He also said that both the IMF and the WTO are part of the same post-war international institutional architecture designed at Bretton Woods. They were meant from the start to play complementary and mutually supporting roles.

However, he underlined, "the specific role that the WTO can actually play was not sufficiently discussed in the seminar and is clearly an area that needs further work."

He went on to describe what the new Brazilian communication tries to take up.

First, it takes a historical perspective and looks back on how the GATT/WTO system has dealt with the interplay between exchange rates and trade in the past. It refers to different debates, but also to specific WTO provisions such as Articles II: 6, XV: 4 and XXIII: 1(b) of the GATT 1994.

[Article XXIII: 1(b) is the GATT dispute settlement provision for "non-violation" complaints.]

Second, Ambassador Azevedo said, the paper assesses whether or not the "traditional" WTO trade remedies such as countervailing, anti-dumping and safeguard measures would be appropriate to respond to the trade effects of currency misalignments. It suggests that all of those remedies are inadequate for this purpose.

"This is not surprising given that they were designed to deal with specific situations totally unrelated to currency instability. Therefore, the paper argues that the WTO is ‘systemically ill-equipped to cope with challenges posed by the macro and micro-economic effects of exchange rates on trade,'" he said.

Finally, he added, the submission suggests a non-exhaustive list of parameters that had to be examined "if we were to have a conversation about what kind of mechanism would make sense in dealing with significant and durable currency misalignments."

He cited several of the parameters highlighted in the paper.

First, is the assessment of currency misalignment: when does it exist and what kind of trigger could authorise the use of systemic remedies?

Second, is the timeframe: what would be the appropriate timeframe for the application of trade remedies? What should determine the maximum duration?

Third, is the scope: should the remedies be applied on an MFN (Most Favoured Nation) basis, in other words, on imports from all countries, or on a selective basis, levelling the playing field for imports that benefit from the misalignment?

Fourth, is the coverage: should the remedies be applicable only to a specific product, or could it cover a whole sector or sectors, or even all sectors?

Fifth, is automaticity: should there be a previous investigation to establish the need for the mechanism, for example, degree of distortion, existence of injury etc, or should it be automatically triggered when certain conditions exist?

Sixth, is initiation: who should initiate any action, the sectors or companies that are affected or the government of the country concerned?

Ambassador Azevedo remarked that some observers argue that avoiding currency misalignments or dealing with them is simply about countries doing their homework.

"This is obviously not true," he said, adding that exchange rate levels are also influenced, and often in a more forceful way, by measures and actions taken outside national borders.

"The policy space available to counteract these ‘imported' forces is often limited by macroeconomic constraints. To the extent that domestic policies are not enough, countries should be in a position to offset the damaging effects of extraneous factors destabilising its currency and driving it to anomalous and often artificial levels."

"The WTO is not to enter into the jurisdiction of other international organisations or forums that deal with the adequate levels or equilibrium points for exchange rates. The WTO must be limited to its role of dealing with the trade aftermath of currency dynamics," Ambassador Azevedo added.

He further stressed that the WTO "is not equipped with instruments that were specifically designed to offset negative trade impact of currency misalignments that are durable and significant", as opposed to minor and normal day-to-day short-term oscillations.

"The WTO disciplines do not reflect the reality of floating exchange rates in the financial markets of the XXI century."

"We cannot take a short-sighted approach," he said, adding that in the case of Brazil, for instance, currency levels follow a cyclical behaviour. "So, Brazil would never favour a WTO solution that would be a threat to its exports nearly half the time. Any solution has to be well designed to allow for natural trade flows to continue unhindered. We must seek a solution that is systemically healthy and that makes sense in the long-term."

Finally, he underlined, Brazil hopes that WTO members continue engaging in this debate. "Pretending that we don't have a serious and pressing issue before us is not an option. We believe that a solution for this matter would help to move the agenda of the organisation forward, even in some of the most intractable negotiating areas."

In response to a question, the Brazilian envoy said that what Brazil is looking at is "a kind of mechanism ... which makes sense from a systemic perspective."

What it is looking at are "ways to address abnormal, anomalous, artificial, situations where the regular trade or trade that would be expected to flow normally would continue to flow normally."

"We are only trying to seek remedy for situations where abnormal trade flows and circumstances are happening because of forces which cause exchange rate misalignments," he added.

In response to another question, Ambassador Azevedo said that he hoped that this is a debate that will be illustrative to everyone, including to Brazil, and that "we will decide what to do, and what is best for the organisation, what is best for trade as an outcome of this discussion. Brazil is not walking into this discussion with a ready-made recipe."

He said that Brazil has "vague ideas" about what the mechanism could be. "It doesn't have a definitive solution, a pre-cooked solution." A pre-cooked mechanism is not in the cards, he added.

As to the "vague ideas", he said that it is something that addresses significant and durable exchange rate misalignments.

He further said that today, there is an anomaly (in the markets), elaborating as an example that "the value of the Brazilian Real is an anomaly."

Ambassador Azevedo further stressed that once it has been established that there has been a misalignment of the currency - that the currency fluctuated significantly in a way which is also durable for a certain amount of time and at a certain order of magnitude - then in Brazil's view, the country should be entitled to use a particular mechanism that helps it deal with the trade effects of that change in exchange rate conditions.

For WTO purposes, it does not matter why the (currency) misalignment is there, he said. He explained that currency exchange rates do not respond to domestic measures only or to the situation of one particular country only. By definition, it is at least a bilateral affair.

It is comparing the value of the currency of one country with the value of the currency of another country. "So, you cannot define exchange rate by looking at what one country does alone. It's also influenced by what happens on the other side of the border."

"Now, I think if we go into this line of discussion about deciding what are the reasons why the currency misalignment took place, why is it so high, why is it not so high, then we're getting into a kind of debate that number one, will not take us anywhere because it will be an infinite discussion. And number two, I don't think that the WTO is suited for that... but if you look at it from an objective perspective, there has been a misalignment, then the question is it doesn't matter why that happened," Ambassador Azevedo said.

He noted that there are examples in the WTO, where there is a provision, for example, that allows countries to modify their specific duties (for example, tariffs in the form of a unit of currency per ton) if there is an undervaluation of their currency.

"Now, nobody requires a country to prove or show or make a demonstration about why the currency [is] undervalued, whether that was legitimate or not. The country is automatically entitled to make an adjustment to its specific duties. That's in the rules," he said, further noting that this was decided in the 1980s.

"And we don't have to undertake a thorough examination of why the currency [is] undervalued. There was an undervaluation and the country is entitled by WTO rules to make an adjustment to the specific duties. So why do you need anything more sophisticated now," he asked.

Asked if he has received support from members, Ambassador Azevedo was of the view that all members have taken a very positive attitude. "I'm not saying that everybody likes what Brazil may be suggesting in terms of developing a new mechanism or something like that, or suggesting that a new mechanism could be in the horizon."

He added that it may well be that some countries would rather not talk about it or that some countries would rather say ‘let's do it but not right now. This is not the right time for that. We have other things to deal with'.

"And we disagree. We think this is a pressing issue, this is something that is before us right now and that there is no point in delaying taking a look at this," he said. "Now, whether this is going to move forward or not, speedily or not, I don't know. My gut feeling, probably not. Probably, we're going to have a slow process of discussion and slow process of very gradual convergence over a long period of time."

"But that's the history of the WTO. We always do that. It's always been like this. It doesn't mean that at the end of the road that you don't get a result. It just means you have to be ready for a long and winding road..."

"... What we want is serious engagement, that people look at it and if they don't want to have a mechanism now, they want to have it in the future, they don't want to ever have it, that's fine, but let them say why. Let them explain why..." he added.

Meanwhile, a Brazilian government press release, also issued on Monday, said that the purpose of the paper is to contribute to the work programme on the relationship between exchange rates and international trade, adopted by all members of the WGTDF. The document attempts to better frame the discussions and focus on what role the WTO could play in tackling distortive trade effects provoked by enduring and significant exchange rate misalignments.

According to the release, the latest submission by Brazil recounts how the GATT/WTO system has historically dealt with exchange rate related issues and scrutinises relevant disciplines and remedies found in the current agreements.

"This analysis concludes that existing provisions and mechanisms are inadequate given the degree and type of volatility that afflicts currencies in the XXI century. It finds that the WTO is systemically ill-equipped to cope with the challenges posed by the macro and micro-economic trade effects caused by exchange rate asymmetries."

According to the release, the Brazilian paper therefore invites members to reflect on how the WTO disciplines could be improved and to consider a proper roadmap for future engagement.

"The intimate correlation between exchange rate movements and trade has been amply demonstrated and acknowledged both in specialised literature and in the continuing debate in the WTO. The growing interconnection of financial markets and substantial fluidity of capital flows are an important background for unstable, anomalous, and sometimes artificial currency behaviour," the release said.

"Unlike other international fora, the WTO is not equipped to tackle the fundamental forces and policies that cause those oscillations and misalignments. It is, however, the proper institution to deal with their trade impact," it concluded. +