TWN Info Service on WTO and Trade Issues (May11/09)
20 May 2011
Third World Network

Brazilian proposal on exchange rates discussed at WTO
Published in SUNS #7148 dated 12 May 2011

Geneva, 11 May (Kanaga Raja) -- The WTO Working Group on Trade, Debt and Finance (WGTDF) this week discussed for the first time the relationship between exchange rates and international trade. The discussion was on a proposal tabled by Brazil for a two-pillared work programme on this subject.

In its submission, Brazil said that what it has proposed is essentially a debate with a view to better understanding the issues involved and their implications for members of the World Trade Organization (WTO).

According to trade officials, the Working Group, which met on 10 May, gave general support to the thrust of the Brazilian proposal.

According to the Brazilian proposal (WT/WGTDF/W/53, dated 13 April 2011), the international debate on the relationship between exchange rates and international trade is not a new one. It was a key component, for example, in the design of the Bretton Woods architecture of international institutions.

"The issue," Brazil said, "has gained momentum again lately. Responses to the financial and economic crisis of 2008/09 have included the adoption, by a vast number of countries, of largely similar fiscal expansionist measures coupled with the lowering of interest rates. Yet, differently calibrated mixes of monetary and fiscal policy instruments have caused relative exchange rates among major trading partners to fluctuate frequently, with potentially different long-term impacts on their respective trade balances."

Brazil noted that concern over the effects of exchange rate movements has been voiced by leaders and senior officials of several countries over the past few years.

In this context, it said that the Seoul G-20 Summit Declaration, for example, has committed member countries to "undertake macro-economic policies, including fiscal consolidation where necessary, to ensure on-going recovery and sustainable growth, in particular moving toward more market-determined exchange rate systems, enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies".

However, Brazil underlined, the more specific macroeconomic dynamics between exchange rate and foreign trade is an issue that is yet to be better understood and addressed in international forums, against the background of the international crisis triggered in 2008.

"The time has come to do so in an institutional and structured way. There can be arguably no better locus for that exercise than the WTO Working Group on Trade, Debt and Finance (WGTDF) that was created by the Doha Ministerial Declaration," it added.

Brazil has proposed that the work programme of the WGTDF on this matter be "divided into two main pillars: a) an economic approach based on academic research and concrete experience; and b) an institutional approach."

With respect to the first pillar ("Pillar A") on an economic approach based on theory and real case studies, Brazil said that no one would deny that exchange rates do influence, in some cases significantly, the foreign trade performance of any given country. That is why political leaders in countries of very different economic realities are often urged to take actions aimed at either appreciating or devaluing the currency, depending on circumstances.

Paradoxically, Brazil noted, the case for establishing (or alternatively, for denying) an unequivocal link between exchange rates and trade seems not to be a trivial one from the perspective of economic theory, as revealed by a quick glance at a review of relevant economic literature that was undertaken at the request of the WGTDF itself in 2002 (WT/WGTD/W/4), in the wake of the financial crises in the 1990s.

According to the Brazilian proposal, a debate that throws light on these different and occasionally conflicting perspectives on the relationship between exchange rates and trade might address the following questions: What does economic theory say about the effect on trade of currency misalignments as opposed to short-term fluctuations in exchange rates? Or, alternatively, do concrete experiences or case studies of WTO members provide any clear evidence on the trade implications of exchange-rate policy?

Brazil proposed the following activities for the WGTDF, as examples, under this pillar:

-- Requesting the Secretariat to prepare an updated review of available literature and research, particularly in the light of the crisis that started in 2008. The Secretariat should consult Members on any literature that they may wish to indicate;

-- Undertaking, in one of the sessions of the WGTDF, a dedicated workshop with the participation of selected economists, as agreed by Members;

-- Sharing of concrete experiences and case studies by WTO member countries, on a voluntary basis, in the form of presentations at the WGTDF sessions, ideally made by capital-based senior officials who are directly responsible for policy making;

-- Commissioning of any study or discussion paper that the WGTDF might consider to be useful as an input into the debate.

As regards the second pillar ("Pillar B") on looking into global coherence of international trade and financial policies and related global governance matters, the Brazilian proposal says that the mandate of the WTO in connection with promoting greater coherence in global economic policy-making dates back to the Uruguay Round.

Brazil noted that the relevant Declaration in the Marrakesh Final Act states that "greater exchange rate stability, based on more orderly underlying economic and financial conditions, should contribute towards the expansion of trade..."

The Declaration further states that "the inter-linkages between the different aspects of economic policy require that the international institutions with responsibilities in each of these areas follow consistent and mutually supportive policies" and requires that "the WTO should therefore pursue and develop cooperation with the international organizations responsible for monetary and financial matters".

According to the Brazilian proposal, the Director-General of the WTO has reported constantly to the General Council on his activities under the "coherence mandate".

"It is time for Members to take stock of how the coherence mandate of the WTO has been implemented as regards particularly the interplay between exchange rate and trade. Can coherence be further strengthened in that area? How, by what measures? These are questions that might be addressed in the debate under this pillar," said Brazil.

The following activities have been proposed by Brazil (under this pillar) for the WGTDF:

-- Commissioning two discussion papers - one to be prepared by independent experts, after consultation to Members, another jointly by the WTO, the IMF, and the World Bank - on how the "coherence mandate" is being implemented with respect to the relationship between exchange rate and international trade. The discussion papers will be encouraged to propose measures, if any, that might contribute to strengthening the "coherence mandate" among the WTO, the IMF and the World Bank;

-- Organizing a workshop in one of the sessions of the WGTDF to debate the discussion papers referred to above.

As to the time-frame, Brazil suggested that all the activities listed under the two pillars are to form part of a work programme for 2011-12 and to be completed during that period.

In a statement at the Working Group meeting on 10 May, Ambassador Roberto Azevedo of Brazil said that the crisis (that started in 2008), as expected, prompted somewhat similar responses across the world. In line with classic economic theory, most countries implemented fiscal and monetary measures that tended to foster economic growth and employment.

These measures, however, were subject to different calibrations in terms of scope, depth and duration, depending on the characteristics of each country, the point of the economic cycle at which they found themselves, and the way that each economy reacted to those stimuli.

As a result, he said, relative exchange rates for currencies of trading partners have also fluctuated considerably, following different paths and placing themselves at levels that significantly depart from historic behaviour. These marked asymmetries tend to affect trade in ways that have not yet been fully estimated or appreciated by governments and private entities. The time is ripe for an open-minded debate on this, he added.

Brazil believes that "a serious and constructive debate on this issue here, in the WTO, and in this Working Group in particular, would demonstrate to the international community our commitment to take up trade issues that have been occupying the front pages of newspapers and some of the top slots of our trade policy agendas," he said further.

The Brazilian envoy went on to underline some of the basic principles that guides Brazil's initiative.

Ambassador Azevedo said that this initiative is not meant to "hijack" the exchange rate issue from other fora. Exchange rate asymmetries, behaviour and implications could be approached from several different angles. "We suggest that, in the WTO, we focus on the trade related aspects of this very complex theme."

He further said that Brazil realizes fully that there is a fundamental division of responsibilities across international organizations, and that it does not explicitly or implicitly intend to question that.

"The IMF, for example, is mostly responsible for monitoring exchange rates globally, whereas the WTO is chiefly concerned with international trade. However, this primary division of responsibilities cannot create a sort of 'no man's land', preventing a much-needed debate on the interface between two key issues that obviously have a bearing on one another, as recognized fully by the provisions of Article XV of GATT 1947," he added.

Underscoring that Brazil was not seeking to negotiate new WTO disciplines or to review existing ones with this initiative, Ambassador Azevedo said: "We do not want to focus on fiscal, monetary or exchange rate policies of specific countries. Our discussions would not seek to interpret or second-guess choices by official authorities. We would like to have a mostly conceptual deliberation on the general relationship between trade and exchange rates."

In his statement, explaining the basic elements of the work programme outlined in Brazil's proposal, the Brazilian envoy said that in terms of the first pillar, in the compilation and review by the Secretariat of available literature and research on the subject, particularly in the light of the crisis that started in 2008, the Secretariat should consult members on any literature they might wish to indicate. "All our activities should be essentially member-driven."

As for holding a workshop with the participation of selected economists, Ambassador Azevedo said, "Here, we also have the choice of different formats, be it with external, independent economists, be it with economists from the staffs of the WTO, the IMF and the World Bank."

WGTDF sessions can be held when WTO Members, on a voluntary basis, share their concrete experiences, and there should be commissioning of any other study or discussion paper that the WGTDF might consider to be useful for the debate, he added.

Under the second pillar, Ambassador Azevedo said that the goal is to assess global coherence of international trade and financial policies and related global governance matters.

In concluding, the Brazilian envoy recalled that the WTO has often been criticized for what some view as an inescapable propensity to adopt a narrow and "mercantilist approach" when discussing global issues.

"The WTO is frequently accused of being unable to promote a high-level policy debate. The relationship between exchange rates and international trade is no doubt a systemic issue in the interest of each and every WTO Member. While Brazil is the one Member proposing this debate, we do hope that the whole membership takes collective ownership of this initiative," he said.

According to trade officials, at the Working Group meeting, all members (except Japan, which requested more time to consider the matter) supported "Pillar A" of Brazil's proposed two-pillar work programme.

Trade officials said that a few members (the United States, Chile and China) expressed caution or concern on account of the implications of "Pillar B" (on looking into global coherence of trade and financial policies and related matters). They did not want that the Working Group "revisits the coherence mandate" or gets into the business of other organizations, trade officials added.

According to trade officials, Brazil said this is not the intention of the proposed work programme. It further said that it would frame "Pillar B" differently in a way that is acceptable to members.

In the meantime, said trade officials, Brazil proposed to start with Pillar A and later get into the revised Pillar B.

According to trade officials, there was consensus for incorporating this work programme into the work of the Working Group for the period of 2011/12.

Trade officials said that work will start immediately on "Pillar A" of Brazil's proposed work programme. +