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
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
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
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
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
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
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,"
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. +