Trade rules and monetary policy

“Trade Rules and Monetary Policy: Implications for
ASEAN Member States
Simon Lacey | Last Updated 10 June 2013

Structure and Outline of this
Presentation
1. What monetary policies are we talking about?
2. Who are the alleged offenders?
3. Historical treatment under international rules
4. Who’s calling for action now?
5. Possible remedies under the WTO?
6. Does currency manipulation even make sense today?
7. What does this mean for ASEAN Member States?
simon.lacey@uph.edu
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| www.uph-analytics.com

What monetary policies
are we talking about?
simon.lacey@uph.edu
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Who’s afraid of competitive devaluation? What about a currency war?
Definition of competitive devaluation:
"When a country tries to devalue its currency to
increase its international competitiveness.
A devaluation in the exchange rates makes
the foreign price of exports lower, and imports
become more expensive"
How threatening can a policy called quantitative easing be?
Definition of quantitative easing:
"The introduction of new money into
the money supply by a central bank".

What monetary policies
are we talking about?
simon.lacey@uph.edu
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What tools achieve competitive devaluation?
• Direct government intervention (buying up foreign currency)
• Capital controls (Argentina’s favourite method);
• Quantitative easing (printing money – or creating more money at the stroke of a computer key)
 How does quantitive easing work, and how does it effect the value of a currency?
- QE is actually primarily a policy to stimulate consumption
and investment when interest rates are already very low
- However indirectly it can effect international currency
markets, especially when it is done by big reserve-currency
countries
- When the central bank buys bonds, it lowers domestic interest
rates across the yield curve:
• Investors receive cash and the higher prices (and lower yields) for
bonds make them less attractive in comparison with bonds in other
economies
• Investors go elsewhere and the portfolio outflow causes the currency
to fall.

Who are the alleged offenders?
simon.lacey@uph.edu
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Source: Wonkblog, Washington Post "Who are the biggest currency manipulators?" quoting Joseph E. Gagnon
"Combatting widespread currency manipulation"

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Source: Wonkblog, Washington Post "Who are the biggest currency manipulators?" quoting Joseph E. Gagnon
"Combatting widespread currency manipulation"

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Biggest users of Quantitative Easing

Historical treatment under
international treaty rules
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Article IV:1 (iii) IMF Articles of Agreement of the International Monetary Fund:
requires members "to avoid manipulating exchange rates or the international monetary
system in order to prevent effective balance of payments adjustments or to gain an
unfair competitive advantage over other members".
Although seemingly unambiguous, there are a number of practical
problems with using this provision as a basis for action:
 Rights and obligations flow between the IMF and its members
 IMF has never once found even a single IMF member to be in
breach of Article IV:1 (iii)
 Difficulties in obtaining consent among Executive Board
Members
 The requirement of proving "intent”

Who’s calling for action now?
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Economists from the Peterson Institute Fred Bergsten and
Joseph Gagnon make a (semi) convincing case for a series
of actions, including:
 Seeking voluntary agreement from the manipulators
to sharply reduce or eliminate their intervention;
 Undertake countervailing currency intervention (CCI)
against countries with convertible currencies by
buying amounts of their currencies equal to the
amounts of dollars they are buying themselves, to
neutralize the impact on exchange rates;
 Tax the earnings on, or restrict further purchases of,
dollar assets acquired by intervening countries with
inconvertible currencies;
 Bring a case against the manipulators in the World
Trade Organization (WTO) that would authorize more
wide-ranging trade retaliation.

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About 200 US lawmakers have signed a letter sent to President Obama to insist on the
insertion of new rules against currency manipulation in the TPP. This group is led by a
handful of congressmen including Michael Michaud (D-Maine), John Dingell (D-Michigan)
Rick Crawford (R-Arkansas) Sam Graves (R-Missouri).
 After 17 rounds of negotiations and with the different negotiating chapters and working groups
having been well established by now, it’s probably too late to introduce new rules into the agreement
at this stage,
 Besides, these kinds of rules really need to be agreed multilaterally to have the desired impact

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Eight US senators reintroduced a currency bill last week entitled the Currency Exchange
and Oversight Reform Act. This group is led by Sen. Sherrod Brown, (D-Ohio), along with
Jeff Sessions, (R-Alaska), Chuck Schumer (D-New York), Lindsey Graham (R-South
Carolina), Debbie Stabenow, (D-Michigan)., Richard Burr, R-North Carolina) Susan Collins,
R-(Maine), and Robert Casey, (D-Philadelphia).
 The bill seeks to replace existing law governing how the U.S. Treasury deals with international currency with a new
framework that requires the Treasury to identify, investigate and report to Congress on “misaligned” currencies and take
action if the countries fail to correct the misalignment;
 The bill would also clarify existing trade laws to lay out the specific standards for the U.S. Department of Commerce or
the International Trade Commission to initiate an investigation, if it’s requested by U.S. industries, into whether currency
undervaluation by a government provides a countervailable subsidy.
 However, this would have to be signed by President Obama in order to become law, which means it has almost no chance
of succeeding (since in its current form it would almost certainly violate international trade rules);

Possible remedies under the WTO?
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 A WTO Compliant on the basis of the Art. 3 of the Agreement on Subsidies
and Countervailing Measures (ASCM - prohibited export subsidy)
 A WTO Compliant on the basis of Part III of the (ASCM - actionable subsidy)
 A WTO dispute settlement compliant on the basis of either GATT Article
XXIII:1 (b) non-violation complaint, or GATT Article XXIII:1 (c) situation
complaint.
 A WTO dispute settlement compliant on the basis of GATT Article XV:4

Does Currency Manipulation
Even Make Sense in Today’s World?
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 Food prices at record highs and the Economist predicting “the end of cheap food”
 Manufacturing industries now largely based on supply chains that span several
countries almost seamlessly
 The beggar-thy-neighbour dynamic exists today as it did in the 1930s (tit-for-tat)

What does this mean for
ASEAN Member States?
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Conclusions?
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 The jury is still out on whether currency misalignment is really the problem some
seem to think it is;
 Under the multilateral trade rules that we have – there is not much that can be done
to combat exchange range misalignment (legally);
 Nor is this likely to change much in the near future;
 With the upward trend in prices for agricultural commodities and the increasing
integration of international supply chains the case for currency intervention is getting
weaker;
 With export-led growth strategies being replaced by a new focus on domestic
demand and investment, there will be even less reason for countries to “willfully”
miss-align exchange rates;
 The rise of another reserve currency alternative to the US dollar would be helpful but
is also not likely to happen soon;
 All of the recent rhetoric on this topic is just hot air by a bunch of US congressmen
(and women) who in fact, really have much more pressing issues to attend to;
 This is not something that leaders in ASEAN are not likely to give very much thought
to, since they too have much more pressing issues to deal with.

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