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My colleage Arvind Subramanian published an intriguing Op-Ed in the Financial Times this week. In “The Weak Renminbi is Not Just America’s Problem” Arvind notes that the undervalued Chinese currency is a global problem that requires a multilateral response. He then argues persuasively that neither the United States nor the IMF can be expected to persuade China to revalue its currency. Instead, he says, such action should come from the WTO.
The World Trade Organisation is a natural forum for developing new multilateral rules. First, undervalued exchange rates are de facto protectionist trade policies because they are a combination of export subsidies and import tariffs. Second, the WTO has a better record on enforcement of rules. Its dispute settlement system, although not perfect, has been reasonably effective in allowing members to initiate and settle disputes. The WTO has greater legitimacy than the IMF – developing countries, even smaller ones, have been active in bringing disputes to the WTO. Tiny Antigua (population: 69,000) managed to successfully challenge US gambling laws.
What is needed is a new rule in the WTO proscribing undervalued exchange rates. The irony is that export subsidies and import tariffs are individually disciplined in the WTO but their lethal combination in “an undervalued exchange rate” is not.
The IMF would continue to be the sole forum for broad exchange rate surveillance. But in those rare instances of substantial and persistent undervaluation, we envisage a more effective delineation of responsibility, with the IMF continuing to play a technical role in assessing when a country’s exchange rate was undervalued, and the WTO assuming the enforcement role…
Such an approach has several advantages. China would not be seen as a victim of bilateral targeting, but part of a co-operative approach to settle an issue that could well go beyond its currency. The remedy would be new broad-based rules rather than just renminbi revaluation. There would be a large collateral benefit too. Negotiating new and important rules would help revitalise the WTO, which has languished because of the unfinished Doha Round of trade talks.
Arvind doesn’t explicitly make the point that the overvalued Chinese currency hurts other developing countries. But the effect is clear, and if anything likely stronger than the impact of the undervalued Chinese currency on the United States, since low-cost Chinese manufactured goods compete most directly with exports from other developing countries.
I think the idea of involving the WTO (which Arvind and Aaditya Mattoo of the World Bank have jointly proposed) makes eminent sense. How to get it off the ground?