Robert Staiger and Alan Sykes have a new Working Paper on "'Currency Manipulation' and World Trade." Here's the abstract:
Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China are now pending on Capitol Hill. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. The analysis goes to the proper relationship between IMF obligations and WTO obligations and to the question whether trade measures can be an appropriate response to exchange rate policies. Our conclusions are at odds with much of what is currently being said in Washington. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. We show how the effects differ, according to whether exporters invoice in the local currency of the producer, in the currency of the buyer, or in a "vehicle" currency such as dollars. The real effects of China's policies are thus potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame). Accordingly, we are skeptical about many of the policy responses now under consideration in Washington both on economic and legal grounds.
The paper has lots of good economic and legal analysis (including GATT Article XV, the SCM Agreement and Non-Violation Nullification or Impairment) of many of the issues surrounding currency manipulation and trade rules. Here's a brief excerpt from the paper, on the issue of whether such manipulation constitutes an "export subsidy":
The specificity requirement is met if exchange market intervention can indeed be characterized as an export subsidy -- i.e., as a subsidy "contingent upon export performance." Article 2.3 provides that all such subsidies are "specific." Exchange market intervention, of course, does not expressly confer benefits on firms "contingent" on their export performance. All firms will operate in the environment of an altered exchange rate irrespective of their export performance. A respectable argument might be made, however, that an undervalued exchange rate tends to favor exporting firms if it has any real effects at all (assuming that prices have not adjusted to offset it). Even if not formally contingent on export performance, therefore, any export stimulus resulting from an undervalued exchange rate is plausibly characterized as an export subsidy.
For me, this raises the fundamental question of what "export contingent" means. Does export have to be a necessary and/or sufficient condition for receiving the subsidy? Does export simply need to be "tied" to the subsidy, the term used in footnote 4? If "tied" is the standard, what constitutes evidence of a "tie"? The authors describe the issue as follows: "an undervalued exchange rate tends to favor exporting firms." I see two ways to interpret this. First, the undervalued exchange rate favors exporting firms over their foreign competitors. But all subsidies do this, so I don't think this what they had in mind. Second, the undervalued exchange rate favors domestic exporting firms over domestic non-exporting firms. I think they probably had this one in mind. I hope they did, anyway, because I've always thought something like this should be the standard for export contingency. I had thought of it in these terms: whether the subsidy provides an incentive for domestic firms to engage in export sales rather than domestic sales.
Anyway, that's a bit of a digression away from the currency issues, which are elaborated at great length in the paper.
