I don't mean to overdo things with the China currency issue, but it's a hot topic and there's a lot to say about it. So here's today's post, which is about an argument made by Arvind Subramanian in the FT:
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.
How would this new rule be incorporated in the WTO? Essentially through negotiation. China would have to agree with its other trading partners in the WTO to negotiate new rules aimed at disciplining undervalued exchange rates. In return for such a commitment, the US Treasury secretary would desist from branding China a currency manipulator next month. To sweeten the pill for China, its major trading partners could pledge to grant China the status of a “market economy” in the WTO. This would have value because anti-dumping and countervailing duty actions are easier to take against non-market economies such as China.
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.
I like this all a lot in theory. I like the part about getting ridding of "market economy" status, and the part about making this a multilateral rather than a bilateral issue, and the part about the IMF and WTO working together on it. I also like the part about revitalizing the WTO.
In practice, though, a new agreement in this area may be quite difficult to achieve. Consider that the Doha round negotiations have been going on for many years, with no end in sight. How long would it take to negotiate new rules on exchange rates? It might be quite a while. It's not just China that has to agree to something. Everyone else has to agree as well. (Perhaps it could be done as a plurilateral agreement, involving only the major trading countries, which would make things a little easier).
That doesn't mean it's not worth trying, though. Perhaps this alone won't solve the dispute, but it could be a part of the solution.