CAN THE TRADING SYSTEM SURVIVE WITHOUT MULTILATERAL DISCIPLINES IN MONEY AND FINANCE?

1
CAN THE TRADING SYSTEM SURVIVE WITHOUT
MULTILATERAL DISCIPLINES IN MONEY AND FINANCE?

• Global Economic Governance
• Conference organized by IPD and FEPS
• Brookings Institution, Washington, D.C. 7-8
  October 2010
• Yilmaz Akyüz
• South Centre, Geneva

2
THE ISSUE

1. Tariffs, QRs and subsidies are losing importance
   as the main instruments of trade and industrial
   policy.
2. Exchange rate, macroeconomic and labour market
   policies have become more important determinants
   of trade outcomes areas of policy not subject
   to multilateral disciplines.
3. It is likely to become increasingly difficult to
   prevent frictions in the trading system without
   multilateral disciplines in money and finance.
   The global economic conditions over the coming
   years will be much tougher than those since the
   inception of the WTO.

3
TRADE MEASURES AND SUBSIDIES

• QRs prohibited. Tariffs bound at significantly
  reduced levels during the UR. Pressure for
  further liberalization in DCs in the Doha round
• Full binding coverage
• Significant reduction in bound tariffs
• Harmonization across countries
• Reduced dispersion and greater uniformity
• Liberalization outside WTO FTA, IMF and
  unilateral. Countries not willing to use policy
  space in tariffs and QRs even during the current
  crisis.
• Agreement on SCM prohibits so-called trade
  distorting, sector specific subsidies for export
  promotion and import substitution.
• With limited scope for further liberalization of
  tariffs and subsidies, attention of big business
  is turning to other areas (financial services,
  investment etc.)

4
TARIFFS, SUBSIDIES AND EXCHANGE RATES

• If tariffs and subsidies cannot differentiate
  among products and sectors, they are virtually
  indistinguishable from exchange rates regarding
  their effects on trade
• Keynes at the BWs
• there is a logical reason for dealing with the
  monetary proposals first. It is extraordinarily
  difficult to frame any proposals about tariffs if
  countries are free to alter the value of their
  currencies without agreement at short notice.
  Tariffs and currency depreciations are in many
  cases alternatives. Without currency agreements
  you have no firm ground on which to discuss
  tariffs... It is very difficult while you have
  monetary chaos to have order of any kind in other
  directions.
• What matters here, of course, is the real
  effective exchange rate, which makes labour
  market and wage polices particularly important.

5
COHERENCE

• The potential disruption to trade from other
  spheres of international economic interaction was
  recognized in the Marrakech Declaration
• Ministers recognize, however, that difficulties
  the origins of which lie outside the trade field
  cannot be redressed through measures taken in the
  trade field alone. This underscores the
  importance of efforts to improve other elements
  of global economic policymaking to complement the
  effective implementation of the results achieved
  in the Uruguay Round.

6
TRADE IMBALANCES AND DISTORTIONS

• With globalization the share of labour income in
  GDP fell in most major economies as wages lagged
  behind productivity growth.
• Global deflation due to under-consumption has
  been averted thanks to consumption and property
  booms driven by debt and asset bubbles in the US
  and several countries in Europe.
• But this generated financial fragility and
  growing trade imbalances that culminated in a
  global crisis with serious consequences for
  international trade.

7
THE MAIN CULPRITS

• US Enjoying exorbitant privilege as issuer of
  dominant reserve currency and living beyond its
  means its monetary and financial policies are
  at the origin of excessive domestic spending and
  growing trade deficits. Now engaged in
  quantitative easing (QE) in order to accelerate
  recovery through, inter alia, weaker dollar..
• China Excessive reliance on exports (1/3 of
  growth during 2002-07). Policy of cheap labour
  and cheap currency consumption falling as of
  GDP along with the share of wages (chart).
• Germany Even greater reliance on exports for
  growth (90 of growth during 2002-07). Policy of
  competitive disinflation, restricting growth
  elsewhere in euroland (chart).
• Japan Relies on exports more than China (over
  50 of growth). Strong yen but sharp declines in
  the share of wages in GDP (chart). Now engaged
  in QE to prevent appreciation of the yen.

8
CHINA WAGES, PROFITS AND PRIVATE CONSUMPTION (
OF GDP)
9
WAGES, PROFITS AND PRIVATE CONSUMPTION
10
POTENTIAL TRADE CONFLICTS

• In the US protectionist pressures are more
  visible now under recovery than during recession.
  Trade frictions can intensify if the US pursues
  rigorously its National Export Initiative to
  double exports in 5 years, while China, Germany
  and Japan continue to rely on exports for growth.
• Cooperation for adjustment? No sign of it. G20
  rhetoric.
• No multilateral mechanism to bring about the
  adjustment needed IMF exchange rate obligations
  are non-binding and its surveillance is
  meaningless for non-borrowing members.
• Unilateral trade sanctions by US cannot be
  justified by invoking either the GATT provisions
  or the Articles of the IMF.

11
MULTILATERAL DISCIPLINES IN MONEY AND FINANCE

• Objectives
• Proper alignment and stability of exchange rates
  of major currencies (dollar, euro, yen and yuan).
• Removal of asymmetry in pressures for adjustment
  between non-reserve issuer deficit countries
  (mostly DEEs) and surplus countries.
• Multilateral discipline for the dominant reserve
  issuer the US.
• Areas of reform
• Obligations for exchange rates target zones?
• Scarce currency clause or taxing surpluses as in
  Keynes Clearing Union.
• Move away from the dollar as the dominant reserve
  currency a global currency or significantly
  expanded role of the SDRs.

12
SYSTEMIC INCOHERENCE

• Reform of financial architecture is needed not
  only for monetary and financial stability but
  also for sustaining an open trading system.
• No serious attempt has been made after Marrakech
  to secure that arrangements in trade and finance
  are mutually supportive.
• Major governments that dominate the policies of
  WTO and BWIs and the secretariats of these
  institutions have not sought to secure systemic
  coherence, but simply uniformity of policy advice
  they all joined in pushing for further and
  further liberalization in developing countries.
• As a result, multilateral system now suffers
  from incoherence between trade and finance, laid
  bare by the most serious post-war crisis.