Brazil Continues Push for Further WTO Discussions on Currency, Trade Relationship

A new proposal by Brazil regarding the possible use of trade remedies to counter currency fluctuations prompted a cool response from some WTO members on Monday. However, officials noted, many members were open to the idea of continuing analytical work on the subject in order to better understand the relationship between exchange rates and trade - despite questions from some over whether the WTO is the right forum for this topic.

Brazil’s 5 November conceptual note (WT/WGTDF/W/68) was submitted to the WTO’s Working Group on Trade, Debt and Finance, which addressed the paper during its meeting on Monday. The proposal outlines the history of exchange rates in the General Agreement on Tariffs and Trade (GATT) and the WTO, then analysing possible tools in the current multilateral trading system that could be seen as applicable to exchange rates and trade.

“The WTO seems to be systemically ill-equipped to cope with the challenges posed by the macro and microeconomic effects of exchange rates on trade,” the Brazilian paper found after conducting the above-mentioned review. “Members may wish, against this background, to consider the need for exchange rate-trade remedies and to start some analytical work to that effect,” it continued, outlining a “non-exhaustive” list of elements that would have to be considered in such work.

This latest concept note was intended to help “frame the discussions in the WTO,” a Brazilian official commented to Bridges. “It was not in any way meant to provide a pre-cooked recipe for members.”

Real’s appreciation in the background

The move comes as Brazil continues to deal with the effects of its currency’s - the real - continued appreciation, particularly the subsequent import surge that many fear has put its manufacturing sector at risk.

In this regard, Brazil has been an avid proponent of addressing the impact of exchange rates on trade in the WTO context, arguing that such a debate is not taking place anywhere else and has become essential in the current economic climate.

Earlier this year, the working group had hosted a highly-anticipated seminar on the relationship between exchange rates and trade, which was designed as an academic exercise to better understand the issues and their implications, and was convened in response to Brazil’s request.

Members react to latest proposal

Brazil’s paper drew a mixed response from members, trade officials commented to Bridges. Sources say that none of the members present spoke openly in support of developing trade measures to respond to currency volatility or misalignment. However several, such as the EU, said they were still ready to continue the debate on the relationship between trade and exchange rates, and suggested that further analytical work be undertaken on the subject.

Others, meanwhile, took a harsher tone. “The WTO is not the right forum to discuss the exchange rate issue,” Zhu Hong, Minister and Deputy Permanent Representative of China to the WTO said at the meeting. “Using trade measures, be it the increase of tariff rates or the imposition of trade remedies, would not do any good to resolve the exchange rate issue, rather it would pose serious challenges to basic WTO rules.”

However, China did note that Brazil “is not the only victim of currency volatility,” arguing that such volatility is the result of the controversial practice of quantitative easing and has a “lingering, negative impact” on developing economies, particularly emerging markets.

The decisions earlier this autumn by the US, EU, and Japan to each undertake new rounds of quantitative easing in order to tackle lagging employment numbers fuelled substantial concern and criticism among several of their trading partners, including Brazil, who argued that the capital flows generated by these monetary policies could debilitate other economies.

Switzerland and Chile were among the other members to raise concerns about the Brazilian paper at Monday’s gathering. “Switzerland considers that such a debate should not serve as a pretext to justify an extension of existing GATT rules,” the Swiss delegate said. Trade remedies are already being used extensively, Switzerland added, noting that approving more remedies could instead exacerbate the problem by restricting trade and “frustrate important and necessary adjustments of an economy.”

Furthermore, the Swiss representative said, the March seminar showed that trade measures are not the appropriate answer to exchange rate disequilibria, adding that monetary problems should be addressed with monetary solutions. Switzerland ultimately said that it could not support Brazil’s proposal to examine possible trade remedies in this area.

Chile, meanwhile, also noted that it “does not find it necessary to create new ‘trade remedies,’ designed to address exchange rate fluctuations and their possible effect on trade.”

“Should currency discussions continue?” members ask

Members at the meeting also differed on whether such discussions - even on an academic level - should continue within the WTO context. While some - notably China - argued that the topic could distract from efforts to put together a small package of Doha measures to be agreed at next year’s WTO ministerial conference in Bali, others said that the current instability of the global economic climate mean that such a debate will likely - and indeed should - continue in the future, while being limited purely to an analytical level.

Switzerland, meanwhile, noted that - while the debate has been useful to better understand the topic - it saw no need for further WTO action on the subject.

Others, however, added that the discussions on exchange rates and trade should indeed continue at an academic level, given today’s economic realities.