CURRENCY SWAP

Knee-jerk critics of the WTO might have overlooked an intriguing exchange that took place in Geneva on June 11. If I understand it correctly, the China flipped and the US flopped.

The exchange arose in the course of the annual trade policy review of the United States conducted this week. China challenged the US to explain the “causal link between dollar depreciation and food price hike, and possibly global wide inflation,” according to a text used by the Chinese representative at the June 11 session.

The US took an obdurate stance in response. First, the dollar exchange rate is “wholly market determined.” China didn’t challenge this.

Second, the USTR-led delegation would not comment on activities of the Federal Reserve, referring the Chinese to the Fed’s Web site. The Chinese understandably found this irritating. The spokesman carped: “it has been the practice of the Review Mechanism that leading agency of a Member would coordinate with and seek response from all other relevant authorities, including those in charge of monetary policies.” That seems not only reasonable but essential to any sort of meaningful policy discussion.

Third, China says the US took the position that “international discussion of these topics would occur in the IMF and the WTO is not the appropriate forum to discuss the US monetary policy.” On this point, the Chinese took great umbrage. They noted that “a continuous depreciation of the US dollar … would obviously affect economy and trade of other [WTO] Members, particularly the developing ones.”

Recalling our comment on Steve Hanke’s analysis of the dollar/rice nexus, that point seems entirely fair. But then the Chinese unloaded on the American “double standard,” noting that at last month’s review of Chinese trade policies, the US had insisted repeatedly on tying to draw China into a defense of its currency policy. The US position, he chided, seemed to be that the “WTO is an appropriate forum to discuss monetary policies of other Members including China, but not of the US.” Ouch!

The WTO’s predecessor was sometimes derided as the Gentlemen’s Agreement to Talk and Talk. The Trade Policy Review Mechanism is one of the best features of the Uruguay Round reforms of the GATT. It forces each country to expose itself periodically to world public opinion. That’s not legally binding, of course, but it does have its uses.

In this case, it has helped China abandon its unreasonable position that exchange rates are “internal matters” that “fall within a country’s sovereignty.” Now, perhaps playing to the developing country majority in the WTO, Beijing takes the sounder position that exchange rates do affect commodity prices and trade and as such fall within the purview of the WTO. That is, exchange rates are a trade as well as a monetary issue. The Treasury would be wise to seize on this opening – whether completely sincere or not-- and convene a closed door meeting with China and other countries with undervalued currencies. An acceptable solution can only be found through negotiation. China’s new position has cracked open the door to real progress. Will the US be pragmatic enough to respond positively?

Charles Blum