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 Yılmaz Akyüz South Centre, Geneva

2. THE ISSUE • Tariffs, QRs and subsidies are losing importance as the main instruments of trade and industrial policy. • Exchange rate, macroeconomic and labour market policies have become more important determinants of trade outcomes – areas of policy not subject to multilateral disciplines. • 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.