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Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization

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  • Arvind Subramanian

    ()

  • Aaditya Mattoo

Abstract

Two aspects of global imbalances—undervalued exchange rates and sovereign wealth funds (SWFs)—require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund (IMF) has not been effective in dealing with undervalued exchange rates. We propose new rules in the World Trade Organization (WTO) to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The WTO would not be involved in exchange rate management, and our proposals do not entail the WTO displacing the IMF: Rather, they would harness the comparative advantage of the two institutions, with the IMF providing the essential technical expertise in the WTO enforcement process. On SWFs, there is a bargain to be struck between countries with SWFs, which want secure and liberal access for their capital, and capital-importing countries that have concerns about the objectives and operations of SWFs. The WTO is the natural place to strike this bargain. Its services agreement, the General Agreement on Trade in Services (GATS), already covers investments by SWFs, and other agreements offer a precedent for designing disciplines for SWFs. Placing exchange rates and SWFs on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups, many of whom are currently disengaged from the round.

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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 142.

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Length: 30 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:cgd:wpaper:142

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Web page: http://www.cgdev.org

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Keywords: exchange rates; undervaluation; sovereign wealth funds; World Trade Organization; International Monetary Fund;

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References

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  1. Brad Setser, 2007. "The Case for Exchange Rate Flexibility in Oil-Exporting Economies," Policy Briefs PB07-8, Peterson Institute for International Economics.
  2. Prasad, Eswar & Rajan, Raghuram G. & Subramanian, Arvind, 2007. "Foreign Capital and Economic Growth," IZA Discussion Papers 3186, Institute for the Study of Labor (IZA).
  3. Edwin M. Truman, 2007. "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability," Policy Briefs PB07-6, Peterson Institute for International Economics.
  4. Gary Clyde Hufbauer & Yee Wong & Ketki Sheth, 2006. "US-China Trade Disputes: Rising Tides Rising Stakes," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa78.
  5. Mattoo, Aaditya & Subramanian, Arvind, 2004. "The WTO and the poorest countries: the stark reality," World Trade Review, Cambridge University Press, vol. 3(03), pages 385-407, November.
  6. Kym Anderson & Will Martin & Dominique van der Mensbrugghe, 2006. "Distortions to World Trade: Impacts on Agricultural Markets and Farm Incomes," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 28(2), pages 168-194.
  7. Aaditya Mattoo & Arvind Subramanian, 2004. "The WTO and the Poorest Countries," IMF Working Papers 04/81, International Monetary Fund.
  8. C. Fred Bergsten, 1998. "Fifty Years of the GATT/WTO: Lessons from the Past for Strategies for the Future," Working Paper Series WP98-3, Peterson Institute for International Economics.
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Citations

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Cited by:
  1. Ho-don Yan & Cheng-lang Yang, 2012. "Does an Undervalued Currency Merit Economic Growth? – Evidence from Taiwan," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(1), pages 37-57, March.
  2. Aaditya Mattoo & Arvind Subramanian, 2008. "Multilateralism beyond Doha," Working Paper Series WP08-8, Peterson Institute for International Economics.
  3. Bernard M. Hoekman, 2013. "Global Governance of International Competitiveness Spillovers," RSCAS Working Papers 2013/33, European University Institute.
  4. Schalast, Christoph & Tiemann, Marcel & Tuppi, Pascal, 2009. "Staatsfonds - neue Akteure an den Finanzmärkten?," Frankfurt School - Working Paper Series 114, Frankfurt School of Finance and Management.
  5. Tsani, Stella, 2013. "Natural resources, governance and institutional quality: The role of resource funds," Resources Policy, Elsevier, vol. 38(2), pages 181-195.
  6. Saadaoui, Jamel, 2012. "Déséquilibres globaux, taux de change d’équilibre et modélisation stock-flux cohérente
    [Global Imbalances, Equilibrium Exchange Rates and Stock-Flow Consistent Modelling]
    ," MPRA Paper 51332, University Library of Munich, Germany.
  7. Timilsina, Govinda R. & Shrestha, Ashish, 2008. "The growth of transport cector CO2 emissions and underlying factors in Latin America and the Caribbean," Policy Research Working Paper Series 4734, The World Bank.
  8. Petr Sedláček, 2010. "State-Run Investment Funds: Major Institutional Investors on Global Financial Markets," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2010(2), pages 3-22.
  9. Arvind Subramanian & Martin Kessler, 2013. "The Hyperglobalization of Trade and Its Future," Working Paper Series WP13-7, Peterson Institute for International Economics.
  10. Freund, Caroline & Pierola, Martha Denisse, 2008. "Export surges : the oower of a competitive currency," Policy Research Working Paper Series 4750, The World Bank.
  11. Helmut Reisen, 2008. "How to Spend It: Commodity and Non-Commodity Sovereign Wealth Funds," OECD Development Centre Policy Briefs 38, OECD Publishing.

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