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

  • Aaditya Mattoo

    (The World Bank)

  • Arvind Subramanian


    (Peterson Institute for International Economics)

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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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP08-2.

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Date of creation: Jan 2008
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Handle: RePEc:iie:wpaper:wp08-2
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  1. Anderson, Kym & Martin, Will & van der Mensbrugghe, Dominique, 2005. "Distortions to world trade: impacts on agricultural markets and farm incomes," Policy Research Working Paper Series 3736, The World Bank.
  2. Aaditya Mattoo & Arvind Subramanian, 2004. "The WTO and the Poorest Countries: The Stark Reality," IMF Working Papers 04/81, International Monetary Fund.
  3. Prasad, Eswar & Rajan, Raghuram G. & Subramanian, Arvind, 2007. "Foreign Capital and Economic Growth," IZA Discussion Papers 3186, Institute for the Study of Labor (IZA).
  4. Gary Clyde Hufbauer & Yee Wong & Ketki Sheth, 2006. "US-China Trade Disputes: Rising Tides Rising Stakes," Peterson Institute Press: Policy Analyses in International Economics, Peterson Institute for International Economics, number pa78.
  5. Edwin M. Truman, 2007. "Sovereign Wealth Funds: The Need for Greater Transparency and Accountability," Policy Briefs PB07-6, Peterson Institute for International Economics.
  6. 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.
  7. Brad Setser, 2007. "The Case for Exchange Rate Flexibility in Oil-Exporting Economies," Policy Briefs PB07-8, Peterson Institute for International Economics.
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