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“Currency Wars” By Other Means? Exchange Rates and WTO Dispute Ini>a>on
Mark Copelovitch & Jon Pevehouse Department of Poli/cal Science
University of Wisconsin – Madison
5th Annual IPES Conference November 13, 2010
“Currency Wars”
The dollar-‐renminbi controversy • Fred Bergsten: China’s exchange rate policy equivalent to a 20-‐25%
export subsidy and tariff • “The largest protecSonist measure maintained by any major economy
since the Second World War”
Quan>ta>ve easing in the US (“QE2”) • Wolfgang Schäuble: “It is not consistent when the Americans accuse
the Chinese of exchange rate manipulaSon and then steer the dollar exchange rate arSficially lower with the help of their [central bank’s] prinSng press” (Financial Times, 11/7/10)
Other measures • Japan: $20 billion FX intervenSon to drive yen down from 15-‐year high • New capital controls on inflows (Brazil, Korea, Thailand)
The Trade Implica>ons of Exchange Rates
Exchange rate stability
• Eliminates currency risk, facilitates internaSonal exchange
Level of the exchange rate
• DepreciaSon/devaluaSon improves exporters’ compeSSveness
• “Exchange rate protecSon” (Corden 1982)
• 10% devaluaSon = 10% tariff + 10% export subsidy
Many examples
• Classical/interwar gold standards, collapse of Brejon Woods, Plaza/Louvre Accords, China/US tensions today
SOURCE: Kindleberger 1986
The Trade Implica>ons of Exchange Rates
“We have been living with this [the global economic crisis] for two years…The ques/on is whether this [the an/-‐protec/onist mood] is stable or risks being dented by currency developments. There is a risk and the risk is not nil.”
Pascal Lamy, Director-‐General, WTO (Guardian, 10/14/10)
How to Fight the “Currency Wars”?
Unilateral trade and exchange rate policies
• “Countervailing currency intervenSon” (Bergsten 2010)
• Retaliatory tariffs
Interna>onal monetary coopera>on
• A new Plaza/Louvre Accord
• WTO-‐style ER dispute sejlement mechanism at the IMF (Waibel 2010)
Pursue an exchange rate case in the WTO
• ArScle XV: forbids countries from “frustraSng the intent of the provisions of this Agreement by exchange rate acSon”
• But, quesSons about legality and effecSveness (Busch and Levy 2010)
Another Alterna>ve: WTO Trade Disputes
DS 413, Electronic Payment Services (September 15, 2010)
• China forbids foreign companies (Visa, Mastercard) from issuing credit/bank cards domesScally or to process point-‐of-‐sale transacSons
DS 414, Flat-‐rolled Electrical Steel (September 15, 2010)
• December 2008: China imposed 25% countervailing duSes on US flat-‐rolled steel arer accusing the US of “dumping”
Curious >ming
• September 15: US House Ways and Means opens hearings on H.R. 2378 (“Currency Reform for Fair Trade Act”) permiung countervailing duSes in response to “predatory exchange rate policies”
• DS 413: China in violaSon of WTO obligaSons since 2006
Our Argument
Ques>on
• Is there a link between exchange rate policies/movements and the iniSaSon of WTO disputes?
Hypotheses
• Level: Countries with lower real exchange rates are more likely to be filed against (“terms of trade”)
• Movement: Countries with depreciaSng currencies are more likely to be filed against (“compeSSve devaluaSons”)
• Regime: Countries with less flexible exchange rates are more likely to be filed against (the “China case”)
Most Frequent WTO Respondents, 1995-‐2008
0 10 20 30 40 50 60 70 80 90 100 110 120
Malaysia Uruguay
Poland Panama
Trinidad and Tobago Romania
Nicaragua Czech Republic
Venezuela Pakistan
Guatemala Dominican Republic
South Africa Slovak Republic
Ecuador Colombia Thailand
Egypt Peru
Indonesia Philippines
Turkey Hungary Australia
Chile China
South Korea Mexico
Brazil Japan
Canada Argentina
India European Union
United States
Most Frequent WTO Complainants, 1995-‐2008
0 10 20 30 40 50 60 70 80
Sri Lanka Antigua and Barbuda
Taiwan Singapore
Bangladesh Malaysia Uruguay
Nicaragua Czech Republic
Venezuela Peru
Turkey Norway Poland
Pakistan Ecuador
China Costa Rica
Switzerland Indonesia
Panama Colombia
Philippines Hungary
Honduras Guatemala
New Zealand Australia
Chile Thailand
South Korea Japan
Argentina India
Mexico Brazil
Canada United States
European Union
Who Files WTO Disputes (and Who is Filed Against)?
“Gravita>on” effects • Country size and trade Ses increase likelihood of being both complainant
and respondent (Sajler and Bernauer 2008, Allee 2008, Horn et. al. 1999)
“Discrimina>on” effects • Developing countries are less likely to file due to lack of resources/legal
capacity, fear of retaliaSon by rich countries, etc. (Busch et. al. 2009, Kim 2008, Bown 2005, Guzman and Simmons 2005, Shaffer 2003, Hoekman and Kostecki 2001)
Other variables • Democracy (Rosendorff 2005, Busch 2000, Reinhardt 1999), relaSve power
(Sajler and Bernauer 2008), past parScipaSon (ConS 2010, Davis and Bermeo 2009), domesSc poliScs/lobbying (Davis and Shirato 2007)
Empirical Analysis – Model Specifica>ons
• Dependent variable = 1 if country i is a respondent in one or more WTO cases in year t (=0 otherwise)
• Independent variables
– Level: Real effecSve exchange rate (REER) index (logged, 1995=100) – Change: 3-‐ year moving average of % change in REER
– Regime: Reinhart-‐Rogoff de facto index (4-‐point scale, 4=float)
• CondiSonal (fixed effects) logit, robust (clustered) standard errors, N=212-‐332 (20 countries monadically, 58 country pairs dyadically)
– Controls: Past complainant acSvity, Trade/GDP, GDP, GDP per capita, current account/GDP, POLITY2, inflaSon, growth, year effects, controls for temporal dependence (Carter & Signorino 2010)
– Excluded: country-‐years of “currency crashes” (Frankel and Rose 1996) or “freely falling” currencies (Reinhart and Rogoff 2004)
Change in the Real Effec>ve Exchange Rate, 1996-‐2007
De Facto Exchange Rate Regime Choice (Reinhart-‐Rogoff), 1996-‐2007
RR=1 (hard peg) RR=2 (crawling peg/band) RR=3 (managed float) RR=4 (float)
ArgenSna (1996-‐2001) ArgenSna (2004-‐7) Brazil (2001-‐7) Australia (1996-‐2007)
China (2001-‐2007) Brazil (1996-‐8) Canada (2003-‐7) Japan (1996-‐2007)
India (1996) Canada (1996-‐2002) Chile (1996-‐9, 2001-‐7) South Africa (1996-‐2007)
Philippines (1997-‐8) Chile (2000) Czech Rep. (1997-‐2002) Turkey (2004-‐7)
Thailand (1996, 1998) CroaSa (2001-‐7) Indonesia (2000-‐7)
Czech Republic (1996, 2003-‐5) Mexico (1997-‐2007)
Hungary (1996-‐2007) Philippines (1996, 1999-‐2000)
India (1997-‐2007) Slovak Republic (1999)
Indonesia (1996, 1998) South Korea (2000-‐7)
Peru (1996-‐2007) Thailand (1999-‐2007)
Philippines (2001-‐7) Turkey (1999-‐2001)
Slovak Republic (1996-‐8, 2000-‐7)
South Korea (1996, 1998)
Results: Dependent Variable = Respondent Monadic Dyadic
Findings and Implica>ons
Key findings
• Exchange rate movements and regime strongly influence WTO filings
• Monadic: countries with depreciaSng currencies and less flexible regimes are substanSally more likely to be filed against
• Dyadic: “peggers” more likely to be filed against by “peggees”
Broader implica>ons
• Need for greater ajenSon to connecSons between related types of economic policies
• Linking the “silos” of IPE: trade, monetary, and financial policies as package deals
Next Steps
Beher data
• Coding dispute outcomes, 1995-‐2010 (full vs. parSal concessions; rulings vs. sejlements; sensiSvity/importance of sector; etc.)
• Staiger and Sykes 2008: real effects of exchange rate movements depend on pass-‐through, invoicing, price sSckiness
Case study analysis
• Evidence of lobbying (firm/sector) pressure to bring WTO cases
• Evidence of firm/sector concern with exchange rate (Broz, Frieden, and Weymouth 2008)
Our larger project
• Trade and exchange rate policies as complements/subsStutes
BACKUP
Summary Sta>s>cs (Monadic Dataset)
Variable | Obs Mean Std. Dev. Min Max!
-------------+--------------------------------------------------------!
respondentd | 212 .3773585 .485873 0 1!
pctdreerbis3 | 212 .6326449 5.46638 -19.06099 20.64558!
lrr4newest | 212 2.622642 .8811112 1 4!
complainant3 | 212 .7484277 .8447855 0 5.333333!
-------------+--------------------------------------------------------!
ltrgdpnew | 212 68.74907 38.05783 14.93284 172.8027!
lngdpbill | 212 -.6468447 1.225402 -3.095525 2.420346!
lnpcgdpl | 212 9.278387 .7016059 7.727966 10.49965!
lpolity2ksg | 212 7.768868 3.64391 -7 10!
tr | 212 2.415094 3.822775 0 19!
-------------+--------------------------------------------------------!
tr2 | 212 20.37736 60.89389 0 361!
Our Larger Project
Rela>onship between trade and exchange rate policies
• This paper: exchange rate movements/regimes and WTO disputes
• Other papers
– PTA commitments with monetary “base” and ER regime choice
– WTO “defeats” and subsequent ER regime/level (“exchange rate protecSon”)
– Bound/applied levels of protecSon and ER regime/level
Broader goals
• Deeper understanding of policy subsStuSon/complementariSes
• Linking the “silos” of IPE:
– Similar theories (interests, insStuSons, etc. ) across trade, money, and finance; lijle empirical tesSng of linkages
– Trade, monetary, and financial policies as “package deals”
