High volatility of currencies caused by quantitative easing

The following is the comments on the Brazilian Proposal by Mr. Zhu Hong, Minister and Deputy Permanent Representative of China to the WTO, on November 26, 2012. The Brazilian Proposal (WT/WGTDF/W/68) is about the Relationship between Exchange Rates and International Trade.

“Thank you, Mr. Chairman, for giving me the floor.

First and foremost, I would like to express my appreciation to Ambassador Azevedo for giving an eloquent introduction of the Brazilian proposal (WT/WGTDF/W/68). His introduction makes perhaps everyone of us present today to better understand the objectives that the Brazilian proposal is after. Our comments on this proposal are as follows:

First, this is already the fourth time for this kind of debate on the relationship between exchange rate and trade within the framework of the World Trade Organization. The most intensive one took place in late March this year, when Members and experts fully exchanged their views at the workshop on relationship between exchange rate and trade under the WGTDF. From our point of view, the only, if any, consensus reached at that workshop was that currency issue is extremely sophisticated, and there are numerous factors that might cause exchange rate volatility. Therefore, quite a number of participants were of the view that trade measures should not be applied to iron out the exchange rate issue. They believed that the mishandling of currency issue with trade measures will not only make the currency issue even more complicated, but also hurt the multilateral trading system itself.

Second, amid the drastic volatility of exchange rates on international monetary markets in recent years, Brazilian Real has appreciated dramatically, resulting in a descent in its exports and its a surge in its imports dealing a blow to its domestic industries. The Brazilian GDP growth decelerated to 7.5% in 2010 and to 2.7% in 2011 in the backdrop of the global economic slowdown. We can understand the concerns as illustrated in the Brazilian proposal and the pressure they have had. As a matter of fact, Brazil is not the only victim of currency volatility. Many other economies, both developing and developed, are also suffering from it. So where does the root of the high volatility of currencies as we witnessed in recent years lie? In our view, it lies in the quantitative easing monetary policy pursued by some government whose currency serves as the major currency for international payment, and in the unfair international monetary and financial system. From its inception on January 1, 2009 to the present day, the quantitative easing monetary policy has been reinforced three times. We, together with many other countries, have been critics of this irresponsible and beggar-thy-neighbor policy. It has a lingering negative impact on developing, emerging economies in particular. Currency issue in nature is a monetary policy issue. The right path to resolve this issue is by enhancing the responsibility of and promoting coordination among the international reserve currency issuers. Therefore, this issue should be confined to the framework of International Monetary Fund (IMF).

Third, the WTO is not the right forum to discuss the exchange rate issue. It would be even more erroneous to try to tackle this issue with trade measures. Using trade measures, be it the increase of tariff rates or the imposition of trade remedies, would not do any good to resolve the exchange rate issue, rather it would pose serious challenges to basic WTO rules. Going down this path, we would be encouraging those practices that run against the spirit of trade liberalization of the WTO to be concealed beneath the WTO rules, and in the end dealing a heavy blow to the multilateral system. The essence of the WTO is trade liberalization, trade facilitation and market opening that serves developmental objective. Anything that threatens such basic WTO spirits should not count on our support..

Fourth, we are all aware of the gloomy global economy. We all want to walk out of that shadow. And we all know that only by promoting development-oriented free and open trade, would we all extract ourselves out of the current recession. To achieve that, we have a great deal of things to do from this very moment to the Bali Ministerial Meeting later next year, particularly to complete the Doha Development Agenda that has been dragging on during the past 11 years. We still feel like that time is our enemy even if we must work 24 hours a day, 7 days a week. They why should we distract our minds and energy on the currency issue, which should not be debated here in the WTO?

Thank you, Mr. Chairman, and all my colleagues for your kind indulgence.”

Source: http://wto2.mofcom.gov.cn/aarticle/bilateralvisits/201211/20121108453606.html

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