Brazil is set to propose an “exchange rate anti-dumping” measure to the World Trade Organization that would allow countries to retaliate against trading partners that undertake competitive devaluations of their currencies. Brazil’s Geneva office is working on the plan, which would mark an escalation of what Latin America’s largest economy has dubbed the “currency war” ? the battle against what it sees as the use of loose monetary policies by reserve-currency issuers such as the US to boost their exports.
Brazil has presented two submissions to the Working Group on Trade, Debt and Finance of the WTO, in April and September 2011. In the first, a work program was proposed including academic research on the relationship between exchange rates and international trade. In the second, further analysis of trade instruments available in the multilateral trading system allowing members to redress eventual distortions caused by exchange-rate misalignments was re- quested.
At present, the Doha Round faces a serious impasse and one can question how the WTO can solve the exchange rate issue. The only reference to the question in the trading system is found in Article XV of the GATT that establishes that countries shall not frustrate the objectives of the trade agreement through exchange-rate measures, or the objectives of the exchange agreement through trade. This article, however, has never been tested by GATT or WTO panels. The same may be said of Brazil’s proposals for new WTO rules. There have occasionally been suggestions about addressing misaligned exchange rates in the WTO but its existing laws are vague on the subject and the likelihood of negotiating new rules is close to nil. Brazil’s contradictory complaint
One strange feature of Brazil’s complaint is that Brazil does not need to wait for WTO approval to remedy the problem of an overvalued currency. If Brazilian authorities are sincerely concerned about their currency being overvalued, this is a problem that can be resolved easily without turning to the WTO. The Japanese Central Bank, US Federal Reserve and European Central Bank each allow foreign governments and foreign companies to purchase yen, dollar, and euro denominated government debt. If the Brazilians wanted to reduce the value of the real against any of these currencies they are free to intervene in currency markets. This is precisely what smaller countries such as Switzerland and Israel have been doing since the onset of the 2008 crisis.
Even states that forbid foreign countries from buying their debt would be vulnerable to Brazilian currency intervention. Brazil could always simply announce that it accepts the foreign currency of other nations at a value substantially higher than the official exchange rate (say, 25%). This would automatically create international arbitrage opportunities, and the ensuing deluge of foreign bills and coins flooding into Brazilian coffers would bring down the value of Brazil’s currency. There are of course downside risks to the strategic acquisition of foreign currency and assets (particularly the government bonds of states with shaky public finances like the United States). However, as economists have long observed, there are no “free” lunches. Sometimes assets lose value. This is a risk that is unavoidable for private investors and sovereign governments alike.
If the Brazilian government is indeed unhappy with the consequences of an overvalued currency, it would be easy for Brazil to correct this problem. If currency intervention is an acceptable policy option for Switzerland, Israel, Singapore, South Korea and others, it must be the case that Brazil as a sovereign state also enjoys the right to determine the value of its own currency. Moreover, Brazil is a much larger and much poorer country than Switzerland or Israel and would certainly occupy the moral high ground if it chose to follow the Swiss or Israeli strategy.
It may be the case that the Brazilians are hesitating to follow the lead of Switzerland and others because they are afraid that if they did so, they would upset their major trading partners. Brazilian officials may be concerned that Brazil would risk undermining its recent diplomatic gains and reduce its international stature. On the other hand, many if not most of the governments of the world regularly participate in international currency markets. Brazil’s unwillingness to take part in this globally accepted practice makes its complaints about having an overvalued currency ring hollow. At any rate, the Brazilians have not been afraid to lodge complaints against the US and Europe for their agricultural subsidies or raise antidumping duties on a range of Chinese exports. It is not obvious that imposing antidumping duties leads to fewer international frictions than simply purchasing foreign currency and government debt. In addition, expanding Brazil’s foreign exchange reserves through strategic purchases carries the upside of advancing another important Brazilian goal, as the next section will discuss.
Brazil: A Leadership role in pushing for a Multipolar International Monetary System?
Brazil should consider participating more actively in international currency markets in part because this would help move the world towards a more internationalized monetary system. Brazil’s finance minister, Guido Mantega, has in fact been a leader in pushing for a more balanced and multipolar international monetary system that is less dominated by the US dollar. Mantega has suggested that the Brazilian real should be promoted as one of the world’s five internationally traded currencies. As Mantega pointed out on the eve of the G20 Ministerial in Paris in 2011, “We would like to transition from a system based on fluctuating exchange rates to a multipolar currency system, where international transactions in other currencies would be recognized.”
As Mantega himself has noted, it doesn’t make any sense for the US dollar to continue playing a hegemonic role given that the US is merely a secondary power in global exporting. As long ago as 2003, Germany surpassed the United States to become the world’s number one exporter. In 2010, China surpassed Germany, so now the US trails far behind as a distant number three. It is very strange that the US should play such a dominant role in the global monetary system given its weakness as an international trader. Brazil is in an excellent position to help accelerate the transition to a multipolar monetary system by building up its reserves of foreign exchange, particularly of the Chinese renminbi, the Euro as well as other significant currencies such as the Japanese yen, and Korean won. Chinese, European, Japanese and Korean currencies would probably be preferable given the underlying economic strength of these powerful export-oriented economies. It would be wise for Brazil to avoid Brtish and American government debt given the deep structural weaknesses of the US and UK economies. In 2011, Dagong credit rating agency downgraded both British and American debt and they maintain a negative outlook moving forward. Assets denominated in yen, won and renminbi and a Germanbacked euro are very attractive investment options and a shift away from dollar reserves on the part of a large trader such as Brazil would help bring the global monetary and trading systems into proper balance.
In recent years, Brazil has demonstrated leadership in promoting an open, multipolar and mutually beneficial international economic order. Brazil’s strong commitment to openness is reflected in its encouragement to foreign investment. While some countries have restricted strategic sectors from foreign investors, including Chinese companies, Brazil has been very welcoming to foreign investment. In September 2011, for example, Taoyuan Iron and Steel and Baosteel together with Citic purchased a 15% stake in Companhia Brasileira de Metalurgia e Minera??o (CBMM) which is a major producer of Niobium. Brazil in fact accounts for 98% of the global production of Niobium. Its openness to foreign participation in the mining of Niobium (which is used in nuclear and high tech industries) is a significant demonstration of Brazil’s commitment to an open international system.