THE CHALLENGES OF THE

MULTILATERAL SYSTEM

2014

Profs. Vera Thorstensen, Emerson Marçal, Lucas Ferraz

Analysis of the Trading System

2

Brazil

National RulesEU, USA, China, India,

South Africa…

Preferential RulesRegional, Bilateral and Non reciprocal Agreements

Multilateral RulesWTO (DSB), IMF, World Bank, OECD, UNCTAD, FAO, WIPO

Themes

Challenges

Multiplication of PTAs

Logic of Global Value Chains

Currency Wars

3

1 - PTAs

Types: RTAs, Bilateral, Non-reciprocal

Scope: goods + services + IP + Inv + Comp + CC

Issues: WTO in + WTO plus + WTO extra

Mega-PTAs: US + EU China+Korea+Japan

4

Number of PTAs5

Source: WTO, 2012

MEGA

Agreements on rules not tariffs TBT + SPS Services + Int. Prop. (WTO +++) Investment + Competition + Environment

(WTO extra) Regulatory coherence Disputes x DSB 65% of trade WTO ???

6

Impacts on WTO

- New WTO plus and WTO extra rules - WTO consistence - DSB x Mega PTAs dispute mecanism - Role of WTO ? Proposals:. Reinforce Committee on Regional Arrangements

. Discuss Mega in each of WTO Committees

. Bring new cases to DSB

. Should outsiders propose a new agenda to WTO ?

7

2 - Transnationals and GVCs

Importance of trade among them (60%)

Strong representation inside national governments

Strong representation in the international arena

Faceless organizations

8

Fora for negotiations

Nationals Preferential agreements Plurilaterals

9

States Universe X Transnationals Universe

10

Transnationals’ Logic

• Trade in tasks(value chains)

• No Tariffs, No Ad, No CVM, No Saf., No Pref. RO

• Investment, competition, IP , Services

• Harmonized standards (TBT/SPS)

• ARBITRATION

States’ Logic

• Trade in goods

• Tariffs, Quotas

• AD, CVM, Safeguards

• RO

• Subsidies

• DISPUTE SETTLEMENT

Impacts of GVC on WTO / outsiders - Old trade instruments: tariffs, AD, CVM, RO ? - New WTO trade instruments: comp, inv, env,

clime? - Are Mega creating a dual WTO? - Will Mega create a fragmented DSB system ?

- How far are outsiders involved in VAC? - Should oursiders have a new agenda in WTO ?

11

3 - Currency Wars

Number of countries with misalignments

Persistance and magnitude of misalignments

Where to judge exchange violations?

Manipulators (IMF Art IV) x Frustrators (GATT Art XV)

12

HOW TO ESTIMATE MISALIGNMENTS

PPP

Equilibrium rate to current account balance (flow)

Equilibrium rate to net foreign asstes (stocks)

13

Exchange rate – Big Mac 1/ 2014

14

IMF - Estimates Exchange Rate Misalignments (7/2014) Pilot External

Sector Report15

PIIE - FEER – Misalignments – Cline-Williamson (10/2013)

16

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Arge

ntina

Aust

ralia

Braz

il

Cana

da

Chile

Chin

a

Colo

mbi

a

Czec

h Re

publ

ic

Euro

Are

a

Hong

Kon

g

Hung

ary

Indi

a

Indo

nesia

Israe

l

Japa

n

Kore

a

Mal

aysia

Mex

ico

New

Zea

land

Nor

way

Phili

ppin

es

Pola

nd

Russ

ia

Saud

i Ara

bia

Sing

apor

e

Sout

h Af

rica

Swed

en

Switz

erla

nd

Taiw

an

Thai

land

Turk

ey

Unite

d Ki

ngdo

m

Unite

d St

ates

Vene

zuel

a

Misalignment from FEER - Cline & Williamson

May-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 May-13 Oct-13

FGV - China: real exchange rate, fundamentals and exchange rate misalignments (annually) 2013

17

Sources: Misalignment estimates – Observatory on Exchange Rate - EESP/FGV (2013)

FGV - US: real exchange rate, fundamentals and exchange rate misalignments (annually)

201318

Source: Observatory on Exchange Rate - EESP/FGV (2013)

FGV - Brazil: real exchange rate, fundamentals and exchange rate misalignments (annually) - 04/2014

19

Taxa de câmbio real Fundamentos

1980 1985 1990 1995 2000 2005 2010

75

100

125

150

175Taxa de câmbio real Fundamentos

Desalinhamento cambial

1980 1985 1990 1995 2000 2005 2010

-0.25

0.00

0.25

Desalinhamento cambial

FGV - BRAZIL: Misalignments – different methods

   

20

NFA, BS, TOT NFA, BS Models' Average

NFA,TOT NFA

1980 1985 1990 1995 2000 2005 2010

-30

-20

-10

0

10

20

30

40

50NFA, BS, TOT NFA, BS Models' Average

NFA,TOT NFA

FGV - Argentina: real exchange rate, fundamentals and exchange rate misalignments (annually) - 7/ 2013

21

FGV – Misalignments 2013Source: Observatory on Exchange Rate

22

“Tariffication” of exchange rate misalignments

To exam the impact of exchange rate misalignments on trade, one possibility is to transform a misaligment into a tariff and then to adjust the import tariff of each country, through a “tariffication” exercise.

An overvalued exchange rate has the effect of reducing or nullifying the import tariffs of the overvalued country, creating an incentive to imports from third countries.

An undervalued exchange rate, on the other hand, will give an incentive to exports from the undervalued country. A country’s undervalued currency will have the effect of increasing its import tariffs, sometimes above the bound levels at the WTO.

The equation used to “tarifficate” the effects of exchange rate misalignments is presented in the next slide

Tariffication of Exchange Rates

24

Simulations regarding the effects of exchange rate misalignments on selected

Tariff Profiles

Using the “tariffication methodology”, one can represent the effects of exchange rate misalignments on a country Tariff Profile.

The Tariff Profile is comprised of bound tariffs and applied tariffs Bound tariffs are the tariffs negotiated at the WTO as the maximum

permitted level of an import tariff. Applied tariffs are the import tariffs actually applied by a country and

notified to the WTO After applying the “tariffication methodology” the results are adjusted

bound and applied tariffs that represent the actual level of protection of a given country.

In the following slides we present the simulations for Brazil, US and EU Tariff Profiles, considering the effects of the exchange rate misalignments of selected countries.

CHINA - Impacts of Exchange Rates on China Tariff Profile

China devaluation 15% 2013

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

China Tariffs x Adjusted Tariffs - Effects of China Exchange Rate Devaluation Simple averages at HS 2 digits

Applied Tariffs (simple average)

Adjusted Applied Tariffs: China - 14%

Bound Tariffs (simple average)

Cereals Sugar

Wool

MeatFootwear

Vehicles

Musical instruments

FurskinsClothing

Tobacco

CHINA - Impacts of Exchange Rates on China Tariff Profile

Ch-Brazil, Ch-Germany, Ch-US, Ch-Brazil in 2013 Bilateral Misalignments

0%

20%

40%

60%

80%

100%

120%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

China Tariffs x Adjusted Tariffs - Effects of Selected Countries Exchange Rate Deviations Simple averages at HS 2 digits

Adjusted Applied Tariffs - effect of CH + BR deviations - 54%

Adjusted Applied Tariffs - effect of CH + BR (06/12) deviations: 29%

Adjusted Applied Tariffs - effect of GER + CH deviations: 12,5%

Adjusted Applied Tariffs - effect of CH + USA deviations: 7%

Bound Tariffs (simple average)

Applied Tariffs (simple average)

Brazilian exporter (2011)

American exporter

German exporter

Brazilian exporter (06/12)

US - Impacts of Exchange Rates on US Tariff ProfileUS devaluation in 2013 ( - 5%)

141%

158%

146%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

0%

5%

10%

15%

20%

25%

30%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

US Applied Tariffs x Adjusted Tariffs - Effects of US Exchange Rate Devaluation Simple averages at HS 2 digits

Adjusted applied tariffs: USA - 7%Bound tariffs

Applied tariffs

Dairy

Tobacco

vegetables

Leather

Clothing

Footwear

Locomotive

Impacts of Exchange Rates on US Tariff Profile

US-Brazil US-Spain US-China and US-Brazil in Bilateral Misalignments (2013)

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

USA Applied Tariffs x Adjusted Tariffs - Effects of Selected Countries Deviations (Article I)Simple averages at HS 2 digits

Adjusted applied tariffs - effect of USA + BR: 47%

Adjusted applied tariffs - effect of USA + BR: 22% (06/2012)

Adjusted applied tariffs - effect of USA + SPAIN: 13,8%

Bound tariffs

Applied tariffs

Adjusted applied tariffs - effect of USA + CH: 7%

Brazilian exporter(2011)

Brazilian exporter (06/2012)

Spanish exporter

Chinese exporter

30

Impacts of Exchange Rates on EU Tariff Profile

Brazil US China 2013

-20%

0%

20%

40%

60%

80%

100%

120%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

EU Market - Effects of Selected Countries Deviations (Article I) Simple averages at HS 2 digits - Exchange rate misalignments for 2011-12

Adjusted Applied Tariffs -Exchange Rate Overvaluation BR - 40%

Adjusted Applied Tariffs -Exchange Rate Overvaluation BR - 15% (06/2012)

Bound Tariffs

Applied Tariffs

Adjusted Applied Tariffs -Exchange Rate Devaluation USA - 7%

Adjusted Applied Tariffs -Exchange Rate Devaluation China - 14%

Brazilianexporter (2011)

Brazilian exporter (06/2012)

American exporter

Chineseexporter

Brazil - Impacts of misalignments on Tariffs2012 (+20%) 2013 (+15%)

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

Brazil Tariffs x Adjusted Tariffs - Effects of Brazil Exchange Rate Overvaluation (2012) Simple averages at HS 2 digits

Bound Tariffs (simple averages)

Applied Tariffs

Adjusted Bound Tariffs -Exchange Rate Overvaluation BR + 20%

Adjusted Applied Tariffs -Exchange Rate Overvaluation BR + 20%

DairySugar Beverages

Tobacco

LeatherCotton

Clothing

SteelTools

Vehicles

31

32

Impacts of Exchange Rates on Brazil Tariff Profile

Brazil-China Brazil-US Brazil-Germany Bilateral Misalignments in 2013

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

1 - 4 - 7 - 10 - 13 - 16 - 19 - 22 - 25 - 28 - 31 - 34 - 37 - 40 - 43 - 46 - 49 - 52 - 55 - 58 - 61 - 64 - 67 - 70 - 73 - 76 - 79 - 82 - 85 - 88 - 91 - 94 - 97 -

Brazilian Market Adjusted for Multiple Exchange Rate Misalignments Simple averages at HS 2 digits

Applied Tariffs

Brazilian Producer

Adjusted Applied Tariffs -effect of BR + GER: 24%

Adjusted Applied Tariffs -effect of BR + USA: 25%

Adjusted Applied Tariffs -effect of BR + CH: 37%

Dairy

Sugar

BeveragesTobacco Leather Cotton

Clothing

SteelTools

Vehicles

Conclusions

- Countries with overvalued exchange rates (Brazil, South Africa, Australia) have their negotiated tariffs reduced or nullified.

- Countries with undervalued exchange rates (USA, China, Germany) grant subsidies to their exports and their applied tariffs surpass the bound levels agreed at the WTO.

- Substantial and persistent exchange rate misalignments significantly affect or nullify most WTO rules: tariffs, antidumping, countervailing measures, safeguards, rules of origin, regional agreements, DSB retaliations…

- Problem: WTO does not have adequate rules to address the exchange rate issue

33

IMF - manipulation (Article IV)

WTO - frustration (Article XV)

HOW TO SOLVE THE PROBLEM

General Agreement on Tariffs and Trade (GATT)

Article XV.4

Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.

* Ad Article XV -Paragraph 4

The word “frustrate” is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a contracting party which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a contracting party which specifies on an import license the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.

WTO Rules relating trade and exchange rates

- Create a world currency

- Negotiate a fluctuation band

- Solve the conflict bilaterally

A NEW PROPOSAL

36

BOX OF SNAKESMisalignments band 23 countries

(03/14)37

-4

-3

-2

-1

0

1

2

3

4

Jan-

80

Nov

-80

Sep-

81

Jul-8

2

May

-83

Mar

-84

Jan-

85

Nov

-85

Sep-

86

Jul-8

7

May

-88

Mar

-89

Jan-

90

Nov

-90

Sep-

91

Jul-9

2

May

-93

Mar

-94

Jan-

95

Nov

-95

Sep-

96

Jul-9

7

May

-98

Mar

-99

Jan-

00

Nov

-00

Sep-

01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Nov

-05

Sep-

06

Jul-0

7

May

-08

Mar

-09

Jan-

10

Nov

-10

Sep-

11

Jul-1

2

May

-13

Mar

-14

Normalized World Trade Currency PPP

United States Brazil Australia Austria Belgium Canada China

France Germany India Italy Japan South Korea Mexico

Netherlands Spain Sweden Switzerland United Kingdom Malaysia Noruega

Portugal Finlândia +- 2 S.D. +- 1 S.D.

BOX OF SNAKES FOR TTIP(03-2014)

38

-4

-3

-2

-1

0

1

2

3

4

Jan-

80

Nov

-80

Sep-

81

Jul-8

2

May

-83

Mar

-84

Jan-

85

Nov

-85

Sep-

86

Jul-8

7

May

-88

Mar

-89

Jan-

90

Nov

-90

Sep-

91

Jul-9

2

May

-93

Mar

-94

Jan-

95

Nov

-95

Sep-

96

Jul-9

7

May

-98

Mar

-99

Jan-

00

Nov

-00

Sep-

01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Nov

-05

Sep-

06

Jul-0

7

May

-08

Mar

-09

Jan-

10

Nov

-10

Sep-

11

Jul-1

2

May

-13

Mar

-14

Normalized World Trade Currency PPP - Selected TTIP Countries

United States Austria Belgium France Germany

Italy Netherlands Spain Sweden Switzerland

United Kingdom Portugal Finlândia +- 2 S.D. +- 1 S.D.

BOX OF SNAKES FOR TPP(03/2014)

39

-4

-3

-2

-1

0

1

2

3

4

Jan-

80

Nov

-80

Sep-

81

Jul-8

2

May

-83

Mar

-84

Jan-

85

Nov

-85

Sep-

86

Jul-8

7

May

-88

Mar

-89

Jan-

90

Nov

-90

Sep-

91

Jul-9

2

May

-93

Mar

-94

Jan-

95

Nov

-95

Sep-

96

Jul-9

7

May

-98

Mar

-99

Jan-

00

Nov

-00

Sep-

01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Nov

-05

Sep-

06

Jul-0

7

May

-08

Mar

-09

Jan-

10

Nov

-10

Sep-

11

Jul-1

2

May

-13

Mar

-14

Normalized World Trade Currency PPP - TPP Countries

United States Australia Canada Japan Singapore

Chile Mexico Malaysia +- 2 S.D. +- 1 S.D.

BOX OF SNAKES FOR EU AND BRAZIL

(03/2014)40

-4

-3

-2

-1

0

1

2

3

4

Jan-

80

Nov

-80

Sep-

81

Jul-8

2

May

-83

Mar

-84

Jan-

85

Nov

-85

Sep-

86

Jul-8

7

May

-88

Mar

-89

Jan-

90

Nov

-90

Sep-

91

Jul-9

2

May

-93

Mar

-94

Jan-

95

Nov

-95

Sep-

96

Jul-9

7

May

-98

Mar

-99

Jan-

00

Nov

-00

Sep-

01

Jul-0

2

May

-03

Mar

-04

Jan-

05

Nov

-05

Sep-

06

Jul-0

7

May

-08

Mar

-09

Jan-

10

Nov

-10

Sep-

11

Jul-1

2

May

-13

Mar

-14

Normalized World Trade Currency PPP - Selected TTIP Countries + Brazil

United States Austria Belgium FranceGermany Italy Netherlands SpainSweden Switzerland United Kingdom PortugalFinlândia Brazil +- 2 S.D. +- 1 S.D.

How to neutralize ?

In the WTO - Tariffs - Anti- subsidies- Currency safeguards- Compensation

In the PTAs - Reduction of preference

41