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

30 Pages Posted: 9 May 2008

See all articles by Arvind Subramanian

Arvind Subramanian

International Monetary Fund (IMF); Center for Global Development

Aaditya Mattoo

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 4 versions of this paper

Date Written: February 28, 2008

Abstract

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.

Keywords: exchange rates, undervaluation, sovereign wealth funds, World Trade Organization, International Monetary Fund

JEL Classification: F21, F31, F32, F53

Suggested Citation

Subramanian, Arvind and Mattoo, Aaditya, Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization (February 28, 2008). Center for Global Development Working Paper No. 142. Available at SSRN: https://ssrn.com/abstract=1131402 or http://dx.doi.org/10.2139/ssrn.1131402

Arvind Subramanian (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Center for Global Development

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5th floor
Washington, DC 20036
United States

Aaditya Mattoo

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
Room MC 3-327
Washington, DC 20433
United States
202-458-8047 (Phone)
202-676-9810 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/amattoo

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