THE CHALLENGES OF THE
MULTILATERAL SYSTEM
2014
Profs. Vera Thorstensen, Emerson Marçal, Lucas Ferraz
Analysis of the Trading System
2
Multilateral Rules
WTO (DSB), IMF, World Bank, OECD, UNCTAD, FAO, WIPO
Preferential Rules
Regional, Bilateral and Non reciprocal Agreements
National Rules
EU, USA, China, India,
South Africa…
Brazil
Challenges
3

Multiplication of PTAs

Logic of Global Value Chains

Currency Wars
1 - PTAs
4

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
Number of PTAs
5
Source: WTO, 2012
MEGA
6








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 ???
Impacts on WTO
7





- 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 ?
2 - Transnationals and GVCs
8

Importance of trade among them (60%)

Strong representation inside national governments

Strong representation in the international arena

Faceless organizations
Fora for negotiations
9



Nationals
Preferential agreements
Plurilaterals
States Universe X Transnationals Universe
10
States’ Logic
Transnationals’ Logic
• Trade in goods
• Trade in tasks(value chains)
• Tariffs, Quotas
• No Tariffs, No Ad, No CVM, No
Saf., No Pref. RO
• AD, CVM, Safeguards
• RO
• Investment, competition, IP ,
Services
• Subsidies
• Harmonized standards
(TBT/SPS)
• DISPUTE SETTLEMENT
• ARBITRATION
Impacts of GVC on WTO / outsiders
11
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



- 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 ?
3 - Currency Wars
12

Number of countries with misalignments

Persistance and magnitude of misalignments

Where to judge exchange violations?

Manipulators (IMF Art IV) x Frustrators (GATT Art XV)
HOW TO ESTIMATE MISALIGNMENTS
13

PPP

Equilibrium rate to current account balance (flow)

Equilibrium rate to net foreign asstes (stocks)
14
Exchange rate – Big Mac
1/ 2014
IMF - Estimates Exchange Rate Misalignments
(7/2014) Pilot External Sector Report
15
May-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
May-13
Oct-13
Venezuela
United States
United Kingdom
Turkey
Thailand
Taiwan
Switzerland
Sweden
South Africa
Singapore
Saudi Arabia
Russia
Poland
Philippines
Norway
New Zealand
Mexico
Malaysia
Korea
Japan
Israel
Indonesia
India
Hungary
40%
Hong Kong
Euro Area
Czech Republic
Colombia
China
Chile
Canada
Brazil
Australia
Argentina
PIIE - FEER – Misalignments – ClineWilliamson (10/2013)
16
Misalignment from FEER - Cline & Williamson
30%
20%
10%
0%
-10%
-20%
-30%
-40%
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) 2013
18
Source: Observatory on Exchange Rate - EESP/FGV (2013)
FGV - Brazil: real exchange rate, fundamentals and exchange
rate misalignments (annually) - 04/2014
19
175
Taxa de câmbio real
Fundamentos
150
125
100
75
1980
1985
1990
1995
2000
2005
2010
1990
1995
2000
2005
2010
Desalinhamento cambial
0.25
0.00
-0.25
1980
1985
FGV - BRAZIL: Misalignments – different methods
20


FGV - Argentina: real exchange rate, fundamentals and
exchange rate misalignments (annually) - 7/ 2013
21
FGV – Misalignments 2013
Source: Observatory on Exchange Rate
22
REER Misalignments - FGV
35%
30%
25%
% to the equilibrium
20%
15%
10%
2011
5%
2012
2013
0%
-5%
-10%
-15%
“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
China Tariffs x Adjusted Tariffs - Effects of China Exchange Rate Devaluation
Simple averages at HS 2 digits
60,00%
Tobacco
50,00%
Cereals
Sugar
Applied Tariffs (simple
average)
40,00%
Footwear
Meat
Furskins
Wool
Clothing
Musical
instruments
Vehicles
30,00%
Adjusted Applied
Tariffs: China - 14%
20,00%
Bound Tariffs (simple
average)
10,00%
0,00%
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 - Impacts of Exchange Rates on China Tariff Profile
Ch-Brazil, Ch-Germany, Ch-US, Ch-Brazil in 2013
Bilateral Misalignments
China Tariffs x Adjusted Tariffs - Effects of Selected Countries Exchange Rate Deviations
Simple averages at HS 2 digits
120%
Adjusted Applied
Tariffs - effect of CH +
BR deviations - 54%
100%
80%
Adjusted Applied
Tariffs - effect of CH +
BR (06/12) deviations:
29%
Brazilian exporter
(2011)
Adjusted Applied
Tariffs - effect of GER +
CH deviations: 12,5%
60%
Brazilian exporter
(06/12)
Adjusted Applied
Tariffs - effect of CH +
USA deviations: 7%
Bound Tariffs (simple
average)
40%
German exporter
Applied Tariffs (simple
average)
20%
American exporter
0%
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 - Impacts of Exchange Rates on US Tariff Profile
US devaluation in 2013 ( - 5%)
US Applied Tariffs x Adjusted Tariffs - Effects of US Exchange Rate Devaluation
Simple averages at HS 2 digits
30%
180%
Tobacco
25%
160%
158%
146%
141%
140%
Clothing
20%
120%
Dairy
Footwear
vegetables
15%
100%
Leather
Applied tariffs
Locomotive
10%
80%
60%
40%
5%
20%
0%
Adjusted applied
tariffs: USA - 7%
Bound tariffs
0%
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 -
Impacts of Exchange Rates on US Tariff Profile
US-Brazil US-Spain US-China and US-Brazil in
Bilateral Misalignments (2013)
USA Applied Tariffs x Adjusted Tariffs - Effects of Selected Countries Deviations (Article I)
Simple averages at HS 2 digits
70%
Brazilian
exporter(2011)
60%
Adjusted applied
tariffs - effect of
USA + BR: 47%
50%
Adjusted applied
tariffs - effect of
USA + BR: 22%
(06/2012)
40%
Brazilian exporter
(06/2012)
Adjusted applied
tariffs - effect of
USA + SPAIN:
13,8%
30%
20%
10%
Bound tariffs
Spanish exporter
Applied tariffs
0%
-10%
Chinese exporter
-20%
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 -
Adjusted applied
tariffs - effect of
USA + CH: 7%
Impacts of Exchange Rates on EU Tariff Profile
Brazil US China 2013
30
EU Market - Effects of Selected Countries Deviations (Article I)
Simple averages at HS 2 digits - Exchange rate misalignments for 2011-12
120%
Adjusted Applied Tariffs Exchange Rate
Overvaluation BR - 40%
100%
Adjusted Applied Tariffs Exchange Rate
Overvaluation BR - 15%
(06/2012)
80%
Brazilian
exporter (2011)
Bound Tariffs
60%
Applied Tariffs
40%
Brazilian exporter
(06/2012)
Adjusted Applied Tariffs Exchange Rate
Devaluation USA - 7%
20%
American exporter
Adjusted Applied Tariffs Exchange Rate
Devaluation China - 14%
0%
-20%
Chinese
exporter
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 - Impacts of misalignments on Tariffs
2012 (+20%) 2013 (+15%)
31
Brazil Tariffs x Adjusted Tariffs - Effects of Brazil Exchange Rate Overvaluation (2012)
Simple averages at HS 2 digits
60%
50%
Clothing
40%
Bound Tariffs (simple
averages)
30%
Leather
20%
Sugar
Vehicles
Cotton
Beverages
Tools
Dairy
Steel
Applied Tariffs
Tobacco
10%
Adjusted Bound Tariffs Exchange Rate
Overvaluation BR + 20%
0%
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 -10%
-20%
-30%
Adjusted Applied Tariffs Exchange Rate
Overvaluation BR + 20%
Impacts of Exchange Rates on Brazil Tariff Profile
Brazil-China Brazil-US Brazil-Germany Bilateral Misalignments in 2013
32
Brazilian Market Adjusted for Multiple Exchange Rate Misalignments
Simple averages at HS 2 digits
40%
Clothing
30%
Tobacco
20%
Dairy
Beverages
Leather
Vehicles
Cotton
Tools
Steel
Sugar
Applied Tariffs
10%
Brazilian Producer
0%
-10%
Adjusted Applied Tariffs effect of BR + GER: 24%
-20%
Adjusted Applied Tariffs effect of BR + USA: 25%
-30%
Adjusted Applied Tariffs effect of BR + CH: 37%
-40%
-50%
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 -
Conclusions
33
- 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
HOW TO SOLVE THE PROBLEM
 IMF
- manipulation (Article IV)
 WTO
- frustration (Article XV)
WTO Rules relating trade and exchange rates
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.
A NEW PROPOSAL
36
- Create a world currency
- Negotiate a fluctuation band
- Solve the conflict bilaterally
BOX OF SNAKES
Misalignments band
23 countries
(03/14)
37
4
Normalized World Trade Currency PPP
3
2
1
0
-1
-2
-3
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.
Mar-14
May-13
Jul-12
Sep-11
Nov-10
Jan-10
Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
Jan-95
Mar-94
May-93
Jul-92
Sep-91
Nov-90
Jan-90
Mar-89
May-88
Jul-87
Sep-86
Nov-85
Jan-85
Mar-84
May-83
Jul-82
Sep-81
Nov-80
Jan-80
-4
-4
United States
Austria
Belgium
France
Germany
Italy
Netherlands
Spain
Sweden
Switzerland
United Kingdom
Portugal
Finlândia
+- 2 S.D.
+- 1 S.D.
Mar-14
May-13
Jul-12
Sep-11
Nov-10
Jan-10
Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
Jan-95
Mar-94
May-93
Jul-92
Sep-91
Nov-90
Jan-90
Mar-89
May-88
Jul-87
Sep-86
Nov-85
Jan-85
4
Mar-84
May-83
Jul-82
Sep-81
Nov-80
Jan-80
BOX OF SNAKES FOR TTIP
(03-2014)
38
Normalized World Trade Currency PPP - Selected TTIP Countries
3
2
1
0
-1
-2
-3
Jan-80
-4
United States
Australia
Canada
Japan
Singapore
Chile
Mexico
Malaysia
+- 2 S.D.
+- 1 S.D.
Mar-14
May-13
Jul-12
Sep-11
Nov-10
Jan-10
Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
Jan-95
Mar-94
May-93
Jul-92
Sep-91
Nov-90
Jan-90
Mar-89
May-88
Jul-87
Sep-86
Nov-85
Jan-85
Mar-84
May-83
Jul-82
Sep-81
Nov-80
BOX OF SNAKES FOR TPP
(03/2014)
39
Normalized World Trade Currency PPP - TPP Countries
4
3
2
1
0
-1
-2
-3
BOX OF SNAKES FOR EU AND BRAZIL
(03/2014)
40
4
Normalized World Trade Currency PPP - Selected TTIP Countries + Brazil
3
2
1
0
-1
-2
United States
Germany
Sweden
Finlândia
Austria
Italy
Switzerland
Brazil
Belgium
Netherlands
United Kingdom
+- 2 S.D.
France
Spain
Portugal
+- 1 S.D.
Mar-14
May-13
Jul-12
Sep-11
Nov-10
Jan-10
Mar-09
May-08
Jul-07
Sep-06
Nov-05
Jan-05
Mar-04
May-03
Jul-02
Sep-01
Nov-00
Jan-00
Mar-99
May-98
Jul-97
Sep-96
Nov-95
Jan-95
Mar-94
May-93
Jul-92
Sep-91
Nov-90
Jan-90
Mar-89
May-88
Jul-87
Sep-86
Nov-85
Jan-85
Mar-84
May-83
Jul-82
Sep-81
Nov-80
-4
Jan-80
-3
How to neutralize ?
41
In the WTO
- Tariffs
- Anti- subsidies
- Currency safeguards
- Compensation

In the PTAs
- Reduction of preference
