TTIP’s monetary clause muddle

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The negotiations on TTIP should speed up. Despite progress having been made in a few areas, the agenda agreed in mid 2013 will not be completed on time. Still, both sides of the talks should reconsider the idea of including a currency clause into this agreement. Perhaps the most powerful cues regarding the issue were given by Fred Bergsten of Petersen Institute in Washington, who claimed in January 2014 that chapters of TTIP should have been extended by a monetary addition. Recently, a small camp of European protagonists of this idea, have been joined by Matteo Renzi, Italy’s prime minister.

Both are right. The transatlantic agreement has to regulate, at least in broad terms, the dollar-euro link. Some commentators however have argued that the extension of TTIP by a monetary provision is a policy mistake because it belittles the institutional nexus of the IMF, WTO, G-20 or OECD. These voices put aside long noted failures of the recalled multilateral fora in establishing definite international standards for states to their monetary and exchange rates policies. This merits consideration.

First, TTIP is designed as a treaty about deepening transatlantic economic relationship mostly by removing tariff barriers (TB) and non-tariff barriers to trade (NTB). It is a well-established goal since for decades a European currency mismatch — not mentioning other problems — prevented the US and the EU from making any intercontinental trade agreement.

Indeed, replacing bipolarity with bimonetarity along with the euro currency introduction in 1999, became a promising step toward the new stage of the US-EU cooperation. Still, any changing value of these currencies exchange rate plays here an important role. And yet during past 15 years the dollar was periodically undervalued up to 50% towards the euro. As we all know, an undervalued dollar protected the American market and stimulated its exports, making European exports to the US less-profitable. Moreover, there is no agreement between the US and the EU whether and under what conditions monetary and exchange rate policy instruments were used as NTB in the period mentioned above.

Second, TTIP should contribute to “…the implementation of international norms to strengthen the multilateral trade system”. This may become a quandary for some countries within the context mentioned. They have to be assisted by the IMF, which is responsible in general before states by telling them whether their exchange rates are misaligned in a protracted way, thus whether they are applied as NTB. However, it is the IMF that has been failing with these obligations since the 1970s. Or, more precisely, its opinion on the scope of misalliance of the currency are usually broad.

The WTO does not offer many help to its members. It is responsible for setting settlement disputes linked to the exchange rate manipulations in a form of countervailable subsidies and is not bound by the opinions of the IMF. As scholars have asserted recently, the final say on the issue rests on the WTO, which—according to the Agreement on Subsidies and Countervailing Measures (ASCM)—is titled to hold whether undervalued currency stands for countervailable subsidy. However, in recent years the WTO did not open any trade dispute linked to the currency manipulations. One may only wonder what effects the continuation of policy of silence toward dollar-euro link is going to have for the expected extension of intercontinental trade. Indeed, our own research indicates that misaligned exchange rates may have permanent effects on mutual trade relations.

Third, the general equilibrium models say—as CEPR found in its report depicting the outcome of TTIP for Europe and the US—that we are right to have positive expectations about development of intercontinental trade. However, since we live in a currency wars era, no one can assume without any doubt that different monetary systems of two political bodies are equipped in mechanisms to facilitate smooth adjustment of their potential imbalances, which, once appear, will have an adverse impact on their post-industrial economies. All this means, that liberalization of trade becomes an important, though not a sufficient, factor for attaining the goal of adjustment of two given economies.

G20 leaders as much as the OECD are familiar with the issue. The crisis of 2008+ stimulated the first body to create a regulatory background for harmonizing rules on financial market regulation. In 2011, the priority became interlinked – under the collaboration with the OECD in liberalization of capital flows – with the need of a creation of a stable International Monetary System. And yet again, both directions and reports of G20 and OECD are well founded. Especially analyses of the OECD, also the ones prepared jointly with the WTO, underline firmly the negative impact of the untidy exchange rates policies, thus the use of their instruments as NTB, on the volume of trade. By today no real actions have been taken to change this.

In sum, the persistent passivity of multilateral fora in solving the controversial issue of  monetary and exchange rate policy is telling. Thus, we propose that it is essential for partners to include into the future agreement a paragraph, which will facilitate in a general prospective a joint transatlantic debate on monetary issues. In fact, one of us (Dunin-Wąsowicz, June 2014) has already suggested such a solution.

In our opinion:

– TTIP can underline the need of enhancing collaboration between the Fed and the ECB for example in the way of standing committee;
– TTIP can denote the inevitability of the intercontinental debate with regard to the future coordination of exchange rate policy of  the Fed and the ECB;
– TTIP may set up an Institute of Transatlantic Monetary Order with the advisory function for the ECB and the Fed.

150311.mdw.01.139x180    Dr Maria Dunin-Wąsowicz is member of the Board of the  European Movement Forum (Poland) and collaborates with the Institute of International Relations at the University of Warsaw.


150311.ez.01.138x180  Katarzyna Żukrowska is Professor of Economics and serves as director of the Institute for International Studies at the Warsaw School of Economics.




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