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Working Paper 08-2

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

by Aaditya Mattoo, The World Bank
and Arvind Subramanian, Peterson Institute for International Economics

January 2008

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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. Mattoo and Subramanian 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 the authors’ 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 WTO enforcement.

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, already covers investments by SWFs, and other agreements offer a precedent for designing disciplines for SWFs.

Placing the two issues on the trade negotiating agenda may help reenergize the Doha Round of trade negotiations by rekindling serious private-sector interest in the WTO system, the absence of which has immobilized and ultimately derailed the round.


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