Brazil breaks currency taboo at the WTO

Deep disagreements over global trade tensions will get a rare hearing at the World Trade Organisation this week when diplomats, executives and central bank officials attempt to take the heat out of currency rivalries. The subject is so sensitive that the innocuously labelled 'symposium' almost didn't happen at all and several participants have insisted the list of attendees must be kept confidential.
"In the beginning, expectations were that this issue would be a deal-breaker in the WTO and we would never be in a position to even talk about this because positions were extremely polarised," Brazil's ambassador to the WTO, Roberto Azevedo, said in an interview. "If you had asked 100 WTO members two years ago if we would be having this conversation today, all 100 would have said 'No chance'. But we are."
China's rapid emergence as the world's second-biggest economy has made currency rates a source of fierce trade tensions, particularly with the United States. China's currency is widely perceived to be undervalued, helping Chinese firms to export at the expense of manufacturers in developed economies. But while Brazil's economy has boomed too, its real currency has been prone to surges in value, making it harder for Brazilian firms to export and easier for China to grab market share in Brazil.
Brazil blames this largely on the flood of cash that major central banks such as the US Federal Reserve have been pumping out, seeking to avert recession at home but in practice encouraging investors to buy assets in emerging economies. While the Bush and Obama administrations have resisted pressure to wage a currency war with China, Brazil has raised tariffs and taxes to protect its industry.
Last September, Brazil demanded that the WTO tackle the problem and said global trade rules should treat unfair currency fluctuations as legitimate grounds for trade retaliation, just like unfair trade practices such as dumping. Nine days later, WTO chief Pascal Lamy told the G20 group of nations they had to defuse the dispute before it blew up at the WTO, which did not have a remit to deal with it.
"In the current volatile environment we need to make sure that the WTO system does not crumble under the weight of excessive expectations," Lamy said in a speech. In the face of China's opposition, Brazil watered down its demand for a debate in favour of the less divisive symposium. Although some trade diplomats remain suspicious of Brazil's motives, Azevedo said attitudes were slowly changing.
"As people see that there's no hidden agenda, that this is not an excuse to take drastic actions, and that we are actually interested in having a rational conversation about this in order to perfect the system, the more these allergies are mitigated or simply overcome." There were at least three main schools of thought, he said.
"One has the members who want to talk about it and do something about it. Then there are those who are reluctantly agreeing that we have to talk about it but don't want to talk - at least not yet - about negotiations on any new mechanisms. "And the biggest camp is probably with those who are willing to talk about it but are still uncertain about what to do with this discussion."
Instead of polemics or a near-sighted blame game, he says Brazil wants a dispassionate conversation about how the system works, since it could one day find itself on the other side of the argument, he said. He expected the process would be a long and bumpy ride, with tough conversations, many technical questions and a "tendency to grab headlines". The outcome was unknown, but the symposium had already served its purpose by getting the discussion started.
"If the WTO can talk about this in a reasonable way why can't the other fora do the same? We are hopeful that the IMF and the G20 can take this up in a constructive and effective way," he said.
Despite many participants' qualms, Azevedo said the symposium was only a first step in the process at the WTO. "I don't sense that there's an attempt by anyone to kill this issue or this conversation," he said. "The work programme we adopted has no expiration date on it."
The symposium includes four sessions spread across Tuesday and Wednesday, with speakers from the private sector, public sector, international organisations and academia. Among the speakers are John Murray, deputy governor of the Bank of Canada, and Rajan Goyal, head of international trade and finance at the Reserve Bank of India, according to a draft programme seen by Reuters. There are no US officials but China has sent the head of its state-owned Export-Import Bank.
One trade diplomat said the meeting would "allow people to let off steam". But another lambasted Brazil's thinking. "If you take the Brazilian argument to its extreme, you might as well do away with the multilateral trading system. If you say you're going to adjust the tariffs according to how the currencies are moving ... what do you do when the currency depreciates? What do you do, eliminate the tariff?" She also questioned the idea that trade tariffs could reflect changes in currencies, which fluctuate every second. Azevedo rejected that characterisation of Brazil's position.