Brazil to ask WTO for ‘exchange rate anti-dumping measure’

Brazil is set to propose an “exchange rate anti-dumping” measure to the World Trade Organization that would allow countries to retaliate against trading partners that undertake competitive devaluations of their currencies.

Brazil’s Geneva office is working on the plan, which would mark an escalation of what Latin America’s largest economy has dubbed the “currency war,” a battle against what it sees as the use of loose monetary policies by reserve-currency issuers such as the U.S. to boost their exports.

“This discussion is ripe to be had now,” Fernando Pimentel, development minister, told Brazilian newspaper O Estado de S. Paulo. “All countries are facing the same problem of the devaluation of the dollar.”

The move comes as Brazil blazes its own path in its efforts to deal with the fallout from the global economic crisis.

Last month it slashed interest rates by 50 basis points to 12 percentage points, in spite of persistently high inflation, arguing that the global economic slowdown mandated the cut.

The reduction was a break with other emerging markets, most of which have so far decided to hold fire until the global economic outlook becomes clearer.

Brazil has also proposed a Brics rescue effort for the eurozone, although most commentators believe this may be more about raising the country’s profile in international affairs than seriously tackling Europe`s problems.

The same may be said of Brazil’s proposals for new WTO rules. There have occasionally been suggestions about addressing misaligned exchange rates in the WTO but its existing laws are vague on the subject and the likelihood of negotiating new rules is close to nil.

WTO rules dating back to the founding treaty in 1947 state that its members “shall not, by exchange action, frustrate the intent of the provisions of this agreement.” But that law, written at a time of the Bretton Woods global fixed exchange rate system, would be extremely hard to apply today, given the huge uncertainties around estimates of fair value for currencies.

Some U.S. lawmakers have suggested incorporating estimates of currency misalignment into the “countervailing duties” that the U.S. and other countries impose on imports they deem to be state-subsidized, but many lawyers believe such a move would be open to legal challenge at the WTO.

Under Brazil’s WTO plan, countries would be permitted to retaliate with additional import tariffs against rivals that allow a depreciation of their currencies beyond a certain band.

The level of depreciation considered anti-competitive would be set by the International Monetary Fund.

Estado reported that Brazilian diplomats had sounded out the US and China over the idea and had met “strong resistance.”

Brazil believes the current levels of import duties, which can be set at up to 35 per cent, were decided at a time of stable exchange rates in the early 1990s and no longer reflect reality.

Brazil has adopted a series of measures to protect domestic industry against cheap imports following the sharp appreciation of its currency, the real, which hit a 12-year high against the dollar in July and is up by 36 per cent since the start of 2009.

September 19, 2011

Source: The Financial Times