Download Currency Wars and Competitive Devaluation.

Welcome to The Economic and Financial Council
(ECOFIN)
Dear delegates,
Welcome to The Economic and Financial Council (ECOFIN) at LVMUN 2015!
This year ECOFIN will discuss and debate over agendas of Currency Wars (Competitive
Devaluation) and Uniting International Trade with Sustainable Development.
With these happening agendas, we expect you to research well and treat this document as an
initial start. We are looking forward to meeting you all and experience your knowledge,
enthusiasm and MUNing skills.
You can revert back to us for any queries.
Please join us on Facebook, where you can check updates and meet other delegates until the
conference begins- https://www.facebook.com/groups/1573640889587149/
Best wishes,
Jan Farfal
Paulina Debska
James Theuerkauf
Head Chair
Assistant Chair
Assistant Chair
2
TOPIC A:
devaluation, especially coins debasement,
was widespread before 19th century, it is
Currency Wars and
hard to talk about the “currency war” as an
Competitive Devaluation.
international phenomenon during those
times, since the volume of international
trade remained insignificant. With the
A) Introduction
With the growing integration of the
markets and increasing capital flows,
competitive
devaluation
is
becoming
increasingly important. Deliberate attempt
to lower the value of currency is often
associated
with
inflationary
policies
aiming to increase local demand, stimulate
exports
and
decrease
unemployment
levels. Nevertheless currency devaluation
can lead to increased prices of foreign
goods and the costs of imported products,
in turn decreasing living standards. More
important however, with increasing trading
costs for other countries and increasing
costs of stable exchange rates, devaluation
policies can provoke other countries to
follow the pattern initiating a very subtle
line between devaluation policy leading to
increased
devaluation
local
that
productivity
provokes
and
growing
competition which might end up in the
currency war.
growing integration of the capital markets
and increasing capital flows in the second
half of the 19th century monetary policies
became playing increasingly important
role. Nevertheless, the adoption of gold
standard system with pegged currency
value, by the major economic powers
between
1870-1914,
diminished
the
possibility of the currency wars. It was
only after world war one, during the times
of
inter-war
instability
when
the
phenomenon of competitive devaluation
really originated. With the advent of Great
Depression, countries started adopting fiat
money policies and devaluating their
currencies, that led to the fall of the goldstandard system. Devaluations reached
unprecedented levels, affecting the living
standards
and
purchasing
power
of
citizens. Rejection of gold standard system
and devaluation of currencies allowed
increased money supply, and inflationary
policies. Those countries that left gold
B) Problem History
standard and those still remaining were in
Currency wars and currency competitions
constant
branded as competitive devaluations were
maintain their exchange rates. However, a
the characteristic that originated in the 20 th
believed people’s poverty provoked by
century. Although the policy of currency
currency competition is much debated. As
competition,
struggling
to
3
Barry Eichengreen summarized:
tensions over their monetary policies from
‘In the 1930s, it is true, with one country
2012.
after another depreciating its currency, no
one ended up gaining competitiveness
C) Current State and Case Study
relative to anyone else. And no country
Since 2012, there has been a heighted
succeeded in exporting its way out of the
rhetorical conflict between the USA and
depression, since there was no one to sell
China,
additional exports to. But this was not
congressmen denouncing China of playing
what mattered. What mattered was that
an “unfair game” (Nazemroaya, 2014).
one country after another moved to loosen
And while many economists expected
monetary policy because it no longer had
currency wars to be over after the end of
to worry about defending the exchange
the Great Financial Crisis in 2010/2011
rate. And this monetary stimulus, felt
(Eichengreen, 2013), the opposite seems to
worldwide, was probably the single most
be the case. The recent European Central
important factor initiating and sustaining
Bank’s €1.1 trillion stimulus package may
economic recovery.’ (Eichengreen, 2013)
again unleash a prolonged period of what
Another phase of currency devaluation
might be associated with the fall of
Bretton-Woods system, when the US
dollar
pegged
currencies
started
implementing floating exchange rates. In
70’s the competitive pressure originated
between US dollar, Deutsche Mark and
Swiss
Franc.
competition
The
was eased
70’s
currency
by exchange
controls and ‘substitution accounts’. (Salin,
1984)
is
with
known
several
as
United
States
“beggar-thy- neighbour”
economic policy: currency wars and
competitive devaluation as they amount to
nations trying to gain economic advantages
without considerations for the ill-effects
they may have on other countries. “This is
a war that pits the central banks of the
world’s major trading blocs against each
other and, as currencies yo- yo in value,
creates a nervousness and caution among
investors
that
can
stagnation” wrote
create
The
years
of
Guardian
on
The period after 2008 financial crisis can
January 25. William White, a senior
be associated with another currency war.
OECD official, furthermore told the Daily
USA, China, Japan and European Union
Telegraph: “We’re seeing true currency
witnessed increased currency devaluation,
wars and everybody is doing it, and I have
with USA and China facing increased
no idea where this is going to end.”
4
Nouriel Roubini, Professor at New York
Bank of England, have engaged in since
University’s Stern School of Business, in
the outbreak of the Great Financial Crisis
another piece of The Guardian, wrote that
and the bankruptcy of Lehman Brothers
almost every country was currently trying
(Joyce et al, 2014).
to devalue against the dollar and against
Yet it is not just the European Central
each other (Roubini, 2014).
Bank that is heavily devaluing its currency
Concretely, the Euro has fallen close
through monetary policy. Japan’s Central
nearly 20% vis-à-vis the Dollar over the
Bank announced in November 2014 that it
past seven months. Some analysts (Chen
would increase QE asset purchases to
and MacDonald, 2015) even expect the
$700bn p.a.
Euro to fall below $1 in a few months time
– in 2014, it was still worth almost $1.40.
Fig. 1: JPY/USD Course for the last 12
months with the JPY loosing nearly half its
Fig. 1: EUR/USD Course for the last 12
value
months with a EUR depreciation of over
The devaluation of the Euro and the Yen
30%
vis-à-vis the US Dollar will mean that
The
Eurozone’s
of
American products will be more expensive
an
in these countries. Therefore, American
unconventional form of monetary policy
exports are expected to fall (Romer, 2011).
where a Central Bank creates new money
In turn, this means that the recovery the
electronically to buy financial assets, such
American economy currently finds itself in
as government bonds, with the aim of
may falter, due to the pressure of the high
directly increasing private sector spending
dollar. What does this imply? Congress
in the economy and returning inflation to
might put pressure on President Obama to
target (Joyce et al, 2011) – could be argued
impose tariffs on artificially low-cost
to just be a later version, or a response, to
imports (Rusbridger, 2015) – but can this
the QE that both the United States’ Federal
be seen as a solution to currency wars?
Reserve, as well as the United Kingdom’s
While, as mentioned at the beginning of
Quantitative
Easing,
latest
or
round
QE,
–
5
this section, the American Congress has
exporters hard, as their products become
articulated its anger at China due to its
much more expensive. As put by The
policy of depreciation, and this may well
Telegraph:
spill over into disputes with Japan and
“The traumatic day in Switzerland has
Europe. If the Chairwoman of the US
exposed limits of central bank power. It is
Federal Reserve, Janet Yellen, were to halt
a foretaste of how difficult it is becoming
her planned increase in interest rates
for countries to resist the tidal force of
(Roubini, 2014) in order to stop the dollar
devaluation policies and currency warfare
from rising, in order to reduce the damage
as deflationary forces sweep the world.
on American exports…
The monetary hegemons are left having to
A full- flown
currency war could be the consequence.
pick their poisons.”
Case Study: The Swiss Franc
D) Potential Country Blocs
“Switzerland ‘capitulates’ on franc as
The Eurozone countries, as united by the
global currency wars take the next victim”,
Euro, are very unlikely to take different
writes Ambrose Evans-Pritchard on 15 Jan
stances in the General Assembly meeting
2015. The franc surged nearly 30% vis-à-
on competitive devaluation and currency
vis the Euro in a day, as the Swiss National
wars. The stance of non-Eurozone EU
Bank (SNB) shocked the financial markets,
members is not that clear. Would Japan
scrapping the three- year currency floor it
join that block? It appears likely, given that
had upheld, and freeing the exchange rate.
the Japanese Central Bank
This came as a response to the QE that was
European Central Bank are engaging in
announced by the European Central Bank,
similar measures.
which
The
would
have
overwhelmed
United
States
and
the
and
the
United
Switzerland. Jeremy Cook, from World
Kingdom, both of whom engaged in heavy
First, said that this retreat was a “total
QE early on in 2009, and are now looking
capitulation”, clearly invoking the war
at increasing interest rates again, seem to
vocabulary. “Nobody wins when you stand
be on a very similar page. Canada is
in the way of a freight train, except the
another likely member to join that block.
train.”
China is a case of its own. While clearly
This huge appreciation of the Swiss Franc,
engaging in competitive devaluation, the
as a consequence of the currency wars
rhetoric it has taken has been openly
involving the Eurozone, will hit Swiss
against it. Where will it join?
6
A series of emerging economies seem to
It is important that the committee keeps in
make another viable country block, as,
mind the mandate of the GA, as well as the
among others,
limits that it has when coming up with a
Raghuram Rajan,
the
governor of the India’s Central Bank, have
resolution,
expressed their worry that competitive
hardest to find a creative and solutions-
devaluations and
currency wars will
oriented approach to solve the current
negatively affect the export and thus
crisis. The committee can also, of course,
growth potential of emerging nations. The
consider the expert advice of other UN
LDCs, given that they have very few
bodies, such as the IMF and the WTO.
while evidently trying
its
instruments to compete in such a war of
the world’s superpowers, are likely to join
such a block.
E) Question a resolution should
address
Centrally, a resolution should address how
to reduce, prevent, and/or stop competitive
devaluations around the world – which
rules could be put in place? How can a
solution be reached? A clear focus should
be to prevent the current currency war
from escalating and turning into a global
disaster – how can we stop this, without
going against the national sovereignty and
the independence of Central Banks?
When
addressing
preventing
the
question
of
future currency wars,
the
committee might find it helpful to think
about the question of exchange rates more
generally, especially how exchange rates
can
actually
strengthen
the
global
economy, and not put it at the hinge of
catastrophe.
7
REFERENCES
http://www.economist.com/blogs/buttonwo
od/2015/02/currency-wars
Chen, X., & MacDonald, R. (2015).
Measuring the Dollar-Euro Permanent
Equilibrium Exchange Rate using the
Unobserved Components Model. Journal
of International Money and Finance.
What's the currency war about?
http://www.bbc.co.uk/news/business11608719
Eichengreen, B. (2013). Currency war or
international policy coordination?.
University of California, Berkeley.
Joyce, M., Tong, M., & Woods, R. (2011).
The United Kingdom’s quantitative easing
policy: design, operation and impact. Bank
of England Quarterly Bulletin, 3 (1).
Joyce, M., Lasaosa, A., Stevens, I., &
Tong, M. (2011). The financial market
impact of quantitative easing in the United
Kingdom. International Journal of Central
Banking, 7(3), 113-161.
Nazemroaya, M.D. (2014). From Energy
War to Currency War: America’s Attack
on the Russian Ruble. Global Research,
Centre for Research on Globalization.
Romer, D. (2011). Advanced
macroeconomics. McGraw-Hill/Irwin.
Roubini, N. (2014). Currency wars bode ill
for the world economy. The Guardian, 25
January.
Rusbridger, A. (2015). Devaluation and
discord as the world’s currencies quietly
go to war. The Guardian, 25 January.
Salin P.(1984) Currency Competition and
Monetary Union. Kluwer
http://www.bloombergview.com/articles/2
014-12-01/stop-worrying-about-currencywars
Eichengreen,
B.
(2012) Exorbitant
Privilege, Princeton University Press
Currency wars: Lose-lose or win-win?
8
and
TOPIC B:
maintain
international
Uniting International Trade
a
trade
balance
and
between
sustainable
development, as well as, develop and
and Sustainable Development.
modify international trade that would
promote sustainable development.
A) Introduction
B) History topic
Since
the
end
of
World
War
II
international trade has made huge progress.
WTO webpage states that :
The liberalization of trade manifested in
decreasing barriers and obstacles allowed
It is the potential impact of economic
achieving unobstructed trading links on the
growth and poverty alleviation that makes
unprecedented
by
trade a powerful ally of sustainable
globalization the increase in traded goods
development. The multilateral trading
has been substantial. Between 1970 and
system is an important tool to carry
2005 the proportion of world product being
forward international efforts aimed at
internationally traded increased from one-
achieving this goal. The purpose of trade
eighth
growing
liberalization and the WTO’s key principle
liberalization has been achieved due to the
of non-discrimination is a more efficient
decreasing number of tariffs, duties and
allocation of resources, which should be
taxes with industrialized countries’ tariffs
positive
on manufactured goods falling from 50%
(https://www.wto.org/English/tratop_E/env
in 1948 to around 3 .7% in 2005. (Brack,
ir_e/sust_dev_e.htm)
to
level.
one-fifth.
Facilitated
This
for
the
environment.
2005). The importance of international
trade in the global development and in
However, the history of the promotion of
economic terms is unquestionable. Yet it
sustainable development by international
became visible, that in the process of
trade for long encountered
growing
obstacles, so as it does now.
trade
liberalization,
social
numerous
development and environmental protection
were occasionally ignored for the sake of
The pillars for modern-day international
increased transfer of manufactured goods.
trade regulations were set up in 1947 with
Therefore, it is essentially important to
nations signing General Agreement on
maintain a balance between those aspects
Tariffs and Trade (GATT) that aimed to
9
remove
trade
framework.
barriers
In 1994
under
unified
during Uruguay
Nevertheless,
introduced
appointment
positive
of
WTO
changes.
Poor
Round, which was the eight consecutive
members of WTO enjoy
round of GATT signatories, a decision was
differential treatment’ that is expressed in
made to set up the body of World Trade
longer repayment time, extra leniency and
Organization, which started functioning
thorough WTO examination in possible
from 1 January 1995. Apart from many
discriminatory
other duties WTO was set up to deal with
example, Brazil won a trial against USA
the prevailing preambles of sustainable
on cotton subsidies unfair treatment, which
development resulting from international
significantly
trade. Violent homogenization of culture
competiveness
leading to the destruction of separate
producers against the American ones.
identities and violating cultural sovereignty
Another example might be the cast lost by
along with
of poor
European Union on sugar tariffs, which
competitive
obliged its members to lower the sugar
rapid
countries
to
industry
were
exposure
developed
two
main
problems
actions.
reduced
of
‘special and
In
2004,
disproportion
Brazilian
for
in
cotton
export rate. (Brack, 2005).
associated with trade liberalization. (Brack,
2005).
Since the establishment of WTO in 1995,
the interplay between international trade
The rapid exposure phenomenon led to
and sustainable development
belief that there was no just balance in the
improved, the WTO document states:
international
countries
system,
exploiting
with
their
has much
developed
poorer
WTO
members recognize that “their
counterparts. Developed countries have
relations in the field of trade and economic
higher industrial tariffs on products from
endeavour should be conducted with a
developing countries in contrast to other
view to raising standards of living,
developed states. Although between 1995
ensuring full employment and a large and
and 2005 developing countries such as
steadily growing volume of real income
China, Thailand, Korea and India managed
and effective demand, and expanding the
to gain noticeable position in the market,
production of and trade in goods and
other poorer nations suffered from the
services, while allowing for the optimal
substantially high tariffs aiming to protect
use of the world’s resources in accordance
their local producers.
with
the
objective
of
sustainable
development, seeking both to protect and
10
preserve the environment and to enhance
vast
the means for doing so in a manner
interconnectedness.
consistent with their respective needs and
include
concerns at different levels of economic
integration of rapidly growing emerging
development.”
market economies. However, on average,
https://www.wto.org/English/tratop_E/envi
world trade has grown nearly twice as fast
r_e/sust_dev_e.htm
as world production in recent decades and
the
expansion
trade
and
Significant
liberalization
expansion
increased
consisted
factors
and
mainly
the
of
However, between 1995 and 2010 the will
noncommodity exports. This phenomenon
of promoting the sustainable development
can be derived from the decline in
became gradually diminishing. Despite,
communication and transportation costs,
powerful and very promising declarations,
that allowed for fragmentation of the
next meetings, next G20 and next climate
production process, vertical specialisation
forums remained unresolved.
in production and subsequently formation
of global supply chains across country
borders. (Riad et al., 2012) For many
C) Current State
Trade is the basis for structural economic
transformation, which in turn is the
foundation of sustainable development.
The issue is addressed in the proposed
Sustainable Development Goals submitted
by the Open Working Group to the
General Assembly during its sixty-eight
session.
Goal
‘strengthening
17
of
calls
the
for
means
the
of
implementation and revitalizing the global
LDCs
and
middle
level
economies,
especially those dependent on commodity
exports, entering a global value chain is
not an easy task, this than prevents changes
in trade flows and structural economic
changes. That is why a united trading
system
is
needed
for
sustainable
development.
Every SDG addresses a wide area,
specified in action targets.
partnership for sustainable development’
(Open Working Group of the General
Universal Multilateral Trading System
Assembly, 2014), an important part of that
is uniting trade to provide an integrated
universal framework enabling countries to
enter the global value chains. Recent
global trade patterns are characterized by
‘17.10 Promote a universal, rules-based,
open, non-discriminatory and equitable
multilateral trading system under the
World
Trade
Organization,
including
through the conclusion of negotiations
11
under its Doha Development Agenda’
Committee on LDCs, 2014) The number of
(OWG GA, 2014)
importing countries was small, which
made LDCs vulnerable to external shocks.
The Multilateral Trading Order is a
In this situation structural transformation is
framework, established by the World
crucial, where economies diversify to
Trade
higher
Organization,
aimed
at
trade
productivity
and
value-added
regulation and liberalization. It unites
sectors, as well as broaden their export
global trade and provides a forum for
partners base. However equal attention has
negotiations. The organization is currently
to be paid to product and partners
trying to complete the Doha Development
diversification, as recent trends show that
Round of trade negotiations, its aim is to
the growth of the share of developing
achieve major reform of the international
countries in export destinations, at the
trading system through the introduction of
same time focuses mainly on products
lower trade barriers and revised trade rules
form low- value-added sectors. (Ancharaz
as well as make the international system
& Pfister, 2013)
more
inclusive
in
face
of
rapid
globalisation. At the end of 2013 WTO
Facilitating LDCs Market Access
agreed by consensus on the Bali Package,
an
agreement
lowering
global
trade
barriers.
‘17.12 Realize timely implementation of
duty-free and quota-free market access on
a lasting basis for all least developed
Developing Countries Exports
countries, consistent with World Trade
Organization
decisions,
including
by
‘17.11 Significantly increase the exports of
ensuring that preferential rules of origin
developing countries, in particular with a
applicable to imports from least developed
view to doubling the least developed
countries are transparent and simple, and
countries’ share of global exports by 2020’
contribute to facilitating market access’
(OWG GA, 2014)
(OWG GA, 2014)
In 2013 the total share of LDC trade
Duty- free and quota- free market access for
remained marginal at around 1.23% of the
LDCs is on the agenda since 1996 and
world’s total, trade deficit grew as imports
during those nineteen years much has been
increased more than exports, that where
done.
concentrated only in several sectors. (Sub-
Ministerial Declaration it was agreed by
In 2005
in
the Hong Kong
12
the WTO member states that developedcountry Members, and developing-country
SDG 17 is a part of a universal agenda,
Members
aimed
declaring
themselves
in
a
at
integrating
the
sustainable
position to do so, agree to implement duty-
development objectives into all areas of
free and quota- free market access for at
international
least 97 per cent of products originating
institutional force so it is up to other UN
from LDCs by 2008. These commitments
bodies to act on the provisions and
where reiterated in the 2013 Bali Package.
implement appropriate policies.
regimes,
that
has
no
However there still remains the problem of
the 3%, part of the developed countries
D) Potential Country Blocs
refuses to provide LDCs with full market
The
access. Additionally many of the excluded
consideration countries economic positions
products are subsidised by the countries
and interests is the distinction between
governments, what makes it even harder
developed countries, developing countries
for LDCs to enter those markets (e.g.
and least developed countries (LDCs).
agricultural products). The Hong Kong
Within
Ministerial Declaration also states that
subsequent divisions can be recognized, on
‘Members shall take additional measures
different basis like the size of the economy
to provide effective market access, …,
(e.g.
including simplified and transparent rules
forums like G8, G-20 or G33 are also
of origin so as to facilitate exports from
worth acknowledging as some of them
LDCs’ Rules of origin specify the amount
often
of local procedure needed for goods to be
coordinate on trade issues.
recognized as products of the exporting
also pay attention to the significance of
country. If they are too restrictive or
regional trading blocks (e.g. EU, NAFTA)
unclear it prevents LDCs from exercising
as they have a big impact on the global
the market access preference. (Bridges,
trade patterns. Their formation leads to
2013). The Decision on Preferential Rules
trade creation between members and trade
of Origin for the LDCs, adopted at the 9th
diversion externally. The member states
Ministerial Conference in Bali, defined a
have to coordinate their trade policies to
set of guidelines for countries to use when
some extent and depending on the level of
formulating their legislation on the subject.
integration may exercise common strategy
However it is only a non-binding proposed
towards outside partners.
basic
division,
those
three
taking
major
BRICS).Economic
share
economic
in
to
groups
governmental
interests
or
One should
framework.
13
E)
Issues
for discussion and
REFERENCES
possible Resolution
Open Working Group of the General
In the discussion and resulting from it
Assembly (2014). Report of the Open
resolution you should try to find creative
Working Group of the General Assembly
solutions to problems of enabling countries
on
to enter global value chains, increasing
(A/68/970). United Nations.
LDCs
exports
and
enforcement
Sustainable
Development
Goals
of
standards as well as try to answer
Riad, N., Errico, L., Henn, C., Saborowski,
questions on how to make the multilateral
C.,
trading system more efficient and inclusive
Changing
while overcoming obstacles posed by
International Monetary Fund.
Saito,
M.,
Turunen,
J.
(2012).
Patterns of Global Trade.
national interests. Try to focus on behindthe-border measures and think about how
The Doha Round. Retrieved March 13,
governments
2015,
could
possibly
through
from
negotiations influence private sectors.
https://www.wto.org/english/tratop_e/dda_
Remember that a resolution requires the
e/dda_e.htm
usage of appropriate language and that
when adopted by ECOFIN it is not
Sub-Committee
on
enforceable.
Countries (2015).
Least-Developed
Market Access for
Products and Services of Export Interest to
Least-Developed Countries. World Trade
Organization.
Ancharaz, V., Pfister, A. (2013). Trade as
a
compass
for
LDCs
structural
transformation. Bridges Africa vol. 2 nr 2.
Doha
Work
Programme
Ministerial
(WT/MIN(05)/DEC).
(2005).
Declaration
World
Trade
Organization.
14
Ministerial Decision (2013). Duty-free and
Quota-free (DFQF) Market Access for
Least
Developed
(WT/MIN(13)/W/16).
Countries
World
Trade
Briefing
(2013).
Organization.
Bridges
Negotiation
Bridges Negotiation Briefing #5, LDC
Issues: Poor Countries Look for Progress
in Bali. Bridges, vol. 17 nr 40
Joseph E. Stiglitz and Andrew Charlton,
Fair Trade for All – How Trade Can
Promote Development (Oxford University
Press, 2005).
Third World Network, Trade Issues/Rules
and WTO:
www.twnside.org.sg/trade.htm.
http://trade.ec.europa.eu/doclib/docs/2013/
july/tradoc_151626.pdf
The World Trade Organization and
sustainable development:
A guide to the debate
https://www.chathamhouse.org/sites/files/c
hathamhouse/public/Research/Energy,%20
Environment%20and%20Development/dec
05wto.pd
15
16