The Comparative. Issue in Focus: Gaining Currency. In This Issue. Alston & Bird s Global Business Strategy Practice.

Transcription

1 The Comparative Advantage A Monthly Digest of Global Trade and Investment February 2007 In This Issue Issue in Focus: Gaining Currency 1 The Doha Charade Continues 2 Talking Heads 2 Global Engagements 3 Forward Trades 4 Trade in Numbers 5 Alston & Bird s Global Business Strategy Practice Washington Office Naotaka Matsukata, Ph.D.* nao.matsukata@alston.com Eric Shimp* eric.shimp@alston.com Yukiko Ko* yukiko.ko@alston.com * Policy advisor; not an attorney. Issue in Focus: Gaining Currency The IMF notwithstanding, there appear to be no rules as to what countries might do with their exchange rates. Desmond Lachman, American Enterprise Institute, February 26, 2007 As the 110 th Congress has turned its attention to the twin subjects of the U.S. trade deficit and the economy s global competitiveness, China and Japan have emerged as primary countries of interest due to the perceived linkages between currency policies and trade deficits. Japan and China rank first and second worldwide, respectively, in terms of the value of their portfolios of long-term U.S. Treasuries. These two countries also rank first and second globally in terms of total foreign exchange reserves, with China holding the top spot in that regard. The new Congress is especially attentive to U.S. manufacturers and labor unions that claim to suffer from unfair structural disadvantages created by foreign exchange policies worldwide. Following on momentum gained during the 2006 campaign, two draft bills have already been proposed in the House of Representatives that would radically alter the U.S. policy approach to the impact of exchange rates on international trade. The Currency Harmonization through Neutralizing Action Act (HR 321) would require the Treasury to analyze China s exchange rate policies and would require the government impose additional tariffs on Chinese exports on the basis of the rate of manipulation of the dollar/yuan exchange rate. The Fair Currency Act of 2007 (HR 782), meanwhile, would expand U.S. trade remedy statutes to treat exchange-rate misalignment as a countervailable export subsidy. The congressional appetite for currency legislation is likely to increase. A key reason? Recent and growing alarms among the financial industry and press over issues such as the global carry trade in Japanese yen. The carry trade will certainly soon appear on the agenda of members of Congress interested in the affect of currency market behavior and government policy upon the value of the dollar and America s economic security. This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

2 In early February, financial market and mainstream media began issuing warning signals over record positions in excess of $1 trillion in worldwide accumulation of yen carry trades. Prominent analysts have warned the increased volume in yen carry trades risks repeating a scenario similar to the 1998 collapse of hedge fund Long Term Capital Management. The February 19 announcement by Bank of Japan of a rate increase to 0.5 percent has done nothing to alleviate concerns that the weak yen will continue to spur heavy volumes of carry trades. Anticipated U.S. rate hikes are expected to reinforce a weak yen by boosting the dollar an additional 7 percent against the yen by the end of Some analysts posit the carry trade actually contributes to the weakening of the yen and that moral hazard caused by Japan s last currency intervention in 2004 continues to serve as an enabler of this pattern. This connection may prove politically volatile for Japan, as it provides a plausible link between Japanese policy and market trades in an artificially low yen. On February 21, Janet Yellen, president of the San Francisco Federal Reserve Bank, noted in a speech that the Bank of Japan rate increase was not sufficient to appreciate the yen and that there remained a significant interest rate differential between Japan and the world. Yellen further noted that the carry trade presented growing risks for speculators. We anticipate that increased market and media attention to the carry trade will spur greater political scrutiny from a Congress already inclined toward legislative intervention. The Doha Charade Continues I am pleased to be able to report some positive news: we have resumed our negotiations fully across the board.at a recent informal gathering of a number of Ministers hosted by our Swiss colleagues in Davos, there was clearly a renewed commitment on all sides to put the Doha Round back on track. WTO Director General Pascal Lamy, February 7, 2007 My personal feeling is that a real pause is needed [in the Doha talks]. Let s have another look at the parameters, the environment, the role of emerging countries, the use of big agriculture production. French Trade Minister Christine Lagarde, February 12, 2007 Pascal Lamy has said we need a breakthrough by the end of March however (of 133 trade negotiators and experts surveyed) only 15 percent are convinced there will be such a breakthrough with 58 percent doubtful, and another 25 percent who see it as a toss-up. Geneva-based respondents are curiously almost twice as pessimistic as those in capitals. Global Trade Opinion Poll, University of Adelaide, January 2007 Talking Heads China is now America s de facto central banker. As it runs record trade surpluses with the U.S., China now largely funds the U.S. deficit by recycling surplus greenbacks back into the U.S. bond market with the U.S. so heavily dependent on China for deficit financing, China now has the power to destabilize both U.S. financial markets and the broader U.S. economy by triggering a stagflation shock. Testimony of Peter Navarro, Associate Professor Economics/Public Policy, UC- Irvine, before the U.S.-China Economic and Security Review Commission, February 1, 2007 A major objective of my two remaining years as Treasury Secretary will be pressing the Chinese government to advance toward the goal of a renminbi whose value is freely set in a competitive marketplace, based upon economic fundamentals. Testimony of Treasury Secretary Paulson before the Senate Banking Committee, January 31, 2007 The unpopularity of the yen as a reserve asset is but one example of how the foreign exchange policies of major governments are shaping global capital flows, and global financial markets. JP Morgan recently discovered that Asian equity market weakness is associated with Asian currency market weakness, but Asian equity market strength isn t associated with Asian currency strength. Why? Because central banks intervene when the money is coming in, but not when it is flowing out. Brad Setser, Head of Global Research, Roubini Global Economics, February 23, 2007

3 Despite the steady stream of rhetorical exhortations from Geneva, our analysis of prospects for the World Trade Organization (WTO) Doha Round, at least in the near term, remains soundly pessimistic. Key contributing factors include the following: Washington s Constraints The United States remains both reluctant demandeur and leading catalyst for these global trade negotiations, a duality that carries certain consequences. First, this allows major WTO partners to essentially remain in a defensive negotiating mode, responding to each new U.S. initiative with politically motivated criticism rather than presenting new proposals of their own. Second, the apparent willingness of many negotiating partners to await U.S. initiatives subjects the fate of the Round to the tenuous relationship between the Bush administration and the newly seated 110 th Congress. The new Congress has launched what promises to be a difficult, time consuming, and in our opinion worthwhile, project reassessing the nation s trade policy. Hearings held in the House during the last week of January indicated that the Democrats will conduct an inclusive process to review the objectives, practices and outcomes of U.S. trade policy. While this process unfolds, America s trade partners must recognize that they are negotiating increasingly with the Congress and its diverse interests, as well as with U.S. Trade Representative. International Limits on Doha Significant barriers to progress also exist in other key capitals. China has demonstrated an almost chronic disinterest in further liberalization. The terms of China s WTO accession have proven politically difficult for Beijing to implement at the provincial and municipal levels, making further concessions difficult for Beijing to consider. Meanwhile, the country s current WTO deal is highly beneficial to China s export sector; there does not appear to be enough commercial demand from Chinese industry for greater market access abroad to justify the further concessions Beijing would need to make to conclude the Round. Regarding rules and standards, China has demonstrated an increasing interest in writing its own rules through bilateral and regional arrangements where Beijing may exert greater influence than at the WTO. On balance, China s mercantilist interests lie in maintaining the appearance of responsible engagement on Doha without actually contributing to the material advancement of the Round. Global Engagements Yukiko Ko, director of the Global Business Strategy Practice was a panelist on Privacy and Data Security Frameworks Around the Globe: Lessons Learned at the RSA Security Conference in San Francisco on February 8. Ms. Ko also gave a speech about the Asia-Pacific Economic Cooperation s cross-border privacy rules at the Asia Trustmark Alliance meeting in Tokyo on February 14. Nao Matsukata, leader of the Global Business Strategy Practice, met in Washington, D.C., with Japan s special envoy for the WTO, Jun Yokota, Ambassador Extraordinary and Plenipotentiary, International Trade and Economic Relations. The Global Business Strategy Practice hosted the 2007 Forum of the Evian Group, Perspectives and Priorities for the Global Trade Agenda in the 21st Century. Featured speakers included John Veroneau, Deputy United States Trade Representative.

4 The European Union, meanwhile, already appears to have turned away from the WTO to focus on priority bilateral relationships. Brussels kicked off 2007 with pursuit of economic partnership agreements with Korea, India and China. The EU s new direction reflects disillusionment with the WTO as well as a desire for trade agreements better suited to political agendas in key capitals. More tellingly, perhaps, are recent findings in the WTO s recently released Trade Policy Review of the European Union. The review notes not only that average EU tariffs on farm imports actually rose from 16.5 percent to 18.6 percent over the past two years, but also that the EU s subsidies on agricultural exports now account for fully 90 percent of all export subsidies provided by the 150 WTO member countries. Clearly, the enduring strength of Europe s agricultural protectionism remains the single greatest obstacle to progress on truly global trade liberalization. The French trade minister called for a break from the Round on February 12. Minister Lagarde s wish appears to have been already granted, as a special meeting in London of agricultural trade envoys from key countries unsurprisingly closed February 23 without, once more, any visible progress on several major obstacles. Mr. Lamy may have called for a breakthrough on the Round by spring, but thus far his rhetoric fails to match the WTO s reality. Forward Trades March 1 March 8-12 March 8-14 Treasury Secretary Paulson to give trade speech at Economic Club of Washington 8th round of U.S.-Korea Free Trade Agreement negotiations, Seoul President Bush travels to Brazil, Uruguay, Colombia, Guatemala and Mexico

5 Trade in Numbers $76.7 billion decline in net private purchases of U.S. long-term securities in December 2006, lowest level of private purchases since May 1995 $2.5 billion net total foreign acquisition of U.S. long-term securities in December 2006, lowest level since October x volume of intra-asian shipping trade compared with U.S.-global shipping trade Share of intra-asian exports 27% China 9% Japan 11% South Korea 75% estimated average import content of Chinese manufactured exports 2016 year by which U.S. global imports are forecast to double 42% American workforce employed by firms engaged in global trade 68% world GDP generated by services sectors 20% services share of global trade $66 billion global surplus of U.S. services trade (2005) 16 billion prospective annual gains in U.S. national income from global tariff liberalization in agriculture and manufacturing $575 billion prospective annual gains in U.S. national income from global services trade liberalization The Comparative Advantage may be reprinted without the express permission of Alston & Bird, so long as it is reprinted in its entirety including the Alston & Bird name and logo. The Global Business Strategy Practice is a consultancy integrated with the legal practices of Alston & Bird that seeks to leverage the firm s expertise in public policy and international trade. If you have any questions, please contact your Alston & Bird attorney or one of the advisors in the Global Business Strategy Practice. If you would like to receive future issues of Alston & Bird s The Comparative Advantage electronically, please forward your contact information including address to comparative.advantage@alston.com. Be sure to put subscribe in the subject line. ATLANTA One Atlantic Center 1201 West Peachtree Street Atlanta, GA Fax: CHARLOTTE Bank of America Plaza 101 South Tryon Street Suite 4000 Charlotte, NC Fax: NEW YORK 90 Park Avenue New York, NY Fax: RESEARCH TRIANGLE 3201 Beechleaf Court Suite 600 Raleigh, NC Fax: WASHINGTON, DC The Atlantic Building 950 F Street, NW Washington, DC Fax: