Bridges Weekly Trade News DigestVolume 16Number 32 • 26th September 2012

Developed Country Monetary Policy Fuelling “Currency War,” Brazil Says

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Warnings that the global economy is embroiled in a “currency war” were again raised by Brazilian Finance Minister Guido Mantega last week, following the US Federal Reserve’s announcement earlier this month that it would be undertaking another round of monetary stimulus. Brasilia’s plan to temporarily raise import tariffs on various goods has also ramped up tensions between the trading partners, as Brazilian officials - including the country’s president - argue that the measures are both WTO-consistent and necessary to counter the currency effects of developed country policy, amid Washington’s claims that the tariffs are protectionist.

US Federal Reserve’s move sparks unease in Brasilia

The 13 September announcement that the US Federal Reserve would be launching a third round of “quantitative easing”- in other words, buying up assets, in this case mortgage-backed securities, to prop up the economy - has prompted harsh criticism from Mantega on various occasions over the past week, with the finance minister lambasting the Fed’s decision as a “protectionist” one that would help the US little.

Instead, Mantega told the Financial Times, QE3 - as the Fed’s programme is commonly known- would only cause the dollar to depreciate while increasing US exports. Japan’s recent decision to expand its own quantitative easing programme was similarly criticised by the Brazilian finance minister. Mantega has argued that the US and others should instead pursue more fiscal measures, rather than relying too heavily on monetary policy.

“[The United States and Japan] will be stimulating the currency wars as [they] will lead all countries also to pursue these wars,” Mantega told reporters in London on Friday, in comments reported by Reuters. He added that the US Federal Reserve’s and the Bank of Japan’s moves would prompt other countries to act in defence of their economies.

The finance minister has lately said that, if necessary, his country could enact taxes on short-term capital inflows and other measures to prevent Brazil’s currency, the real, from appreciating.

Brazilian President Dilma Rousseff similarly lambasted the Federal Reserve’s decision during her address to the UN General Assembly on Tuesday.

“Monetary policy cannot possibly be the only answer to solve increasing unemployment, higher poverty levels, and lack of heart and lack of a future outlook which currently affect the most vulnerable layers of the population worldwide,” she said.

Noting the imbalance in foreign exchange rates caused by developed country central banks using such monetary policies, she told the audience that emerging economies will again lose market space as a result, due to their own currencies appreciating.

This latest round of quantitative easing is slated to continue until the US job market improves substantially, and involves the Federal Reserve’s buying US$40 billion a month in mortgage debt, in addition to other existing programmes for a total of US$85 billion in asset purchases per month.

Mantega first cautioned of a “currency war” in September 2010, in a speech that made headlines worldwide and fuelled increased debate on the impact of currency valuation on export competitiveness. (See Bridges Weekly, 29 September 2010) Concerns over what critics deem “excessively loose” monetary policy by developed economies - particularly the US and EU - has since been on the rise, with various developing countries arguing that such policies effectively “export the crisis” to emerging and developing economies.

Brazil has been one of the most vocal critics of these measures, as the South American country has worked to push against an import surge exacerbated by the real’s continued appreciation. While the real’s appreciation has lately slowed, with the currency now being at what Mantega calls “a reasonable value,” it is still “overvalued against a basket of Brazil’s trading partners,” according to the minister.

The South American country has also pressed for discussions on the impact of exchange rates on trade to take place in the WTO context, which most recently led to the Geneva-based organisation holding a seminar on the subject. (See Bridges Weekly, 4 April 2012)

QE3 has been defended, however, by International Monetary Fund (IMF) Managing Director Christine Lagarde, who similarly praised the European Central Bank’s OMT bond-purchasing programme and Bank of Japan’s expanded Asset Purchase Program as “big policy signals in the right direction.”

“They point the way forward and create an opportunity to build on what has been done; an opportunity to make a decisive turn in the crisis,” Lagarde said, while noting that prospects for the future remain uncertain.

WTO Director-General Pascal Lamy has similarly noted that “recently announced measures to reinforce the euro and boost growth in the United States are… extremely welcome.”

Some analysts, such as Kevin Gallagher - a professor of international relations at Boston University - have urged the Federal Reserve to approach renewed quantitative easing with caution, with Gallagher urging in a recent Financial Times op-ed that the US use more fiscal policy and not just employ monetary policy.

Gallagher also suggested that the Federal Reserve pursue stronger financial regulation “in order to ensure that financial institutions do not steer newfound liquidity into currency and commodity speculation in emerging markets and developing countries-speculation that can wreak havoc on developing countries’ financial systems and growth prospects.”

Washington criticises Brazilian import tariffs

Meanwhile, Brazilian and US officials have also exchanged barbs over the South American country’s plans to temporarily increase import tariffs, ramping up tensions further between the two trading partners.

“I am writing to state in strong and clear terms the United States’ concern about scheduled and proposed tariff increases in Brazil and Mercosur,” US Trade Representative Ron Kirk wrote in a letter to Brazilian Foreign Minister Antonio Patriota last week.

Brasilia plans to raise import tariffs on 100 products this month, with increases in rates of up to 25 percent for most products. Additional products are set to be added to that list in October.

The scheduled tariff increases are likely to “significantly hit US exports to Brazil in key areas of export interest to the United States,” Kirk said in his letter, criticising these and earlier import tariff increases throughout the year as “clearly represent[ing] protectionist measures” that could risk a response in kind from trading partners.

Brazil’s Foreign Ministry quickly countered the US trade official’s criticism, with a ministry spokesman calling the claims “baseless.”

In his reply to the US trade official, Brazilian Foreign Minister Antonio Patriota argued that the currency effects of US monetary policy is forcing the South American country to tackle “a flood of imported goods at artificially low prices.”

“It would be fairer if those increases [in US exports] took place in an environment not distorted by exchange rate misalignments and blatant government support,” Patriota said, adding that Brazil’s policies were WTO-consistent, unlike the “illegal subsidisation of farm products by the United States, which impact Brazil and other developing countries, including some of the poorest countries in Africa.”

Rousseff similarly defended the trade measures during her UN speech on Tuesday. “We cannot possibly accept that trade defence initiatives of developing countries be unfairly classified as protectionism,” she said, given that current rich country monetary policy is having the effect of worsening current global recession trends.

“It should be called to mind that legitimate trade defence measures are enshrined under the norms of the World Trade Organization,” she added, adding that protectionism and other forms of trade manipulation “should be tackled inasmuch as they accord greater competitiveness in an illegitimate, spurious, and fraudulent fashion.

ICTSD reporting; “UPDATE 5-U.S. warns Brazil on tariffs, gets stinging rebuke,” REUTERS, 21 September 2012; “US calls on Brazil to reconsider proposed tariff increases in Brazil and Mercosur,” MERCOPRESS, 21 September 2012; “Don’t wait for the end of the EU crisis: boost trade among emerging economies, recommends Brazil,” MERCOPRESS, 19 September 2012; “Mantega says Brazil’s economy resilient,” FINANCIAL TIMES, 20 September 2012; “Brazil’s finance chief attacks US over QE3,” FINANCIAL TIMES, 20 September 2012; “UPDATE 3-Brazil may fire up tax artillery in ‘currency war’,” REUTERS, 21 September 2012; “Let’s not get ‘carried away’ by Bernanke’s latest twist,” FINANCIAL TIMES, 25 September 2012.

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