The Asian Perspective
Edited by Richard Baldwin, Masahiro Kawai and Ganeshan Wignaraja
Chapter 7: Exchange rate policy and regional trade agreements: a case of conflicted interests?
The relationship between exchange rates and trade has long been controversial. The fixed exchange rates of the pre-1914 gold standard were viewed as essential for efficient trade. In the period of 1919–39, exchange rate flexibility was positively correlated with growth, and too rigid adherence to the gold standard was negatively correlated with growth (Eichengreen 1992). However, beggar-thy-neighbor policies of devaluing in order to reduce unemployment in the 1930s came to be seen as a zero-sum strategy that exacerbated the breakdown of the global economy. In the Bretton Woods era the International Monetary Fund (IMF) was responsible for ensuring that countries maintained fixed exchange rates and that any devaluation or revaluation was orderly. Since the advent of generalized floating in the 1970s, no multilateral organization has been responsible for the global exchange rate system. There have been recurring charges of countries using exchange rate protectionism or promoting exports by exchange rate undervaluation. At the same time, the global trading system is increasingly characterized by proliferation of regional trade agreements which, together with World Trade Organization commitments, limit governments’ ability to use traditional trade policy measures (WTO 2011), and may increase the attractiveness of using the exchange rate as a trade policy instrument. The aim of this chapter is to examine the relationship between the exchange rate regime and exchange rate volatility and trade among countries in an RTA.
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