International Economic Law and Policy Blog

Fears about Offshoring

Greg Mankiw is famous (infamous?) for his statements about offshoring back in 2004, when he was Chair of the White House Council of Economic Advisors.  At the time, he said:

the "offshoring" of U.S. service jobs is only "the latest manifestation of the gains from trade that economists have talked about" for centuries.

"Outsourcing is just a new way of doing international trade," Mankiw told reporters. "More things are tradable than were tradable in the past and that's a good thing."

He took a lot of heat from people who thought this view was insensitive to the plight of the workers affected.

Never one to shy away from controversy, over on his blog he is picking up his defense of offshoring again.  This time he is responding to well-known economist Alan Blinder, whose views on the issue were discussed in a recent article in the Wall Street Journal.  As the WSJ put it:

[Blinder] is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says.

...

Mr. Blinder says he agreed with Mr. Mankiw's point that the economics of trade are the same however imports are delivered. But he'd begun to wonder if the technology that allowed English-speaking workers in India to do the jobs of American workers at lower wages was "a good thing" for many Americans.

Mankiw's response on his blog was as follows:

Suppose some country had high tariffs that prevented many goods and services from being imported from abroad. Then a new President eliminated the tariffs. Alan would, I believe, applaud the policy move, despite job losses for some workers in previously protected industries.

But the rise in offshoring is much the same. If technology changes and suddenly makes previously nontraded goods tradable, that has precisely same effects as removing tariffs. In both cases, a barrier to trade has fallen. We would import more, and there would be some painful dislocations, but the nation overall would enjoy greater prosperity.

For some reason, Alan does not respond to this rise in technology-driven offshoring as he would to a rise in policy-driven trade. But economic logic suggests that if he is to embrace tariff reductions as an economic positive, he should similarly embrace technology-driven trade increases an an economic positive. But instead of recognizing this change as primarily a force for good, he offers mainly hand-wringing. In doing so, he gives, perhaps unintentially, aid and comfort to the protectionists.

I wonder what the contributors and commenters on this blog think of the issue?  Is offshoring somehow different from traditional trade in goods in terms of its impact on workers?  Is the scope of the impact greater?  Does it matter that different kinds of workers are affected?

Korea Investment and Trade

Today's FT reports that the U.S.-Korea FTA may be held up because of unsatisfactory investment protection provisions:

Against a backdrop of rising economic nationalism, the state audit board has called for the purchase [of Korea Exchange Bank by Lone Star, a U.S. company] to be nullified on the grounds that Lone Star bought the bank at an artificially cheap price in the wake of the 1997 Asian financial crisis.

The Korean government has repeatedly said it will treat foreign investors fairly and in accordance with the law.

Lobbyists for Chevron say diluted investment rules under negotiation could leave its joint-venture refinery with LG Group – one of Asia’s biggest – legally vulnerable to expropriation.

The fear of economic nationalism and expropriation, even in Korea which is no longer a developing country, seems to have stimulated U.S. business lobbyists to act. 

7th BIICL WTO Conference: 22-23 May

The Seventh Annual BIICL WTO Conference is coming up on 22-23 May 2007, in London.  It's a great group of participants as always.  The topics are:

1. The GMOs Dispute
2. Compliance and Remedies: Articles 21.5 and 22 DSU
3. Dispute Settlement under FTAs and the WTO: Conflict or Convergence?
4. WTO Institutional Reform in a Broader Context
5. Continuing the "Global Regulatory Legitimacy" Discussion
6. The Growing Importance of International Juridical Institutions
7. Revisiting the Role of Precedent in WTO Rulings

The full program is available here.

The U.S. and WTO Disputes

Robert Lawrence of the Kennedy School has a report out with CFR entitled "The United States and the WTO Dispute Settlement System."  From the press release, here are some of his main recommendations.  For the system:

Lawrence proposes a series of realistic fixes to bring about a more effective system:

• Allow greater participation by multinational corporations and nongovernmental organizations that have a stake in the proceedings;
• Open hearings before the dispute settlement panels to the public;
• Allow countries to appeal decisions in which the panel has authorized the plaintiff to retaliate;
• Increase the resources of the dispute settlement mechanism so as to accelerate decision-making.

For the U.S.:

Recommendations for the U.S. government include:

• Encourage the U.S. Trade Representative and Department of Commerce to be proactive in using dispute-settlement procedures to open significant export markets;
• Improve the United States’ record of compliance with WTO rulings;
• Establish a panel to examine incidences of U.S. violations of WTO rules and recommend steps to avoid recurrence.

The full report is available here.

Are we, trade law academics, irrelevant?

A column in the New York Times – about how US judges find academic writings irrelevant – reminded me of a question I have had for some time: Why is it that WTO panels and the Appellate Body almost never, ever, refer to scholarly writings (and if they do, it is to Brownlie rather than Jackson)?

On the opinio juris blog the point is made that in public international law, academics have more input than in domestic law. Yet, at the WTO, we must all admit, if you were just to read Appellate Body reports, you could think that there are no trade law academics …

Of course, we would all like to see our writings referred to in WTO reports. But that is not the point. The point is, rather, systemic and raises questions about the WTO "legal system" as such. Why is, for example, the ICJ referring to publications; and not the AB?

I have some possible explanations – the ICJ has Art. 38, the WTO does not; the WTO is or wants to be member-driven; the academic field is too new, divided and often advocacy; disputing parties themselves do not refer to publications in their submissions (but why not?); the AB reads but does not cite to writings, etc. -- but would be most interested in your views.

Doha Zeros

There is an interesting article by Alan Beattie in yesterday's FT.  Beattie first observes that dispute settlement is heating up in response to the continued failure to conclude Doha.  He then refers to Robert Lighthizers' complaints about the AB, which we have discussed before.  Then Beattie makes the following statement about the AB findings regarding zeroing:

For American companies, lawmakers and officials, this is a clear case of panellists legislating from the bench. Warren Maruyama, general counsel for the US trade representative, says the USTR has “substantial problems” with the most recent zeroing case. “If it looks as though the WTO panels or the appellate body are making up law out of whole cloth, that is a problem,” he says. “I think they have to stick to the texts. In situations like [zeroing] the country challenging a measure has the burden of proof, so if the matter is unclear the panel should go negative.”

I just don't see any reasonable argument that anything is made up out of whole cloth or that anyone is legislating from the bench.  Article 2.4 of the Antidumping Agreement provides that "A fair comparison shall be made between the export price and the normal value."  Zeroing is an unfair comparison.   I know that there is some complexity in the operation of the more detailed provisions of the Agreement, and probably some imperfect drafting, but given the language of Article 2.4, it seems simply false to claim that the AB is making it up. 

Detlev Vagts on the History of IEL

For a wonderful tour d'horizon of the history of international economic law, albeit through the lens of the AJIL, see Detlev Vagts article at 100 AJIL 769 (October 2006).  Here is the conclusion:

Looking back on the relationship between international economic law and the Journal, one wonders why it was given so little coverage until so very recently. The first hypothesis is that not much was really going on in the field. Before 1914, the flows of economic factors were largely unregulated. The dramatic events in international economic relations occurred largely in what we would now call the Third World--expropriations, defaults, exclusion of foreigners. They seemed a bit exotic and peripheral to American lawyers. The interwar period saw a major increase in national restrictions but very little effective response at the international level. Nevertheless, quite a few private international law cases stemmed from these restraints. The other explanation may be that the background and interests of Journal editors caused them to overlook significant developments in this field. The early editors focused on questions of war and peace and the international rule of law. [FN67] Although many of them represented corporations, they did little work in the economic field. Tariff controversies were the preserve of a specialized bar, as was intellectual property. The general mind-set of lawyers, including academics, was much less influenced by economic ideas than in the twenty-first century. Arthur Nussbaum was almost alone in connecting law and economics. Nobody would have speculated as to whether the Drago doctrine raised the cost of capital to developing countries. Thus, it was not until well after the post-1945 creation of the great multinational economic institutions that the American Journal of International Law developed the interest in international economic law that we now consider appropriate.

A "Glimpse" at the Aicraft WTO Panel Meetings

As stated in news reports, the WTO will offer a "glimpse" at the upcoming panel meeting in the aircraft case (the one brought by the U.S. against alleged subsidies to Airbus).  The actual meeting will be tomorrow.  However, the "glimpse" will occur on Thursday, via closed circuit transmission.  It will be "carefully censored as many of the allegations involve information Brussels says is confidential."

As with the Hormones Sanctions panel meetings, Anna-Emilia Autio was once again kind enough to agree to attend and report on the meeting.  I will post her notes as soon as she has a chance to digest everything.

The First CAFTA Investment Claim

In what is being reported as the first investment claim under CAFTA Chapter 10 (the claimant's press release says it is "believed to be the first notice of intent" under this provision), Pittsburgh-based Railroad Development Corporation (RDC) filed a claim alleging that actions by the Government of Guatemala have amounted to an indirect expropriation of assets and direct interference with contractual rights.  RDC's version of the facts is as follows:

In August of 2006, following the effective date of CAFTA, the Government of Guatemala issued a Presidential Decree declaring the privatization of the national railway rolling stock "lesivo," or against the interests of the State. Since then, Ferrovias Guatemala has suffered increased losses due to inability to obtain credit; reluctance of freight transportation customers to do business with a private entity under attack by the Government of Guatemala; and inability to generate lease revenue from railway-related businesses such as lease of station facilities in urban areas and the railway's right-of-way between urban centers for businesses such as electricity distribution. RDC President Robert A. Pietrandrea commented, "As the first example of the restoration of a completely abandoned national railway by the private sector, the usufruct agreement was structured in such a way as to use revenue from businesses such as leases in order to fund the basic railway infrastructure. The Government of Guatemala's failure to treat Ferrovias Guatemala and its investors fairly as required under CAFTA has so undermined our ability to operate and meet our investment objectives that it constitutes an indirect expropriation of the company's assets and right to earn revenue."

I first read about the case in the IISD's Investment Treaty News email.  I don't see the latest newsletter on the IISD site yet, but the RDC news release, where the information above comes from, is here: http://www.sys-con.com/read/348643.htm

This could be the first of many!

Joost Pauwelyn on Non-Discrimination

A few months ago, I did a post praising a paper by the WTO's Mireille Cossy, which was on "likeness" and non-discrimination under the GATS.  I stand by my statement that she "addressed some of the hard issues involved in an intelligent way."  However, I also agree with some criticisms of her paper offered in a new paper by Joost Pauwelyn.  Joost writes:

although it follows most GATT and WTO jurisprudence, as well as most commentators, Cossy's focus on "likeness" as the core element of a national treatment test, is misguided. It begs more questions than it resolves. Instead, the focus of a national treatment analysis ought to be on how to define "less favorable treatment of foreign services or service suppliers", in particular: What qualifies as de facto discrimination?

He further explains:

The obsession with “likeness” in the GATT/WTO is unheard of in any other legal arena that needs to decide cases of alleged discrimination, be it in EU law, US constitutional law or before the European Court of Human Rights. In each of these other fora the big question is rather: How to define de facto discrimination? If a law or regulation explicitly differentiates based on sex, race or nationality, de jure discrimination is easily found (even though such discrimination might still be justified under exceptions). The sticking point, of course, is to decide whether laws or regulations that are sex, race or origin-neutral on their face amount to de facto discrimination of, for example, women, blacks or foreigners.

Instead of tackling this question head-on – i.e., although the law or regulation is origin-neutral on the books, is it nonetheless more burdensome on imports? –, especially WTO panels and the Appellate Body have spent most of their energy on deciding whether the domestic products and imports compared are “comparable” or “like” in the first place. Once they find “likeness”, discrimination almost follows naturally, as an afterthought. Yet, this bottom-up approach of deciding, in the abstract, whether two products referred to by the complainant are “like” -- be it shochu and vodka; asbestos and other fibres; GMOs and conventional crops – is tackling the question from the wrong end. Instead of examining whether products are “like” with reference to some purportedly neutral criteria of physical characteristics, end use, consumer tastes and tariff classifications -- all of which are portrayed as permissible features on which to base regulatory distinctions -- panels ought to focus on the specific law or regulation that is at issue, and ask the following question: Does the law or regulation differentiate, de jure or de facto, based on the one and only impermissible criterion, namely: national origin. Instead of approaching the question from what is permissible (the universe of features that validly make products unlike), panels ought to approach the question from what is not permissible (the specifics of whether the regulation distinguishes based on origin).

Now, as most readers of this blog are probably aware, there is a long history of debate over the proper interpretation of the WTO's non-discrimination provisions. People hold very different views on fundamental questions such as (1) which factors should be taken into account and (2) under which parts of the relevant provisions should these factors be considered. I agree with what I see as Joost's view: The core issue in the de facto discrimination cases (which are the hard cases) should not be likeness, but rather "less favourable treatment." (For those provisions that use this term, anyway. For those that do not, the situation is more complicated -- too complicated to get into in this blog post!).

Rather than delve any deeper into this, I'm going to stop for now and see if anyone has any reactions to his paper.  For those wondering why Joost didn't do a post himself, I asked him whether he'd be willing, but he was too busy with other projects.  But, time permitting, he will probably respond if people offer comments.

Trade and Labor--Fast Track

In yesterday's FT, Gary Hufbauer and Theodore Moran argue against the inclusion of requirements for core labor standards in fast track legislation: 

US congressional Democrats, led by Sandy Levin and Barney Frank, are insisting that core labour standards promoted by the United Nations’ International Labour Organisation be included in forthcoming trade agreements as part of a “grand bargain”. They want to make ratification of free trade agreements (with Panama, Peru and Colombia) – and renewal of President George W. Bush’s fast-track trade negotiating authority to conclude the Doha round – conditional on the inclusion of enforceable ILO standards.

Their main argument is that the U.S. itself does not comply with these requirements, with non-conforming rules at both the state and the federal level.  They don't mention the other concern with this proposal:  that many other countries would see it as an avenue for "blue protection." 

Exchange Rates and Trade: A void in international economic law

It has long been recognized that the Bretton Woods system no longer serves the contemporary international trade order. As Frieder Roessler concluded in his piece "The Relationship Between the World Trade Order and the International Monetary System" (see Chapter 7 of his book, "Essay on the International Structure, Functions and Limits of the World Trade Order" (Cameron May 2000)):

The primary aim of the architects of the International Monetary Fund was to achieve currency convertibility and stability. They decided to introduce fixed exchanged rates so as to ensure that the competitive devaluations of the 1930's would not recur. They were ready to sacrifice to some extent trade liberalization for this purpose. The General Agreement was therefore carefully drafted to ensure that the Fund retained full control over exchange controls and that trade restrictions could be imposed, if necessary, to maintain exchange rate stability.

Today, all major currencies are convertible into each other. Exchange rates are no longer fixed. The fear of competitive devaluations that had haunted the creators of the Fund has given way to frustrations over insufficient devaluations. The rules governing the relationship between the world trade order and the international monetary system are thus no longer needed for the purposes for which they were originally drafted.

Roessler's piece was written before the WTO was established. Since then the status of law in this area hasn't changed despite the formal agreements between the WTO and the Fund to strengthen their coordination. The China currency controversy in recent years only highlights the lack of proper rules in regulating the relationship between exchange rates and trade.

It will be a daunting task to replace the Bretton Woods system with a new legal framework for the contemporary world in which both floating and fixed exchange rates are practiced. The task cannot be undertaken by the WTO alone, since it lacks expertise in making monetary and financial policies. Although the IMF presumably has such expertise, it may not be up to the task either - the Fund is increasingly losing its relevance in a world that is flush with cash and liquidity.

The problem is one of macroeconomics. In a globalized economy, what is the net effect of exchange rates on a national economy? Do we have any workable benchmark in judging what the proper exchange rate should be for a currency? In fact, do we even know what the principles are or should be? For example, is stability still a primary goal for the international monetary system? (If the answer is yes, then China's maintenance of a stable exchange rate for the last 13 years, including the period of turmoil during the Asia Financial Crisis, should be commended.) If stability is no longer a primary goal, then why should fixed exchange rates or pegging be allowed to exist at all? Or should we distinguish pegging maintained by a currency board (as practiced in Hong Kong) from that maintained through government intervention in the currency market (as in China) because the latter requires government action on a daily basis? If the criterion is whether government action is involved in setting the exchange rate, then what about central bank's adjustment of interest rates which directly affects the exchange rate of a currency? In this regard, also consider the effect of the strong (or weak) dollar policy pursued by the US government.

If the United States enacts domestic law to allow CVD to be used against "currency subsidies," then such law needs to be consistent with the SCM Agreement. If China were to challenge the US measure at the WTO, then the panel and the AB would be required to interpret the SCM in the context of exchange rate policies. Since the SCM was not designed to deal with such issue, the WTO judiciary could be compelled to either fill a huge gap clearly outside its competence, or declare non liquet. Either way, the result probably would not be good for the WTO system.

On the other hand, a "crisis" triggered by the US measure could prompt the world community finally to focus on this void in international economic law. Remember the effect of US Section 301 on the development of the WTO legal framework?

Public Panel Hearing in the Aircraft Dispute

For those in Geneva (or those willing to make the trip), DG Trade posted the following on its web site in relation to public access to the DS316 Aircraft panel meeting:

External Trade draws your attention to a public viewing of the panel hearing in the WTO dispute between the EC and the US on alleged subsidies to Large Civil Aircrafts, the "Airbus-Boeing Dispute". The participants will be able to view the public portion of the panel's hearing with the parties in the dispute regarding alleged EC subsidies to Airbus. Since the hearing involves - to a significant extent - confidential information, it is likely that only a limited portion of the hearing can be viewed in the public screening. This is the second WTO dispute so far in which the public is able to observe the panel's oral hearing.

The event is due to take place on Thursday 22 March 2007 (subject to final confirmation) on the premises of the WTO in Geneva.

To register for this screening, send an email with your full name, citizenship, position and contact details.

You will shortly thereafter be contacted with information on precise venue and time.

The deadline for the registration is Monday 12 March 5 pm Brussels time.

In a nutshell, contact DG Trade if you want to go: [email protected]

SOAS Call for Papers -- Assessing Law and Economics in the Context of Development

People interested in L&E, law reform and development, might be interested in this call for papers published by the University of London School of Oriental and African Studies. I copy the background section below:

"The model of the relationship of law to economics provided by the current "Law and Economics" school makes certain assumptions about the role of regulation in the promotion of international development. It views legal reform as aiming at implementing a particular view of the market, and free market democracy, consistent with neoclassical assumptions. It therefore uses law reform to aim at the creation and preservation of market supporting institutions centred on property rights and contract. This model has been applied to various transitional and developing countries under the auspices of the Washington Consensus.

However, it has proved an insufficient basis for economic and legal reforms, and is unable to explain the wide variations in the impact of law and institutional reform across countries. These variations highlight the importance of the broader institutional and economic structure, point to the existence of path dependence and reveal the complex nature of concepts such as property rights or contracts. Despite this criticism, however, interpretations of the relationship of law to economics that rely only on the neoclassical framework continue to define the thinking of major international financial institutions."

T.

The Law of Currency Manipulation

Marc's previous post referred to the silence of international trade law on the currency manipulation issue.  Looks like some people are trying to change that, at least under domestic law.  According to a news report, two U.S. Senators, Debbie Stabenow and Jim Bunning, have "introduced legislation to make it easier for U.S. manufacturers to prove they're being injured by currency manipulation and impose sanctions on guilty foreign competitors."  I don't think the full text of the bill is available on the web yet, but the article summarizes its provisions as follows:

Stabenow and Bunning said their legislation would say that if the U.S. government finds "currency misalignment" by a country, it could slap a countervailing duty on a guilty country's goods. And if the U.S. government won't push the claim, the manufacturer could go directly to the World Trade Organization and ask for sanctions.

"This gives the manufacturer the direct ability to go to the WTO with the case," Bunning said.

The senators said the standard for proving currency manipulation would be showing that the value of a country's currency isn't tracking with the currency changes of the rest of the world.

I'm curious about the "go directly to the World Trade Organization and ask for sanctions" part.  Does that mean they can ask USTR to bring a case and USTR must then do so?  Apparently, a similar bill (H.R.782) was introduced in the House last year, but I don't see a "go directly to the WTO" provision in it.

ADDED:  The full text of the bill is now available here: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_bills&docid=f:s796is.txt.pdf  I don't see anything in it about going directly to the WTO.  Perhaps that was a mis-statement or a mis-quote in the article.

Currency Manipulation: The Strange Silence of International Trade Law

The late Raymond Vernon was fond of saying that Multinational Corporations are everywhere except in economic textbooks. In the same vein, I would say that currency manipulation is everywhere the talk of the day except in international trade law which is strangely silent on this issue.

In an interesting article, Peter Morici summarizes the present situation in two sentences:

Currency manipulation . . . is [one of ] the new devil's workshop of trade policy but the Doha Round agenda is silent on these issues. Instead negotiations are locked in a tussle over farm subsidies . . . Regarding exchange rates, the WTO defers to the IMF but the IMF has no power to act. Currency manipulation is not on the Doha Round agenda.

Since Doha is silent on this issue, one could turn to existing agreements to see what they have to offer. The answer is "not much." The only provision which seems to address directly this issue is Article XV:4 of GATT 1994 (an integral part of the WTO Agreement) which says that " Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement."  GATT contains an "Ad Note" which is not really helpful for defining the word "frustrate." It says only that there is no violation of this provision if, in practice, there is no appreciable departure from the intent of one of GATT 1994 Articles.

However, even this meager provision is qualified by Article XV:2 of GATT 1994 which requires the WTO to accept the Fund's determination on the consistency of a measure with the Fund's Articles, and Article XV:9(a) which states that the GATT does not preclude the use of exchange controls or exchange restrictions that are consistent with the Fund's Articles.

According to Siegel ( 96 AMJIL 561) , the plain meaning of these words leads to the fact that:

Even if WTO members considered that the trade effects of a measure brought it within the scope of the GATT, the fact that it was an exchange measure that was applied consistently with the Fund's Articles would mean that it could not be found to violate the GATT.

If Morici is right when he says that the IMF has no power to act, does this mean that ,concerning currency manipulation, international trade law is in a kind of egg and chicken issue? Moreover does this mean that all the talk about currency manipulation as an export subsidy is useless as long as the IMF does not find currency manipulation?  It seems that the answer is "yes," at least if one concludes that the SCM carries forward implicitly Article XV of GATT 1994 and its implicit division of labor between WTO and IMF.

Labor Rights in Trade Agreements

Over at Opinio Juris, Julian Ku has some thoughts on recent and past efforts to incorporate labor rights into trade agreements.

Beyond Doha’s Promises

Suppose that the current deadlock on the Doha trade talks has been broken as developed countries agreed on the dramatic reduction of agricultural tariffs and subsidies. Would such ostensibly generous concessions be automatically translated into poor countries’ enhanced market access to rich countries’ markets? I question this premise by observing that “administrative barriers” such as antidumping measures, regulatory standards (SPS/TBT), and rules of origin, may still impede the poor countries' market access, filling in the gap of conventional trade barriers, such as tariffs and subsidies. (Daniel Kono dubbed this entropic phenomenon as “optimal obfuscation.”)

You can download my paper here. It was presented at Berkeley Journal of International Law 2007 Stefan A. Riesenfeld Symposium, The WTO & International Trade Law After Doha: Where do we go from here?, on March 2.

Comparative Currency Policy

At the risk of turning this into the "Asian Currency Blog," I came across the following piece by an AEI scholar:

In a letter to Treasury Secretary Henry Paulson earlier this month, four leading Democratic congressman urged action to pressure the Japanese to strengthen the value of the Japanese yen by selling off its reserves of dollars and euros. They noted that a weaker yen had artificially cheapened Japanese exports and they attributed the yen’s weakness to Japanese government policy.

...

The congressmen want the Japanese to sell their currency reserves to drive up the value of the yen at the very time that they are urging China not to intervene in its foreign exchange market.

...

The U.S. approach to Japan affects the credibility of our approach to the vexing Chinese currency issue. U.S. policy has been to urge the Chinese toward a more market-determined yuan. An expression of dissatisfaction with market-determined rates in Japan would signal that U.S. currency demands are unreasonable and impossible ever to satisfy. That would be unlikely to further the legitimate U.S. and global interest in allowing necessary movements in the Chinese currency.

Notably, three of the four who signed the Japan letter also supported the China Section 301 petition.

ADDED:  Someone pointed out to me that the Economist (subscription only) has taken a somewhat different view:

Hank Paulson, America's treasury secretary, says he is not worried about the yen's weakness because it is market-driven and reflects economic fundamentals—namely low interest rates and a fragile economy. China, in contrast, is accused of manipulating its currency with heavy intervention.

Mr Paulson is being short-sighted. Even if Japan is not intervening to hold down its currency, the yen is still misaligned. A country with one of the world's largest current-account surpluses and low inflation (but no longer deflation) should have a much stronger currency. Japan's economy is no longer flat on its back. Last year it grew by an estimated 2.3%, and it is forecast to maintain a similar pace this year. As a result, Japan does not need such low interest rates or a super-cheap currency any more. Indeed, Japan's abnormally low rates could be viewed as a form of intervention to hold down the yen.

...

A severely misaligned exchange rate calls for action. It is true, as Mr Paulson says, that Japan is not intervening to hold down the yen. But since Japan still holds almost $900 billion of foreign-exchange reserves, accumulated a few years ago when it was intervening, it is hard to claim that the currency is truly market-determined. Stephen Jen, an economist at Morgan Stanley, argues that Japan's Ministry of Finance should consider selling some of those reserves to break the one-way bet against the yen. There is a risk that such a move could itself upset financial markets. But the lower the yen slides, the greater the threat of an even sharper rebound.