IS “QUANTITATIVE EASING” EQUIVALENT TO EXCHANGE RATE MANIPULATION?

In the context of the present fast track negotiations, a recent article in the New York Times points out the following aspect: The Obama administration fears that prohibitions on currency intervention could boomerang on Washington, allowing trading partners to challenge policies of the Federal Reserve Board.

In the implicit view of those opposing inclusion of currency issues in the fast track legislation,this means that there is a danger that the Federal Reserve’s program of “quantitative easing” could be challengeable in the WTO, exactly as China’s fixed exchange rate.

Although there are pretty good economic arguments that such an equivalence is false (see here), what about the legal aspect?

The implicit idea here is that, through quantitative easing (which could probably result in a fall of the dollar since it increases the supply of dollars), a US Government "public body" (the Federal Reserve) is “entrusting or directing” commercial banks to give a financial contribution benefiting US exporters. This idea is similar to the one argued by the complainant in the recent magnesia WTO case . Here, the complainant argued that China’s export restraints and their price effects indicate that the Government of China “gives responsibility" to domestic producers to carry out the function of providing a financial contribution to magnesia users in China under the form of provision of goods. This is because, the export restraints allegedly lead magnesia producers to divert the sales of magnesia products to the domestic market in order to continue to sell their products.

This argument has been rejected by the magnesia Panel on the basis of previous Appellate Body Statements. The general idea is that a financial contribution is determined by reference to the action of the government and not by reference to the economic effects of the measure at issue:

We consider that this argument is inconsistent with the idea that "the existence of each of the four types of financial contribution is determined by reference to the action of the government concerned rather than by reference to the effects of the measure on a market". We also consider that this argument is in contradiction with the statements of the Appellate Body that entrustment and direction "imply a more active role than mere acts of encouragement", that entrustment or direction "cannot be inadvertent or a mere by-product of governmental regulation" and that "in most cases, one would expect entrustment or direction of a private body to involve some form of threat or inducement, which could, in turn, serve as evidence of entrustment or direction". Furthermore, we find pertinent the Appellate Body's observation that "there must be a demonstrable link between the government and the conduct of the private party". In the latter regard, we agree with Canada's comment that "there is no such demonstrable link between an export restraint and the reactions of market operators, because the government does not task market operators to sell in the domestic market".

In sum, quantitative easing is probably not an “entrusted or directed” financial contribution through commercial banks. First, we are no even sure that the Federal Reserve is a "public body" controlled by the US Government. Prima facie, the Federal Reserve is independent. Second, market operators such as banks will determine autonomously the impact of quantitative easing on the value of the dollar. The Federal Reserve cannot dictate the reactions of such market operators through “threat or inducement”.