from the International Monetary Fund
The tariff disputes roiling markets are a reminder that the global system of free trade, which has delivered so much prosperity, is a fragile one.
We all know what happened in the 1930s when trade wars only served to deepen the misery inflicted by the Great Depression. That is why, after World War II, countries agreed to gradually reduce tariffs.
But many continued to restrict flows of goods across borders in other ways as they sought to give their domestic industries an edge over foreign competitors.
One common method was to impose different exchange rates for different kinds of transactions in a bid to stimulate exports and discourage imports. That is one example of what is known as a multiple currency practice, or MCP. Another is to offer favorable exchange rates to selected industries.
In line with its mandate to promote international monetary cooperation, the IMF’s Articles of Agreement forbid its members to maintain MCPs in most circumstances. Countries have historically used such MCPs to mitigate balance of payments pressures, to raise fiscal revenues or allocate resources to specific entities or sectors. However, these practices can be distortionary, create unfair competitive advantage, and hamper international trade and foreign investment.
The Chart of the Week shows that the IMF’s policy has borne fruit. In the mid-1950s, about two-thirds of member countries maintained MCPs. While falling over time, the list continued to include advanced economies such as Belgium, France, Italy, and the UK as well as large emerging markets such as Argentina, Indonesia, Mexico, and Turkey until the 1980s. At the end of 2017, the proportion had dropped to about 15 percent or 28 countries. That is down from 55 countries in 1986. The list is dominated by lower-middle and low-income economies, mainly in Africa and the Middle East, including Armenia, Burundi, Ghana, Kyrgyz Republic, Nigeria, Pakistan, and Sudan.
The IMF’s Articles of Agreement forbid its members to maintain MCPs in most circumstances.
The IMF is now reviewing its policy on MCPs, which was last updated in 1981, to keep up with developments in foreign exchange markets. The goal: to maintain the downward trend in MCPs and prevent a resurgence, including among larger economies – and maintain a level playing field in international trade.
Source
https://blogs.imf.org/2019/06/10/keeping-the-wheels-of-commerce-turning/
Disclaimer
The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board.
