Knowledge Bank

Recent controversies over "currency wars" in the global economy highlight the inextricable link between exchange rates and international trade. Yet while scholars and policy makers are well aware of the impact of exchange rates on the terms of trade, the existing literature on the political economy of the WTO has overlooked their importance as a determinant of trade disputes.

In this paper, we argue that both exchange rate levels and regime choices are key determinants of WTO dispute initiation. Using a dyadic dataset of all WTO members from 1995 to 2006, we find that countries with more appreciated and overvalued exchange rates compared to their trading partners are more likely to initiate WTO disputes.

We also find that flexible exchange rates are associated with WTO dispute initiation: within dyads, countries with more flexible exchange rate regimes are less likely to initiate disputes and less likely to be targeted by their trading partners.

These results strongly suggest that exchange rates play a key role in determining the frequency of trade disputes between countries within the WTO. More broadly, our findings speak to the importance of more carefully exploring the complex relationship between trade and exchange rate policies in the contemporary global economy.