2013 SIEL/CUP Essay Prize Submission
The Ideational Dimension of Currency
Manipulation: A Fundamental Transformation
of the WTO’s Mandate?
Caitlin Conyers
London School of Economics & Political Science
Email: conyers.caitlin@gmail.com
Tel: +447585946035
The Ideational Dimension of Currency
Manipulation: A Fundamental Transformation
of the WTO’s Mandate?
Introduction
In recent years there has been debate over whether monetary policy, traditionally falling
under the jurisdiction of the International Monetary Fund (IMF), may be considered a trade
barrier under the World Trade Organization (WTO) Agreements. The context of this debate
has been shaped by China’s currency peg of its Renminbi (RMB) to the United States Dollar
(USD) and its alleged undervaluation,1 which has been criticised as constituting currency
manipulation.2 The literature surrounding China’s exchange rate policy has ranged from its
consistency with the IMF Articles of Agreement and the WTO Agreements, to the
relationship between these institutions and the economic effects of exchange rate policies on
trade.3
The literature, at present, has tended to focus on doctrinal matters, analysing legal provisions
of the IMF Articles of Agreement and the WTO Agreements. For example, many authors
look at Article XV of the General Agreement on Tariffs and Trade (GATT) and at the
Agreement on Subsidies and Countervailing Measures (ASCM), concluding that ‘yes’ it
1
From 1995 to 2005, the Renminbi (RMB) was pegged at a rate of 8.28 per USD. From 2005 to 2008 the
Chinese government adopted a managed float, pegging the RMB to an undisclosed basket of currencies, which
allowed the RMB to appreciate. In mid-2008 China re-established the peg to the USD. Since mid-2010 the RMB
has appreciated overall and the RMB/USD exchange rate is approximately 6.17. See Wayne Morrison and Marc
Labonte, ‘China’s Currency Policy: An Analysis of the Economic Issues’, CRS, 22 July 2013
<http://www.fas.org/sgp/crs/row/RS21625.pdf>, 4.
2
Aaditya Mattoo and Arvind Subramanian, ‘Currency Undervaluation and Sovereign Wealth Funds: A New
Role for the World Trade Organization’ (2008) Policy Research Working Paper no. 4668, The World Bank
Development Research Group Trade Team; C. Fred Bergsten ‘The US Trade Deficit and China’ (2005) PIIE
<http://www.iie.com/publications/testimony/testimony.cfm?ResearchID=611>; C. Fred Bergsten, ‘Currency
Manipulation, the US Economy, and the Global Economic Order’ (December 2012) PIIE
<http://www.iie.com/publications/pb/pb12-25.pdf>; Joseph E. Gagnon, ‘Combating Widespread Currency
Manipulation’, (July 2012) PIEE <http://www.iie.com/publications/pb/pb12-19.pdf>.
3
Claus D. Zimmermann, ‘Exchange Rate Misalignment and International Law’ (July 2011) 105 ASIL 3;
Deborah Siegel, ‘Legal Aspects of the IMF/WTO Relationship: The Fund’s Articles of Agreement and the
WTO Agreements’ (2002) 96 AJIL 561; Robert Staiger and Alan Sykes, ‘Currency Manipulation and World
Trade’ (December 2008) Working Paper Series, NBER <http://www.nber.org/papers/w14600> accessed 14
January 2013.
1
violates these Agreements4 or ‘no’ it does not.5 Though these doctrinal arguments are
important, and inform a large part of this paper, there is a need to analyse the background
norms and the assumptions taken for granted within the academic debate. This paper will
attempt to fill this gap by focusing on the conceptual reformulation of ‘currency
manipulation’ as constituting a trade barrier under WTO law.
Accordingly, it is not the goal of this paper to determine whether China’s currency policy
violates its obligations under the IMF Articles of Agreement or WTO law; instead, the paper
will focus on the “ideational dimension” of currency manipulation, taking inspiration from
the constructivist perspective of international trade law developed predominantly by Andrew
Lang.6 As a result, the paper will focus mainly on the production and reproduction of ideas
that have informed and influenced the debate around currency manipulation and will involve
an analysis of the actors, norms and background processes that have framed the conceptual
transformation of currency manipulation as a ‘trade barrier’.
The paper will proceed as follows. Section I provides a short history of the division of
mandates between the IMF and the WTO, highlighting their formation under the Bretton
Woods system, and their relationship today in the context of Article XV:2 of the GATT.
Section II looks at the technical arguments claiming that China’s exchange rate policy
violates the WTO Agreements, focusing on the GATT and the ASCM. Unlike most previous
academic writing, however, this paper will not end there with a conclusion on the strength of
these arguments. Instead, Section III provides an analysis of the role that ideas have played in
informing this debate, making use of the “principles of vision and division”.7 The meaning of
these terms will be expanded on below; here it suffices to say that they are the principles that
make certain governmental policies visible as ‘trade barriers’ while setting aside others as
making up the background context of trade. The underlying argument of this paper is that an
Aluisio de Lima-Campos and Juan Antonio Gaviria Gil, ‘A Case for Misaligned Currencies as Countervailable
Subsidies’ (2012) UNCTAD <http://unctad.org/meetings/en/SessionalDocuments/ditc_dir_2012d2_deLimaCampos.pdf>; Gregory Hudson et al, ‘The Legality of Exchange Rate Undervaluation Under WTO Law’ (2011)
Working Paper, Graduate Institute of International and Development Studies.
5
Catharina E. Koops, ‘Manipulating the WTO? The Possibilities for Challenging Undervalued Currencies under
WTO Rules’ (2010) Amsterdam Centre for International Law <http://ssrn.com/abstract=1564093>;
Zimmermann (n 3).
6
Andrew Lang, World Trade Law After Neoliberalism: Reimagining the Global Economic Order (Oxford
University Press, 2011) 6.
7
ibid 171 citing Pierre Bourdieu, In Other Words: Essays Towards a Reflexive Sociology (Polity Press 1990)
and Practical Reason: on the Theory of Action (Stanford University Press 1998).
4
2
expansion of the term ‘trade barrier’ to include currency manipulation would constitute a
fundamental transformation of WTO law.
Section I: The Relationship Between the IMF and the WTO
In order to provide a context for the discussion to follow it is necessary to understand the
relationship between the IMF and the WTO. In particular, it is important to understand the
differing mandates of these institutions as it provides a basis for the claim that bringing
exchange rate policy within the jurisdiction of the WTO would constitute a significant
transformation. Therefore, this section starts by looking at the history of the Bretton Woods
system and the GATT and then at Article XV:2, which governs the relationship between the
WTO/GATT and the IMF.
The Bretton Woods system and the GATT
The Bretton Woods system was developed following World War II to establish a new
international monetary system.8 The Bretton Woods Agreement Act in 1945 resulted in the
creation of the IMF and the World Bank.9 The mandate of the IMF centred on ensuring
monetary stability; it was “intended to govern currency relations among sovereign states”10
and balance-of-payments issues.11 Therefore, exchange rate policy, as a matter of currency
relations, fell under the mandate of the IMF.
Initially, reminiscent of the role of floating exchange rates in instigating the 1930s trade wars
and the instability of the interwar years, the IMF established a currency system based on
adjustable fixed exchange rates requiring currencies to be pegged to the price of gold or to the
USD (also known as the par value system).12 However, in 1978, recognising the adoption of
floating exchange rates by all of the industrial countries, the IMF issued a Second
Margaret Vires, ‘The Bretton Woods Conference and the Birth of the IMF’ in Orin Kirshner (ed) The Bretton
Woods-GATT System: Retrospect and Prospect After Fifty Years (ME Sharpe 1996) 3.
9
ibid.
10
Benjamin Cohen, ‘Bretton Woods System’, Routledge Encyclopedia of International Political Economy
<http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html> accessed 7 August 2013.
11
Dugkeun Ahn, ‘Is the Chinese Exchange Rate Regime WTO-Legal?’ in Simon Everett (ed), The US-Sino
Currency Dispute: New Insights from Economics, Politics and Law (Center for Economic Policy Research).
12
Michael Bordo, ‘The Bretton Woods International Monetary System: A Historical Overview’ in Michael
Bordo and Barry Eichengreen (eds), A Retrospective on the Bretton Woods System: Lessons for International
Monetary Reform (University of Chicago Press 1993) 81-82.
8
3
Amendment of its Articles of Agreement abolishing the par value system and incorporating
the present version of the Articles, including the provision on currency manipulation.
Developing separately from the international monetary system, it was not until the late 1940s
that a multilateral agreement was created in respect of the international trade system. Though
there were proposals for the creation of an International Trade Organization (ITO), due to
lack of US Congressional approval, only the agreed upon tariff concessions between the
participating countries remained enforceable.13 These tariff negotiations constituted the
GATT 1947, which, until the establishment of the WTO in 1994, operated as the sole
multilateral treaty with regard to international trade.
The relationship between the IMF and the WTO/GATT has been influenced by this initial
distinction between macroeconomic policies such as exchange rates, dealt with by the IMF,
and trade policies dealt with by the GATT. Though there was little collaboration between the
two initially, Article XV:2 established a requirement that the Contracting Parties consult with
the IMF on questions of exchange arrangements. This is still the most significant provision in
terms of the relationship between the WTO and the IMF.
Article XV:2 of the GATT: The Consultation Requirement
As a formal operational agreement between the IMF and the GATT was never established,
the provision governing their relationship has been Article XV:2 of the GATT. Article XV:2
states that:
In all cases in which the CONTRACTING PARTIES are called upon to consider or
deal with problems concerning […] foreign exchange arrangements, they shall
consult fully with the International Monetary Fund. In such consultations, the
CONTRACTING PARTIES shall accept all findings of statistical and other facts
presented by the Fund relating to foreign exchange […] and shall accept the
determination of the Fund as to whether action by a contracting party in exchange
matters is in accordance with the Articles of Agreement.14
Simon Reisman, ‘The Birth of a World Trading System: ITO and GATT’ in Kirshner (n 8) 61.
(Emphasis added). As per Article XXXVIII of the GATT, “CONTRACTING PARTIES” is now replaced by
“WTO” and “Contracting parties” is replaced by “WTO members”.
13
14
4
Therefore, the WTO is required to consult with the IMF on problems concerning foreign
exchange arrangements, including currency manipulation. In turn, the IMF has an obligation
to respond to such consultation as stipulated by the IMF/WTO Cooperation Agreement
signed in 1996.15 Despite the obligatory wording of Article XV:2 and the Cooperation
Agreement, it should be noted that there is still uncertainty regarding the consultation
requirement.16
As per Article XV:2 the WTO is also required to accept all findings of the IMF regarding any
facts and legal determinations concerning an exchange rate policy. A determination by the
IMF regarding the consistency of an exchange rate policy with the Articles of Agreement is a
“legal ruling”.17 As Article XV:9(a) of the GATT further states, “Nothing in this Agreement
shall preclude: (a) the use by a contracting party of exchange controls or exchange
restrictions in accordance with the Articles of Agreement of the [IMF].” Therefore, based on
these provisions, a challenge to an exchange rate policy under the GATT would require a
determination that the policy is inconsistent with the IMF Articles of Agreement.
It should be clear from the discussion above that the IMF and the WTO/GATT have distinct
mandates in terms of exchange rate policy and trade policy. It should also be clear that
exchange policy still falls squarely within the jurisdiction of the IMF regardless of any
implications it may have for international trade. This fact has led a number of authors to
conclude that the scope of WTO rules needs to be changed in order to accommodate a
challenge before the WTO Dispute Settlement Body (DSB).18 From the perspective of one
author, exchange rate policy represents a “loophole” in the international legal system and thus
requires some sort of reform.19
The claim that exchange rate manipulation should be challengeable under the WTO DSB is
evidence of its conceptual reformulation as a trade barrier. The following section will outline
IMF, ‘Agreement Between the International Monetary Fund and the World Trade Organization’ (9 December
1996) reprinted in Selected Decisions and Selected Documents of the IMF (Twenty-fifth Issue 2000) 705 para 8.
16
Siegel (n 3) 593. See also Panel Report, India—Quantitative Restrictions on Imports of Agricultural, Textile
and Industrial Products, WT/DS90/R (Nov. 25, 1997) paras. 5.12-5.13. Cf Appellate Body Report, Argentina—
Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/AB/R & Corr. 1, DSR
1998: III, para 84. The Appellate Body has not issued a decision on the matter of consultation.
17
Siegel, ibid 576.
18
Mattoo and Subramanian (n 2); Haneul Jung, ‘Tackling Currency Manipulation with International Law’
(2012) 9 MJIEL 2, 199; Campos and Gil (n 4).
19
Christoph Hermann, ‘Don Yuan: China’s ‘Selfish’ Exchange Rate Policy and International Economic Law’
[2010] EYIEL 51.
15
5
the primary arguments made under WTO law. However, this section and the following one
only attempt to illustrate the debate from the perspective of the institutional shifts that are
occurring and provide a context for the discussion on the ideational shift provided in Section
III.
Section II: Currency Manipulation under the WTO
Much of the literature surrounding currency manipulation focuses on the potential to use
WTO rules to challenge China’s exchange rate policy. This section will highlight these
arguments focusing on the two strongest claims:20 (1) that it “frustrates” the intent of the
GATT under Article XV:4; and (2) that China’s exchange rate policy constitutes a prohibited
export subsidy under the ASCM.
The underpinning of these claims is the allegation that China’s exchange rate policy has
resulted in an undervaluation of the Chinese RMB, as the peg has prevented the RMB from
appreciating against the USD.21 More specifically it is argued that the undervaluation
provides an unfair advantage to Chinese exports causing them to be cheaper than domestic
US products. The further US policy argument is that the undervaluation is a chief source of
the US trade deficit and unemployment rate.22
“Frustration” of the Intent of the GATT under Article XV
As per Article XV:4 GATT, “Contracting parties shall not, by exchange action, frustrate the
intent of the provisions of this Agreement…”. The Ad note to the Article defines frustration
as the “appreciable departure from the intent of [any Article of this Agreement]”. Therefore,
the finding of a violation under Article XV:4 would require: (1) that the measure amounts to
an ‘exchange action’; and (2) that there is an appreciable departure from the intent of a
specific Article of the GATT.
The argument that China’s exchange rate policy may constitute a non-violation nullification or impairment
under GATT Article XXIII is not addressed in this paper. See Staiger and Sykes (n 3) 33-34.
21
Morrison and Labonte (n 1) 4.
22
See eg Robert E. Scott and others, ‘Reducing US trade deficits will generate a manufacturing-based recovery
for the US and Ohio’ (7 February 2013) The Economic Policy Institute <http://www.epi.org/publication/bp351trade-deficit-currency-manipulation/> (“The U.S. goods trade deficit could be reduced by between about $190
billion and $400 billion over the course of three years…by eliminating global currency manipulation. [The
reduction] would create between 2.2 million and 4.7 million US jobs”).
20
6
It has been argued that the language of Article XV:4, with regard to ‘exchange action’ refers
only to liberalization of payments or convertibility, which would not include exchange rate
policies.23 However, at the time it was included, ‘exchange action’ was used “in a broad
sense”24 and thus may be interpreted to include exchange rate policies. The more difficult
hurdle is the interpretation of the Ad note, which requires the frustration of the intent of a
specific Article of the GATT. Arguments have been made in favour of a frustration of intent
of Article II (Schedule of Concessions).25 However, it is unlikely that it would be
challengeable as “tariff bindings are always in percentages, and these rates do not change
with currency fluctuations.”26
In any event, if the WTO DSB were to find a frustration of intent, Article XV:9(a) would
prevent a finding of violation under the GATT if the exchange rate was consistent with the
IMF Articles of Agreement. Though it has been argued that Article XV:4 takes precedence
over the exception as lex specialis, it has been argued persuasively that this interpretation is
contrary to the negotiating history of the GATT.27 Therefore, an argument under Article
XV:4 of the GATT would still require a determination by the IMF that the policy is
inconsistent with the Articles of Agreement. In light of this, an analysis of the IMF provisions
governing currency manipulation is required.
Under the IMF Articles of Agreement, members are not required to adopt a particular
exchange arrangement28 as exchange rate policy is an important aspect of monetary
sovereignty.29 Accordingly, the IMF’s main function is surveillance over exchange rate
policy to ensure consistency with the Articles. With regard to currency manipulation, Article
IV:1(iii) of the Articles of Agreement states that members shall not manipulate exchange
rates “in order to prevent effective balance of payments adjustment or to gain an unfair
competitive advantage”. Thus, a finding of exchange rate misalignment requires a finding of
Erik Denters, ‘Manipulation of Exchange Rates in International Law: The Chinese Yuan’ ASIL Insights
(2003) <www.asil.org/insigh118.cfm>; Michael Waibel, ‘Retaliating against exchange-rate manipulation under
WTO rules’ (16 April 2010) VoxEU.org <www.voxeu.org/index.php?q=node/4881> accessed 25 July 2013.
24
Zimmermann (n 3) citing John H. Jackson, World Trade and the Law of the GATT 479-91 (1969) at 479. See
Ahn (n 11).
25
Staiger and Sykes (n 3) 30.
26
ibid 11.
27
Siegel (n 3) 609.
28
Article IV Section 2(b), IMF Articles of Agreement.
29
Waibel (n 23) 133.
23
7
intent.30 Though the Articles of Agreement do not include a definition of ‘manipulation’, its
meaning has been elaborated on in the IMF Executive Board’s 2007 Decision on Bilateral
Surveillance (hereinafter “2007 Decision”).
The 2007 Decision states that ‘manipulation’ will only be found where the policy is “targeted
at—and actually affect[s]—the level of an exchange rate”.31 The IMF decision goes on to
state that for the policy to be illegitimate it must be undertaken with the intent of “securing
fundamental exchange rate misalignment…to increase net exports”.32 It has been argued that
China’s exchange rate policy is ‘manipulation’ as it affects the level of the exchange rate;
however, it is controversial whether the policy has the intent of securing fundamental
misalignment and increasing net exports.
Additionally, the 2007 Decision added a principle that members “should avoid exchange rate
policies that result in external instability”. However, if it can be shown that a member’s
policy is intended to promote domestic stability, it will be assumed to be in the interests of
external stability.33 Thus, there is still an element of intent involved in its determination,
which will be difficult to establish as members are given the benefit of the doubt. For this
reason, the requirement of intent has been described as the “paralysis of the law” as it makes
the provisions on currency manipulation “essentially inoperable”.34 As a result, authors have
pursued the classification of undervaluation as a countervailable subsidy under the ASCM,
justifying unilateral action.
Prohibited Export Subsidy under the ASCM
In order to constitute a prohibited export subsidy under the ASCM, China’s exchange rate
policy must meet three requirements: (1) a “financial contribution by a government or any
public body”; (2) a “benefit conferred”; and (3) it must be specific.35 With regard to the
IMF, Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework, para 3.3 (June 28,
2006) <http://www.imf.org/external/np/pp/eng/2006/062806.pdf> (emphasis added).
31
Decision of the IMF Executive Board, ‘Bilateral Surveillance over Members’ Policies’ (15 June 2007)
<www.imf.org/external/np/sec/pn/2007/pn0769.htm#decision>.
32
ibid.
33
ibid para 6.
34
Claus D. Zimmerman, ‘Currency Manipulation and the Paralysis of the Law’ (31 August 2010)
<http://ssrn.com/abstract=1300542> 5.
35
Articles 1.1 and 1.2 ASCM.
30
8
‘financial contribution’, Article 1.1(a)(1) contains an exhaustive36 list of four examples. In
this context, it has been argued that an undervalued exchange rate may constitute a “direct
transfer of funds” as the Chinese government “engages in exchange transactions on the
foreign exchange market”.37 However, this transaction is not made directly with Chinese
exporters; but the conferral of an indirect benefit may be sufficient.38 A key problem with this
argument is that it conflates the requirements of financial contribution and benefit, which the
Appellate Body has confirmed must be considered “separate legal elements”.39
For a benefit to be conferred, the financial contribution must result in “a more advantageous
position” as compared to “those available to the recipient in the market”.40 Therefore, it is
argued that the undervaluation of the exchange rate makes Chinese exports cheaper than they
would be based on a market-determined exchange rate.41 However, the economic analysis
carried out by Staiger and Sykes raises a number of problems with this deduction. For
example, an analysis would need to take into account price adjustment, as it is the relative
prices between countries that result in real effects in the long run.42
In order to satisfy the specificity requirement as a prohibited export subsidy,43 the policy
must be “contingent, in law or in fact, whether solely or as one of several other conditions,
upon export performance”.44 Scholars have looked at de facto contingency arguing that since
the benefit of the undervaluation is only generated if a producer exports, the undervalued
exchange rate is contingent upon export performance.45 However, as Leviton makes clear,
“export performance is not the sole objective of [China’s] currency policy”. 46 Thus, it is
36
Panel Report, US—Measures Affecting Trade in Large Civil Aircraft (2nd complaint) WT/DSB/M/313, para
7.955.
37
Koops (n 5) 3. Matthew Leviton, ‘Is it a Subsidy? An Evaluation of China’s Currency Regime and its
Compliance with the WTO’ (2005) Paper 660, Bepress Legal Series <http://law.bepress.com/expresso/eps/660>
accessed 15 January 2013, 18.
38
Staiger and Sykes (n 3) 32; Jonathan E. Sanford, ‘Currency Manipulation: The IMF and WTO’ (8 May 2008)
CRS Report for Congress, RS22658, 31.
39
Appellate Body Report, Brazil—Aircraft WT/DS46/AB/R, para157.
40
Appellate Body, Canada—Aircraft WT/DS70/AB/R, para 149.
41
Leviton (n 37) 20; Gary C. Hufbauer & Yee Wong, ‘International Economics Policy Briefs: China Bashing
2004’ (September 2004) Peterson Institute of International Economics
<http://www.iie.com/publications/pb/pb04-5.pdf>.
42
See Staiger and Sykes (n 3) 8-25. Also see Koops (n 5) 4.
43
All prohibited export subsidies are deemed to be specific (Article 2.3 ASCM).
44
Article 3.1(a) ASCM.
45
The China Currency Coalition, The Section 301 Petition (September 2004)
<www.chinacurrencycoalition.org>; Koops (n 5) 5.
46
Leviton (n 37) 24.
9
arguably not “tied to” or “conditional” on export performance.47 Evidently, there are
difficulties with classifying currency manipulation as an export subsidy.
However, if the US were able to establish that China’s exchange rate policy did amount to a
subsidy under the ASCM and that Chinese imports “are causing [domestic] injury, [the US]
may impose a countervailing duty [in accordance with the ASCM]”.48 This would be
convenient for the US because it would bypass the problems of finding intent under Article
XV:4 and the IMF Articles of Agreement noted above. It would instead be based on the
economic effects of the policy and any injury caused.
As stated above, the purpose of this paper is not to determine whether China’s exchange rate
policy violates the WTO Agreements. The relationship between the IMF and the WTO and
the preceding arguments are only necessary to provide the context for the analysis of the
ideational dimension of currency manipulation presented in the next section.
Section III: The Ideational Dimension of Currency Manipulation
This section will analyse the ideational dimension of currency manipulation; namely, the
actors, norms and processes that inform and influence the current debate. The first part will
focus briefly on the ambiguity of the term ‘manipulation’ in international economic law. The
second will provide an overview of the actors involved, focusing on individuals and
institutions in the US and the ways in which exchange rate policy has been made visible (by
use of the principles of vision) as a trade barrier in contravention of WTO law. Finally, the
principles of division will be analysed, highlighting the processes by which legitimate
governmental actions have been distinguished from illegitimate ones.
Before proceeding to the analysis, it is necessary to provide a basic understanding of the
principles of vision and division borrowed from the work of Pierre Bourdieu. As Bourdieu
states, “The social world may be uttered and constructed in different ways according to
different principles of vision and division”.49 Accordingly, in the context of international
47
Fn 4 of the ASCM; Canada—Aircraft, para 86.
Article 19 ASCM.
49
Pierre Bourdieu, ‘Social Space and Symbolic Power’ (Spring 1989) 7 Sociological Theory 1, 19.
48
10
trade law, the principles of vision and division are the principles through which trade barriers
are articulated and created; “they form a kind of ‘established code’ by reference to which
existing and new trade problems are identified, evaluated, and addressed.”50 Thus, they are
the principles through which governmental policies are made visible as trade barriers and
through which illegitimate policies are distinguished from legitimate ones.
Indeterminacy and the Role of Interpretation
It is evident from the discussion above that the definition of ‘currency manipulation’ is far
from definite and remains open to interpretation. The importance of this section is to
highlight this indeterminacy and thus, the way in which currency manipulation can only be
made determinate through processes of interpretation and application. As Lang states, it is
these processes that tie “ambiguous and indeterminate general disciplines…to concrete
projects of political and economic reform”.51 This is significant in considering the role that
the ideational dimension plays in determining the meaning of currency manipulation.
It should be stated from the outset that “the main virtue of Article IV, Section 1 was that it
would leave as much freedom as possible for the national determination of domestic
policies”; in particular, for the US.52 Today, even the US Treasury has admitted that this
ambiguity remains and that determining whether another country is involved in currency
manipulation “is inherently complex, and there is no formulaic procedure that accomplishes
this objective.”53
However, this ambiguity is often overlooked. As Hermann has stated, “The mere existence of
rules…makes it possible [in diplomacy] to point at behaviour and label it ‘illegal’”.54
However, what does ‘illegal’ really mean in the context of currency manipulation? As
detailed above, the labeling of an exchange rate policy as ‘illegal’ requires a determination of
50
Lang (n 6) 171 citing Gerard Curzon, Multilateral Commercial Diplomacy: The General Agreement on Tariffs
and Trade and its Impact on National Commercial Policies and Techniques (Michael Joseph 1965) 335.
51
ibid 165.
52
Joseph Gold, Legal Effects of Fluctuating Exchange Rates (IMF, 1990) 16-17.
53
Daniel Griswold, ‘Who’s Manipulating Whom? China’s Currency and the US Economy’ (11 July 2006)
Trade Briefing Paper No. 23, Cato Institute, <http://www.cato.org/publications/trade-briefing-paper/whosmanipulating-whom-chinas-currency-us-economy> citing the US Department of the Treasury, ‘Report to
Congress on International Economic and Exchange Rate Policies’ (May 2005).
54
Hermann (n 19) 51.
11
‘manipulation’, which implies a determination of ‘fundamental misalignment’ and the
intention to gain an ‘unfair’ competitive advantage. The IMF has defined ‘fundamental
exchange rate misalignment’ as “a deviation of the real effective exchange rate from its
equilibrium level, that is, the level consistent with a current account in line with economic
fundamentals”.55 The term ‘unfair competitive advantage’ has not been defined. Therefore,
the labeling of an exchange rate policy as ‘illegal’ employs a number of assumptions about
inter alia what represents ‘fair’ trade between countries, what constitutes a current account
‘equilibrium’, and how ‘economic fundamentals’ are to be determined.
Therefore, a difference in perspective, preference and technique with regard to these
determinations will often render different definitions of what constitutes illegitimate
‘currency manipulation’. Thus, the following sections will analyse the processes that produce
these understandings and techniques, as well as how they have informed the debate around
China.
Principles of Vision: A Further Expansion of the Term ‘Trade Barrier’
As Staiger and Sykes state, “[t]he nature of the international problems created by the
devaluation is not analogous to the international problems traditionally addressed by trade
agreements.”56 It has been shown that prior to the 1970s, the GATT dealt only with domestic
regulation that imposed barriers on goods at the border.57 However, from the 1970s on, the
term ‘trade barrier’ was reformed to include ‘behind the border’ barriers that had an effect on
international trade. Therefore, rather than being based on its “form or intention”, the
legitimacy of domestic regulatory action became based on its “economic effects”. 58 In Lang’s
analysis of the WTO’s “neoliberal turn” this represented a profound transformation of the
principles of vision.59
IMF, ‘Surveillance Guidelines, Landmark Framework for IMF Surveillance’ (21 June 2007)
<http://www.imf.org/external/pubs/ft/survey/so/2007/POL0621B.htm>.
56
Staiger and Sykes (n 3) 19 (emphasis omitted).
57
Robert E Hudec, The GATT Legal System and World Trade Diplomacy (2nd edn, Butterworth Legal Publishers
1990) 103, 213; Lang (n 6) 206-220.
58
Lang (n 6) 226.
59
ibid 171-172.
55
12
It is argued here that the move away from intention and form and towards the economic
effect of a governmental policy is still taking place in the context of currency manipulation.
The classification of an undervalued exchange rate as an export subsidy seeks to bypass the
requirement of intent under IMF law by relying solely on the economic effects of an
undervalued exchange rate via countervailing duties in accordance with the ASCM. The
move towards “external stability” under IMF law, on the other hand, seeks to move away
from the requirement of intent altogether, enabling the use of Article XV:4 of the GATT.
These are the two ideas that will be analysed in this part, as they are the key approaches used
to make currency manipulation visible as a trade barrier. However, it is first necessary to
mention the geo-political context of the debate and the primary actors involved. In this
regard, it is necessary to look substantially at the US as US policy-makers and institutions
have been the most prominent voice in support of making China’s exchange rate policy
visible.
Prior to analysing the US’ efforts to label China a currency manipulator, it is essential to
highlight the sensitivity among policy-makers that US economic hegemony is in decline.
There is also a common perception that China represents the major threat to that hegemony.60
As Lang states with regard to the 1960s and 1970s, there was a common tendency to blame
the decline in US supremacy on “unfair trade practices” of other countries.61 This is mirrored
in the current US debate where the undervaluation of the RMB is being blamed for the US
trade deficit, the country’s unemployment rate, and the decline of its manufacturing industry.
As one academic has pointed out, China may be seen as a “scapegoat” for job losses in the
US.62 This notion that the US is using China’s exchange rate policy as an excuse for their
domestic problems is further supported by the fact that the trade-restrictive effects of China’s
policy have been substantially challenged.63 Alternative explanations have also been
Lyman Miller, ‘China an Emerging Superpower?’ (January 2003) SJIL
<http://www.stanford.edu/group/sjir/6.1.03_miller.html>; Also see Charles Riley, ‘China seen surpassing US in
superpower shift’ (18 July 2013) CNNMoney <http://money.cnn.com/2013/07/18/news/economy/china-ussuperpower/index.html>.
61
Lang (n 6) 225.
62
Edward Lazear, ‘Chinese ‘Currency Manipulation’ is not the Problem’ (7 January 2013) The Wall Street
Journal <http://online.wsj.com/article/SB10001424127887323320404578213203581231448.html>.
63
ibid. Also see Staiger and Sykes (n 3) arguing that the policy’s effects on exports are looked at in isolation
from its effects on imports, obscuring its real trade effects. They also argue that neither the pricing of goods nor
the long-term versus short-term effects on trade is considered. It should be noted, however, that their study
focuses on trade volumes rather than trade balances. Christopher J. Neely, ‘The Difference Between Currency
Manipulation and Monetary Policy’ (2011) Economic Synopses <http://research.stlouisfed.org/publications
60
13
identified; namely that the US trade deficit is a result of insufficient domestic saving. 64 One
author has even argued that US neoliberal policy is directly responsible for the declining
growth rates and stagnating domestic employment.65 In this way, the focus on China’s
exchange rate may be seen as an attempt to draw attention away from domestic structural
problems in the US.
There has been a tremendous effort by policy-makers and academics to portray China’s
exchange rate as illegal and detrimental to US and international stability. To fully understand
these efforts and the background processes they represent in shaping the debate, attention
should be drawn to some of the primary actors involved. One of the key institutions is the
Peterson Institute for International Economics (PIIE).66 The founding director of the PIIE,
Fred Bergsten, as well as senior fellows Morris Goldstein, Arvind Subramanian and Michael
Mussa, have been some of the most prominent critics of China’s exchange rate policy. They
have also been prominent in calling for the reform of WTO rules. 67 It should be mentioned
that Michael Mussa was the former chief economist of the IMF and Morris Goldstein has
held “several senior staff positions at the IMF”.68 Fred Bergsten also served as Assistant
Secretary for International Affairs at the US Treasury. Thus, these actors and the PIIE as an
institution have significant links with US domestic policy and the IMF. As their website
states, PIIE attempts “to inform and shape public debate” via the US government and
international organisations.69 Accordingly, the PIIE frequently publishes policy briefs for the
US Congress, US Treasury and the IMF.70 These individuals and the institution as a whole
have played a significant role in making currency manipulation visible as a trade barrier and
shaped public perception of the role China’s exchange rate has played in the US economy. A
report published by PIIE in 2012 stated that currency manipulation has caused the US to lose
/es/11/ES1105.pdf> at 5 (“Ultimately, an appreciated RMB…would probably only very modestly affect the
overall level of the US trade deficit”).
64
Ronald McKinnon, The Unloved Dollar Standard: From Bretton Woods to the Rise of China (OUP 2013), 85134.
65
Robert Pollin, Contours of Descent: US Economic Fractures and the Landscape of Global Austerity (Verso,
2003).
66
PIIE, ‘About the Institute’ <http://www.piie.com/institute/aboutiie.cfm> (PIIE is a “private, non-profit,
nonpartisan research institution devoted to the study of international economic policy”).
67
Mattoo and Subramanian (n 2).
68
PIIE Biographies, on Mussa <http://www.piie.com/staff/author_bio.cfm?author_id=128>; on Goldstein
<http://www.iie.com/staff/author_bio.cfm?author_id=10>
69
PIIE, ‘About the Institute’ (n 66).
70
Congressional testimonies: C. Fred Bergsten, ‘Correcting the Chinese Exchange Rate’ (15 September 2010)
Congressional Testimony <http://www.iie.com/publications/testimony/bergsten20100915.pdf>; Bergsten ‘The
US Trade Deficit and China’ (n 2). Policy Briefs: Bergsten, ‘Currency Manipulation’ (n 2); Gagnon (n 2); Gary
C. Hufbauer & Yee Wong, (n 41).
14
“1 million to 5 million jobs” and increased the trade deficit by “$200 billion to $500 billion
per year”.71
The US manufacturing industry and state senators have also played a significant role in
making currency manipulation visible as a trade barrier. In 2012, the US manufacturing and
distributing industry spent over $110 million lobbying congress.72 This lobbying is reflected
in a number of statements made by US Senators pushing for US legislation that would enable
unilateral action against China. As Senator Graham stated in June 2013, “It is universally
accepted that China…intentionally manipulate[s] their currency to create an advantage for
themselves in the marketplace. […] Manufacturing jobs in South Carolina and across the
country are being destroyed because the Chinese and others continue to defy the rules of
international trade.”73 Along similar lines, Senator Schumer stated that, “The single biggest
step we could take today to create jobs in American manufacturing is to tackle China’s
currency manipulation.”74 Other Senators made related statements about the manufacturing
industry, manipulation and the labelling of undervalued exchange rates as a subsidy.75
The legislation that these statements advocate for is the proposed Currency Reform for Fair
Trade Act, which seeks to classify exchange rate undervaluation as a “countervailable
subsidy”.76 As stated above, this is one of the primary ways currency manipulation may be
made challengeable under WTO law as it is solely based on its economic effects. Senators in
the US have also proposed the Currency Exchange Rate Oversight Reform Act of 2007,
which requires the consideration of exchange rate undervaluation when administering US
antidumping laws under Article XI of the GATT.77 Again, this bill would allow the US to
respond unilaterally to China’s exchange rate policy by imposing anti-dumping duties on
71
Bergsten & Gagnon (n 2).
Lobbying Database, OpenSecrets.org
<http://www.opensecrets.org/lobby/top.php?showYear=2012&indexType=i> accessed 15 September 2013.
73
Michael Sturmo, US Senate-Press Release, ‘Senators Introduce Currency Manipulation Bill’ (5 June 2013)
<http://www.tradereform.org/2013/06/senators-introduce-currency-manipulator-bill/>.
74
ibid.
75
ibid. See statements by Senator Sessions (“American manufacturers and American workers are suffering from
currency manipulation that unfairly impacts their ability to compete”) and Senator Collins (“it is a clear
subsidy”).
76
H.R. 1276 Currency Reform for Fair Trade Act.
77
Zimmermann (n 3) 456, note 157 citing S. 3134, 111 th Congress (2010) <http://thomas.loc.gov/cgibin/query/z?c111:S.3134:>
72
15
Chinese imports where those imports cause injury to the domestic industry. 78 However, it
should be noted that even if the duties were legal under US law, they could still be challenged
by China under WTO law. Though Congress has not enacted either of these Acts, their
significance lies in highlighting the background processes and actors that work to generate a
particular understanding of currency manipulation. Both have been resubmitted for the 113th
session of Congress (2013-2014).
The second key approach to making currency manipulation visible as a trade barrier is the
move to make external stability a requirement for exchange rate policy within the IMF,
evident in the 2007 Decision. Differing from the domestic tactics detailed above, this
approach may be seen as an attempt to bypass the intent requirement under IMF law
altogether, thus enabling the use of Article XV:4 of the GATT. Zimmerman has stated that
this refocusing should “be welcomed” as it increases “the efficiency of bilateral surveillance
for good faith scenarios of exchange rate misalignment”; in other words those that do not
satisfy the intent requirement.79 However, this refocusing may also be seen as an attempt to
make currency manipulation challengeable under WTO law and as part of a further reimagination of the international trade regime, where monetary policy is challengeable before
the DSB. It should also be reiterated that external stability is not an objective term and how
one defines stability will influence what constitutes a legitimate versus illegitimate exchange
rate policy. This is particularly interesting in transitioning to the next section on the principles
of division – the principles used to distinguish between legitimate and illegitimate policies.
Principles of Division: Currency Manipulation versus Monetary Policy
As was shown above, from the perspective of US policy, the debate around currency
manipulation may be seen as an attempt to make it ‘visible’ as a trade barrier. This section
will now look at the ways in which ‘fair’ trade and ‘external stability’ have been defined
based on an understanding of the ‘free market’ in order to distinguish between legitimate and
illegitimate policies. In particular, the ways in which China’s exchange rate policy has been
See GATT Article VI, ASCM Articles 1, 2, 10 and 32.1. Benjamin B Caryl, ‘Is China’s Currency Regime A
Countervailable Subsidy? A Legal Analysis Under the World Trade Organization’s SCM Agreement’ (2011) 45
JWT 1.
79
Zimmerman, ‘Currency Manipulation and the Paralysis of the Law’ (n 34) 55.
78
16
foregrounded as illegitimate, while other ‘manipulated’ exchange rates are accepted as
legitimate.
As stated above, in the 1970s trade barriers were made visible based on their economic
effects rather than their intention or form. Apart from expanding the definition of trade
barrier, this also had a significant effect on how the legitimacy of a governmental action was
measured. Rather than looking at the purpose of a measure, the yardstick became the
“optimally regulated market” – the imagined ‘free market’.80 In the context of currency
manipulation, a floating exchange rate is often seen as representative of the ‘free market’.
Today, Fred Bergsten has described the pegging of exchange rates to the USD as “absurd,
especially from a US national perspective but also from the standpoint of global financial
stability” and recommends that China should move toward a “market-determined [RMB]”.81
This view of exchange rate policy is also reflected in the summits of the recent G20 meetings.
It has been stated that the G20 should “move toward more market-determined exchange rate
systems
and enhance
exchange rate flexibility to
reflect
underlying economic
fundamentals”.82 Thus, the market has become the reference point for determining a
legitimate exchange rate.
However, a definition of the ‘free market’ is not an objective or neutral benchmark. It is
highly influenced by perspective and requires a number of value judgments. 83 In the context
of exchange rate policy, floating exchange rates such as those adopted by the major
economies in the 1970s, most prominently the US, are today viewed as a manifestation of the
‘free market’. This formulation seems to imply that there is no governmental intervention.
However, as Liu states “despite neo-liberal rhetoric, no government today or even in history,
particularly the US government, leaves the exchange rate of its currency to market forces.”84
80
ibid 226, 366.
Fred Bergsten, ‘Correcting the Chinese Exchange Rate’ ibid; Doug Palmer, ‘New US strategy needed on
China forex’ (9 May 2007) Reuters Online, <http://www.reuters.com/article/2007/05/09/usa-china-currencyidUSN0848773620070509> (Don Evans, CEO of the Financial Services Forum, agreed with this view).
82
G-20, The Seoul Summit Document, 11-12 November 2010, para 12,
<http://www.g20.org/Documents2010/11/seoulsummit_declaration.pdf>; G-20, The Moscow Summit
Document, February 2013 where similar language was used.
83
Lang (n 6) 227.
84
Henry Liu, ‘The US as a leading currency manipulator’ (15 February 2007) Asia Times Online
<http://www.atimes.com/atimes/China_Business/IB15Cb03.html>.
81
17
For example, the US Federal Reserve,85 through quantitative easing, explicitly intervenes in
the foreign exchange market by injecting capital into the market and lowering the short-term
interest rate.86 The US also maintains an Exchange Stabilization Fund, which holds money
used by the US Treasury to influence exchange rates.87 However, this form of intervention is
presented as legitimate ‘monetary policy’ whereas China’s fixed exchange rate is deemed
‘manipulation’.88 Therefore, the criticism against China’s currency peg is an example of the
US using “the institutional form of its own domestic market as the primary reference point
against which fairness and distortions are measured”.89 Therefore, a policy, which is not
similar to the US’ policy, such as a fixed exchange rate versus a floating exchange rate, is
seen as illegitimate where it is perceived to affect the US economy.
The US has also sought to depict certain institutional differences as distortions with regard to
external stability. As stated in the section above, the IMF 2007 Decision on Bilateral
Surveillance emphasised the link between exchange rate policy and external stability adding
the principle that “members should avoid exchange rate policies that result in external
instability”.90 Though many have welcomed this addition, others have interpreted the 2007
Decision “as reflecting a US-led effort to increase the pressure on China.”91
Apart from the 2007 Decision itself, the highlighting of certain factors that affect external
stability over others may also reflect US interests. For example, the US has focused on
China’s accumulation of foreign reserves as the main cause of instability and “global
imbalances”.92 The US has also sought to influence the IMF’s perception of the risk that
85
The US Government has delegated responsibility for monetary policy, including exchange rate policy, to the
US Federal Reserve.
86
Lowell Ricketts, ‘Quantitative Easing Explained’ (April 2011) The Liber8 Economic Information Newsletter,
Federal Reserve Bank of St Louis <http://research.stlouisfed.org/pageoneeconomics/uploads/newsletter/2011/201104.pdf>.
87
US Department of the Treasury, ‘Exchange Stabilization Fund’, <http://www.treasury.gov/resourcecenter/international/ESF/Pages/esf-index.aspx>.
88
See Ben Bernanke, ‘US Monetary Policy and International Implications’ (14 October 2012) Speech at the
IMF Seminar on “Challenges of the Global Financial System: Risks and Governance under Evolving
Globalization” <http://www.federalreserve.gov/newsevents/speech/bernanke20121014a.htm>.
89
Lang (n 6) 226.
90
See 2007 Decision (n 31). Also see Claus D. Zimmermann, ‘Currency Manipulation’ (n 3) arguing about the
“need for the international community to focus on global currency account imbalances as the underlying
problem” at 427.
91
Andrew Walter, ‘Global Imbalances and Currency Politics: The US, EU, and China’ in Robert Ross et al.
(eds), US-EU-China Relations: Promoting Cooperation and Managing Conflicts of Interest (Routledge, 2010).
92
As was stated in an IMF working paper, ‘global imbalances’ are actually “a euphemism for the large US
deficit”. See Miranda Xafa, ‘Global Imbalances and Financial Stability’ (May 2007) IMF Working Paper
<http://www.imf.org/external/pubs/ft/wp/2007/wp07111.pdf>.
18
foreign reserve accumulation poses to the stability of the monetary system. As a report issued
by the IMF’s Independent Evaluation Office of the IMF found in 2012:
[S]enior IMF staff and former Management, as well as country officials…considered
that the views of influential shareholders regarding the IMF’s inability to influence
China’s exchange rate policy in the last decade were an important factor explaining
why concerns about the stability of the international monetary system were expressed
in terms of excessive reserve accumulation.93
As the US is the most prominent critic of China’s policy and accumulation of foreign
reserves, as well as the IMF’s most influential shareholder,94 it can be inferred that the report
was referring to the US’ influence.
The report went on to state that there are “more pressing issues than reserves, for example the
growth in global liquidity and capital flow volatility”. 95 Therefore, the view that the
accumulation of foreign reserves is the main risk to external stability is a view influenced by
the US’ domestic position and is a not-so-subtle attack on China. As stated above, the Federal
Reserve injects USD into the market; therefore, though this may affect global liquidity, listed
by the Independent Evaluation Office as a risk to stability, the IMF has not expressed the
same level of concern for this aspect of external stability. This process of influence, in turn,
will have an influence over the surveillance process of the IMF and its determination as to
whether a country’s policy affects external stability.
It should be evident from the above discussion that there are a number of norms that are
assumed in the labelling of a country as a ‘currency manipulator’. It should also be evident
that these norms are not objective. They are influenced by significant actors and background
processes within certain social, political and economic contexts. Therefore, in discussing
currency manipulation, scholars and policy-makers alike should be aware of the assumptions
that are being made in labelling China a ‘manipulator’.
IMF Independent Evaluation Office, ‘International reserves: IMF concerns and country perspectives’ (2012)
<http://www.ieo-imf.org/ieo/files/completedevaluations/IR_Main_Report.pdf> 1.
94
IMF, Members’ Quotas and Voting Power <http://www.imf.org/external/np/sec/memdir/members.aspx>
citing the US as holding 17.69 per cent of IMF quota; the next being Japan with 6.56 per cent.
95
IMF Independent Evaluation Office (n 93) 3.
93
19
Conclusion
In conclusion, there is no obvious answer as to whether China manipulates its currency and
whether the policy is inconsistent with the IMF Articles of Agreement. Equally, there is no
obvious answer as to whether currency manipulation is (or should be) challengeable under
international trade law. Yet, as this paper has attempted to make clear, the contemporary
institutional shifts within the IMF and the WTO with regard to currency manipulation are a
manifestation of ideational shifts that imply an expansion of the term ‘trade barrier’ within
WTO law as well as a certain understanding of ‘external stability’. It is argued that this
ideational shift has the potential to fundamentally transform the mandate of the WTO as
monetary policy and global trade balances are brought within its mandate.
This paper has shown that there has been a dichotomy between the international monetary
system and the international trade system since the establishment of the IMF and the GATT
in the 1940s. It has also shown the ways in which policy-makers and scholars have attempted
to bridge this dichotomy with regard to currency manipulation by arguing that it constitutes a
countervailable subsidy by virtue of its economic effects. Lastly, this paper has explored the
actors, background processes and assumptions that have influenced the interpretation and
application of currency manipulation in international economic law.
Though this paper remains limited in scope, it opens a number of doors for further research.
In particular, it is worth highlighting the prominence of the view that the WTO is better
equipped to deal with the issue of currency manipulation than the IMF. Again, inspiration is
taken from Lang’s World Trade Law After Neoliberalism and his claim that the WTO has
been re-imagined as a “political marketplace”.96 The desire to bring exchange rate policy
within WTO law often reflects the view that the IMF’s ineffectiveness is due to the fact that
members do not have horizontal obligations toward other members, but rather vertically with
the institution.97 Therefore, bringing currency manipulation within WTO law would enable
the US and other countries to negotiate with China directly and use the threat of trade
retaliation to ensure the “liberalization” of the RMB. This would be a very interesting line of
argument in the context of Lang’s argument that the WTO has been re-imagined as “a forum
96
97
Lang (n 6) 232.
Siegel (n 3) 564; Zimmermann (n 3) 433.
20
of negotiations”.98 It is suggested that this claim requires further attention and development in
the literature surrounding currency manipulation.
98
Lang (n 6) 232-233.
21
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