North Carolina Journal of International Law

"Connecting North Carolina to the World of International Law"

Report: Embracing the Status Quo: The Paralyzed Reality of International Currency Regulation

By: Shawn Johnston

Currency manipulation has established itself as a popular talking point among politicians in any discussion involving trade policy.   These discussions largely focus on unilateral measures that can be taken to address imbalances that result from currency manipulation.  The political discourse seldom considers the availability of recourse that can be delivered by the international governing bodies charged regulating trade.  This is because the current international framework is not set up to effectively address violations.

The World Trade Organization (WTO) and the International Monetary Fund (IMF) both have an explicitly identified role as regulators of international trade.  The WTO’s “goal is to help producers of goods and services, exporters, and importers conduct their business.”[1]  Similarly, the IMF works “to foster global monetary cooperation, secure financial stability, [and] facilitate international trade.”[2]  Despite these intentions, each organization lacks significant tools to effectively manage international trade.  “The IMF lacks any viable enforcement mechanism, and the WTO, while it does have different complaint mechanisms, fails to use them effectively.”[3]  The end result is a system that is far less apt at ensuring fair trade than bilateral agreements amongst international trading partners.  This report will analyze the structure of the WTO and IMF in order to better understand the areas where each organization is lacking.  In addition, this report will analyze the underlying intentions behind each organization’s operations in order to predict future responses to currency manipulation.

The Word Trade Organization was established in 1995 and required members to submit to the existing trade rules of the General Agreement on Tariffs and Trade (GATT).[4]  The GATT’s rules are “directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce.”[5]  Changes in the global market since GATT’s establishment have made it increasingly harder for the WTO to achieve barrier reduction.  The most notable change came in 1978, when the IMF relinquished control over exchange rates.[6]  Without a centralized body governing the exchange rate, the WTO’s ability to identify currency manipulation is significantly reduced.  As a consequence, so too is their otherwise effective means enforcement.

The WTO does not explicitly denounce currency manipulation.[7]  Instead, Article XV(2) acknowledges the IMF’s authority in this realm when it states “In all cases in which the Contracting Parties are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they shall consult fully with the International Monetary Fund.”[8]  Although WTO’s recognition of the IMF’s role is not a declaration of apathy, “The only provision of WTO law specifically relating to currency practices is found in Article XV(4), concerning ‘exchange action’ that would ‘frustrate the intent’ of GATT.”[9]  Consequently, the WTO’s ability to reach currency manipulators relies on a tenuous relationship between their mis-valued currency and more explicit GATT infractions.[10]  The connections that are most frequently identified by economist arise from the overall drain currency manipulation has on the global economy and GATT’s subsidy preclusions.[11]

Alleged WTO violations concerning global economic drain stem from Article XV(4)’s broad rebuke of frustrating the GATT’s intent.[12]  Thus, any exchange action that poses a barrier to trade can be said to be a violation.[13]  WTO violations relating to subsidies are much more specific.  Consequently, their connection to currency manipulation can be harder to establish.  Article XVI § (A)(1) provides states, “If any contracting party grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory, it shall notify the CONTRACTING PARTIES of the extent and nature of the subsidization.”[14]  While currency manipulation undoubtedly provides the market forces discussed in §(A)(1), it is hard to confine currency manipulation to the definition of a subsidy.[15]

To qualify as a subsidy under the WTO “there must be a financial contribution by a government to the exporter or some other form of income or price support.”[16]  Though exporters certainly benefit when a government devalues its currency, such manipulation does not appear to constitute governmental financial support.[17]  As such, the GATT’s failure to expressly address currency manipulation leaves the WTO struggling to find ground for action without significant overreach.[18]  Ultimately, this chills the WTO’s otherwise very capable enforcement abilities provided by its dispute settlement panels.[19]

The IMF’s struggles regarding currency manipulation are virtually a mirror image to that of the WTO.  While the WTO possesses enforcement ability that is limited by jurisdiction, the IMF possesses express jurisdiction with limited ability to enforce.[20]  The IMF prohibits members from “manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustments or to gain an unfair competitive advantage over other members.”[21]  Despite this clear prohibition of currency manipulation, the Fund experiences difficulty as an enforcer due the complicated nature of proving currency manipulation.  Staiger explains, “[B]efore an IMF member may be found to have engaged in illegal currency manipulation to affect the balance of trade, it must have deliberately affected the exchange rate to a degree sufficient to cause ‘fundamental misalignment’, and must have done so for the ‘purpose’ of increasing net exports.”[22]  The actual conduct of currency manipulation is relatively easy to discern through economic analysis.  Proving the mens rea required by the IMF, however, is virtually impossible.  “Countries are able to successfully argue that their exchange rate policies are not attempts to gain competitive trading advantages, but simply mechanisms to stabilize the value of their currency and prevent disruption in their domestic economy.”[23]  The extreme deference the IMF gives to countries with such claims is evident by the fact that “[s]ince the adoption of Article IV in 1978, the IMF has never publicly declared that any nation is violating this ban on currency manipulation.”[24]

Many scholars, like Gary Clyde Hufbauer and Jeffrey J. Schott, have argued that adjustments to the governance of currency manipulation are required.[25]  Hufbauer and Schott have suggested better cooperation between the IMF and the WTO in order to better utilize the strengths of each organization and eliminate weaknesses.[26]  They propose a process that is initiated by one country’s complaint of another’s prolonged manipulation.[27]  Following the complaint, the WTO director-general would send a request to the IMF managing director for review of the currency in question in order to determine: 1) whether the currency is seriously undervalued, 2) whether the country in question has taken measures to contribute to the serious undervaluation, whether the undervaluation has persisted for a prolong period of time, and 4) whether the undervaluation has impacted a significant amount of global trade.[28]  In the event that appropriate finding were made by the IMF, Hufbauer and Schott’s proposal would allow countries “to impose uniform across-the-board tariffs, not to exceed the amount of undervaluation, on imports from the noncompliant member”[29]  Though this process seems practical considering the effective cooperation the WTO and IMF achieved in a multitude of areas,[30] even the cooperative nature of the WTO and IMF have not been able to circumvent the inherent difficulties of combatting currency manipulation.

Hufbauer and Schott suggest that some of the roadblocks that stand in the way of effective WTO and IMF currency regulation are political.  They explain, “[P]olitical considerations make many members of [the IMF Executive Board] cautious in breaking new ground in this area.”[31]  However, acknowledgment of the political concerns does not account for the deep-seated uncertainty that accompanies every attempt to curb currency manipulation.  This uncertainty is best seen through analysis of domestic initiatives in response to currency manipulators.

Legislative efforts in the U.S. to counter Chinese currency manipulation provide insight into how complicated it is to find an effective solution.  “The question of whether and how to respond to foreign currency manipulation has been vexing [U.S.] policymakers since 2003 when Sen. Chuck Schumer first introduced a bill calling for a 27.5 percent tariff on all imports from China to compel the Chinese government to permit the Yuan to appreciate.”[32]  This type of legislation has been proposed consistently throughout Congress, but the effort has routinely failed to garner support.[33]  Each effort has been plagued by the inability to accurately determine the extent of the China’s currency manipulation.  Ikenson explains,

When Schumer introduced his bill, economists were generally in consensus that the Chinese currency was undervalued.  But they disagreed widely about the magnitude.  Economists from the IMF, the OECD, the Federal Reserve, the U.S. Treasury, think tanks, and academia were all producing different estimates of undervaluation.  Schumer chose 27.5 percent because it was the midpoint in a range of dozens of these estimates spanning from 10 to 45 percent.[34]

The wide variation is due to the fact that economists are not at all in agreement on their approach to developing currency estimates in the absence of a free-floating, supply and demand determined currency.[35]  Combating currency manipulation without accurate knowledge of the its value risks causing more damage further distorting the market place.[36]  Still, some domestic economists argue that the effects of currency manipulation are so problematic that action is required, regardless of any calculation difficulties.[37]  The debate is further exacerbated on the international level.

Just as the threat of further distortion has fueled domestic regulatory inaction in the face of currency manipulation, the same can be said for international regulators like the WTO and IMF.  The only real difference is that international regulators lack the ability to leverage the market like the U.S. recently did by withdrawing from the Trans Pacific Partnership.[38]  Consequently, the IMF and WTO are not likely to deviate from their hands-off approach to currency valuation until a consensus estimation approach can be achieved.

[1] World Trade Organization, What is the WTO?,, [].

[2] International Monetary Fund, About the IMF,, []

[3] Laurence Howard, Chinese Currency Manipulation: Are There Any Real Solutions?, 27 Emory Int’l L. Rev. 1215, 1224 (2013) [hereinafter Howard].

[4] Jonathan E. Sanford, Cong. Research Serv., RS22658, Currency Manipulation: The IMF and WTO 2 (2011) [hereinafter Sanford].

[5] WTO Agreement: Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 4 (1999), 1867 U.N.T.S. 154, 33 I.L.M. 1144 (1994) [hereinafter WTO Agreement].

[6] Id.

[7] Robert W. Staiger and Alan O. Sykes, Currency manipulation’ and world trade, 9 World Trade Rev. 583 (2010) [hereinafter Staiger].

[8] WTO Analytical Index, GATT Analytical Index, Article XV, ¶ 4 [hereinafter Art. XV].

[9] Staiger, supra note 7, at 586.

[10] Howard, supra note 3, at 1227-8.

[11] Id. at 1228.

[12] Art. XV, supra note 8, ¶ 4.

[13] See WTO Agreement, supra note 5.

[14] WTO Analytical Index, General Agreement on Tariffs and Trade 1994, Article XVI (A)(1) [hereinafter GATT 1994].

[15] Howard, supra note 3, at 1228.

[16] Sanford, supra note 4, at 3.

[17] Id.

[18] Howard, supra note 3, at 1227.

[19] Sanford, supra note 4, at 2.

[20] Howard, supra note 3, at 1224-26.


[22] Staiger, supra note 7, at 591.

[23] Howard, supra note 3, at 1226.

[24] Howard, supra note 3, at 1225.

[25] Gary Clyde Hufbauer & Jeffrey J. Schott, Peterson Institute for International Economics Policy Brief No. PB12-11, Will the World Trade Organization Enjoy a Bright Future? 12 (2012).

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id. at 11.

[31] Id. at 12.

[32] Dan Ikenson, Currency Manipulation And The Trans-Pacific Partnership: What Art Laffer, Fred Bergsten, And Other Hawks Get Wrong, Forbes (2015), [].

[33] Id.

[34] Id.

[35] Id.

[36] Id.

[37] Capital Flows, Currency Manipulation: Why Something Must Be Done, Forbes (2015), (last visited Mar 17, 2017).

[38] Trump signs order withdrawing from TPP, CNN, [].


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