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Exchange Rate Misalignment and International Law

Published online by Cambridge University Press:  02 March 2017

Claus D. Zimmermann
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History is replete with examples where states have interfered with foreign exchange markets in order to influence exchange rates. The trade conflicts between the two world wars, for instance, were fought not only via the imposition of tariffs, but also via competitive devaluations. Since then, straightforward competitive devaluations have become a rare phenomenon; contemporary scenarios, in which exchange rate policies are criticized for their potentially protectionist impact, tend to be much more sophisticated. The exchange rate policy followed by China is certainly the outstanding, yet not exclusive, example. In recent years policymakers worldwide have criticized China for maintaining an undervalued real exchange rate as part of its strategy of export-led growth.

Type
Research Article
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American Journal of International Law , Volume 105 , Issue 3 , July 2011 , pp. 423 - 476
Copyright
Copyright © American Society of International Law 2011

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References

1 The official currency of China is the renminbi (RMB). Strictly speaking, the Yuan, which is often used as a synonym for the RMB in public discussions, is the unit of account of the RMB (one yuan, two yuan,. . .). For almost a decade now, China’s exchange rate policy has been subject to fierce criticism, especially by U.S. politicians. Between 1995 and July 2005, China pegged the RMB to the U.S. dollar (USD) at a rate of RMB 8.28 per USD. Over the course of the following three years, the Chinese authorities let the RMB appreciate by around 21 per cent against the USD under a managed float. From July 2008 until June 19, 2010, the RMB was again effectively pegged to the USD, this time at around RMB 6.83 per USD. On June 19, 2010, one week before the G-20 Toronto Summit, the People’s Bank of China, China’s central bank, announced that it would increase the exchange rate flexibility of the RMB but emphasized that it did not see the economic basis for a large-scale appreciation of the RMB under its new managed float. By May 1, 2011, the RMB had appreciated by approximately 5.2 percent against the USD and stood at 6.49 RMB per USD. On the Chinese policy shift announced on June 19, 2010, see Zimmermann, Claus D., Congress Continues to Attack Currency Manipulation as China Defuses G-20 Pressure for Now: The International Law Issues , ASIL INSIGHTS (June 30, 2010), at http://www.asil.org/insightsl00630.cfm Google Scholar. For a succinct overview of the key economic issues related to the Chinese exchange rate, see, for example, Frankel, Jeffrey, The Renminbi Since 2005 , in THE US-Sino Currency Dispute: New Insights From Economics, Politics and Law 51 (Evenett, Simon J. ed., 2010), at http://www.voxeu.org/index.php?q=node/4868 Google Scholar; Wyplosz, Charles, Is an Undervalued Renminbi the Source of Global Imbalances? , in THE US-Sino Currency Dispute, supra, at 37 Google Scholar; Morrison, Wayne M. & Labonte, Marc, China’s Currency: An Analysis of the Economic Issues, Cong. Res. Serv. Rep. RS21625 (2011), available at http://www.fas.org/sgp/crs/row/RS2l625.pdf Google Scholar.

2 See, e.g., How to Stop a Currency War, Economist (Oct. 14, 2010), at http://www.economist.com/node/17251850.

3 See, e.g., Nakamoto, Michiyo, Japan Finance Chief Defends Yen Intervention , Fin. Times (Oct. 8, 2010), at http://www.ft.eom/cms/s/0/6a5dl3ca-d292-lldf-9e88-00144feabdc0.html Google Scholar.

4 How to Stop a Currency War, supra note 2.

5 See, e.g., Atkins, Ralph, Germany Attacks US Economic Policy , Fin. Times (Nov. 7,2010), at http://www.ft.com/cms/s/0/c0dca084-ea6c-lldf-b28d-00144feab49a.html Google Scholar; John Paul, Rathbone & Wheatley, Jonathan, Brazil Ready to Retaliate for US Move in ‘Currency War,’ Fin. Times (Nov. 4, 2010), at http://www.ft.eom/cms/s/0/b6e3d086-ed 12-11 df-9912-00144feab49a.html Google Scholar.

6 Alan Greenspan, chairman (1987–2006) of the Federal Reserve (Fed), the U.S. central bank, is among the best-known critics of contemporary U.S. monetary policy. See, e.g., Beattie, Alan, Greenspan Warns over Weaker Dollar , Fin. Times (Nov. 10, 2010), at http://www.ft.eom/cms/s/0/b6e3d086-edl2-lldf-9912-00l44feab49a.html Google Scholar.

7 Having signaled as early as in August 2010 its willingness to engage again in bond purchases aimed at stimulating the economy, a practice known as quantitative easing, the Fed formally announced on November 3, 2010, that it would buy USD 600 billion in long-term Treasury bonds over a period of eight months and that it would reinvest an additional USD 250–300 billion in Treasury bonds with the proceeds of its earlier investments. The intended goal of this policy is to stimulate U.S. growth by squeezing the yield on U.S. assets, thereby lowering the costs of domestic borrowing and stimulating domestic investment. As a side effect, capital inflows into foreign countries, and thus demand for foreign currencies, are likely to rise. See, e.g., Censky, Annalyn, QE2: Fed Pulls the Trigger , CNNMoney.com, Nov. 3, 2010, at http://money.cnn.com/2010/ll/03/news/economy/fed_decision/index.htm. Google Scholar

8 On the concept of equilibrium exchange rate see, for example, Krugman, Paul R., Equilibrium Exchange Rates , in International Policy Coordination and Exchange Rate Fluctuations 159 (Branson, William H., Frenkel, Jacob A., & Goldstein, Morris eds., 1990), available at http://www.nber.org/chapters/c6948.pdf Google Scholar.

9 As used in the public debate, the term “currency manipulation” reflects a negative political judgment since it implicitly refers to situations in which a country seeks to achieve an artificial undervaluation of its currency to obtain an unfair competitive advantage in global trade. By contrast, the term “exchange rate manipulation,” as employed in this article (consistent with IMF terminology), is a technical term designating any policy measures that are targeted at, and actually affect, the exchange rate, independent of the (lawful or unlawful) purpose for which such manipulation is being undertaken.

10 The Plaza Accord, at http://www.g8.utoronto.ca/finance/fm850922.htm, was an agreement between France, Japan, the United Kingdom, the United States, and then West Germany to intervene in currency markets to bring about an appreciation of the yen and deutsche mark in relation to the USD. It was signed on September 22, 1985, at the Plaza Hotel in New York City, hence its name.

11 Articles of Agreement of the International Monetary Fund, July 22, 1944, 60 Stat. 1401, 2 UNTS 39, as amended effective Feb. 18, 2011 [hereinafter IMF Agreement], available at http://www.imf.org/external/pubs/ft/aa/index.htm. The IMF Agreement, which opened for signature on December 27, 1945, was adopted on July 22, 1944, at the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire.

12 The IMF is an intergovernmental organization with quasi-universal membership. As of May 1, 2011, the IMF counted 187 members. The IMF’s highest decision-making body is the Board of Governors, which comprises one governor and one alternate governor per IMF member. These posts are usually held by the minister of finance and the central bank governor. While the Board of Governors, which normally meets only once a year, has delegated most of its powers to the IMF’s Executive Board under IMF Article XII:2(b), it retains and may not delegate certain fundamental rights, such as the approval of quota increases, the allocation of special drawing rights, the admittance of new members, compulsory withdrawal of members, and amendments to the IMF Agreement and bylaws. For a regularly updated overview of all IMF governors and of the IMF quota and related voting power of every single IMF member, see http://www.imf.org/external/np/sec/memdir/members.htm. The Board of Governors is the ultimate arbiter on issues related to interpreting the IMF Agreement. The Executive Board, which functions in continuous session, is in charge of conducting the IMF’s day-to-day business, which also includes discussion of those issues that will ultimately have to be decided by the IMF’s Board of Governors. The Executive Board comprises twenty-four directors and the managing director, who serves as its nonvoting chairman. For a regularly updated overview of the Executive Board’s composition, see http://www.imf.org/external/np/sec/memdir/eds.htm.

13 On August 15, 1971, the United States under President Richard Nixon informed the IMF that it would no longer freely buy and sell gold to settle international USD transactions. Par values and convertibility of the dollar—two main features of the Bretton Woods system—thereby ceased to exist. On March 19, 1973, “generalized floating” began as the members of the European Community introduced a joint float for their currencies against the USD. On April 1, 1978, the second amendment of the IMF Agreement entered into force, establishing the right of members to adopt exchange rate arrangements of their choice. For insightful accounts of the former system of par values and its demise leading up to the second amendment of the IMF Agreement, see Gold, Joseph, Strengthening the Soft International Law of Exchange Arrangements , 77 AJIL 443, 445–52 (1983)Google Scholar, and Lowenfeld, Andreas F., International Economic Law 622–27 (2d ed. 2008)Google Scholar.

14 Since the second amendment in 1978, IMF Article IV:2(b) provides that

exchange arrangements may include (i) the maintenance by a member of a value for its currency in terms of the special drawing right or another denominator, other than gold, selected by the member, or (ii) cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, or (iii) other exchange arrangements of a member’s choice.

Overall, the IMF has identified eight different categories of exchange rate regimes: (1) exchange arrangements with no separate legal tender (that is, where one state uses the currency of another), (2) currency board arrangements, (3) conventional fixed-peg arrangements, (4) pegged exchange rates with horizontal bands, (5) crawling pegs, (6) exchange rates within crawling bands, (7) managed floating with no predetermined path for the exchange rate, and (8) independently floating. For a detailed description of each category, see IMF, De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework (July 31, 2006), at http://www.imf.org/external/np/mfd/er/2006/eng/0706.htm Google Scholar.

15 Mussa, Michael, IMF Surveillance over China’s Exchange Rate Policy 40 (2007), at http://www.iie.com/publications/papers/mussal007.pdf Google Scholar.

16 Whereas the nominal exchange rate merely reflects how many units of one currency buy one unit of another and vice versa, the real exchange rate is defined as the purchasing power of two currencies relative to one another. In other words, the real exchange rate expresses the rate at which a country’s real goods and services can be changed into those of another country. For related analysis, see part III of this article.

17 IMF, Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework , para. 3.2 (June 28, 2006), at http://www.imf.org/external/np/pp/eng/2006/062806.pdf Google Scholar. This report was prepared in the process of reforming the IMF’s bilateral surveillance mechanism and was designed to assist the IMF’s Executive Board in its consideration of the steps that could be taken to provide IMF members with more specific guidance as to their obligations under IMF Article IV. Staff analysis reports prepared by the IMF’s Legal Department, often in consultation with other IMF departments, and as approved by the IMF general counsel, fulfill an important role in advising the IMF’s Executive Board on how to interpret the law of the IMF. For more on this issue, see, for example, Holder, William E., On Being a Lawyer in the International Monetary Fund , in Current Legal Issues Affecting Central Banks 14 (Effros, Robert ed., 1998)Google Scholar.

IMF Article XXIX(a) provides: “Any question of interpretation of the provisions of [the IMF Agreement] arising between any member and the Fund or between any members of the Fund shall be submitted to the Executive Board for its decision.” Although the numerous reports prepared by the Legal Department and other IMF departments provide invaluable insight into all sorts of IMF-related issues, they do not express the formal view of the IMF as an institution. As noted above, the latter can only emerge from the Executive Board. Likewise, although all decisions by the Executive Board are initially prepared and drafted by IMF staff, it is only through vetting and approval by the Executive Board, after consideration of the views of IMF members as expressed by the twenty-four executive directors, that they become formal decisions of the institution. On this point see Siegel, Deborah E., Legal Aspects of the IMF/WTO Relationship: The Fund’s Articles of Agreement and the WTO Agreements , 96 AJIL 561, 569 (2002)Google Scholar.

18 Article IV of the Fund’s Articles of Agreement, supra note 17, para. 3.2.

19 Gianviti, François, Stabilité et Manipulation des Taux de Change , in Le droit international Économique À l’aube du XXIÈme siÈcle 113, 119 (Jean-Marc Sorel ed., 2009 Google Scholar). As described bluntly by Joseph Gold, IMF general counsel from 1960 to 1979,

[governments have tended to regard the choice of domestic policies as a privilege inherent in sovereignty and a privilege that is not to be lightly limited or yielded. . . . Indeed, for some members, particularly the United States, 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.

Gold, Joseph, Legal Effects of Fluctuating Exchange Rates 16–17 (1990)Google Scholar.

20 Article IV of the Fund’s Articles of Agreement, supra note 17, para. 3.3.

21 Id, para. 35.

22 Id.

23 Id., para. 36.

24 Id.

25 Gianviti, supra note 19, at 120 n.14.

26 Id. at 121

27 Id. at 122.

28 The logic is as follows. In order to control inflation, most central banks will keep interest rates high, which will attract foreign capital and lead to an appreciation of the domestic currency. Exported domestic goods will therefore become more expensive, which will lead to a deterioration of the balance of trade and, if not compensated by a corresponding shift in the capital account, of the entire balance of payments. See id. at 122.

29 Id.

30 Article TV of the Fund’s Articles of Agreement, supra note 17, para. 38.

31 Decision No. 5392-(77/63) (Apr.29,1977), as amended by Decision Nos. 8564-(87/59) (Apr. 1,1987), 8856-(88/64) (Apr. 22,1988), & 10950-(95/37) (Apr. 10,1995), repealed and replaced by Decision No. 13919-(07/51) (June 15,2007). The full text of the 1977 Surveillance Decision as amended can be found in IMF, Biennial Review of the Implementation of the Fund’s Surveillance and of the 1977 Surveillance Decision—Overview , App. (July 2, 2004), at http://www.imf.org/external/np/pdr/surv/2004/082404.pdf. Google Scholar

32 IMF Executive Board Adopts New Decision on Bilateral Surveillance over Members’ Policies, IMF Public Information Notice No. 07/69 (June 21, 2007) [hereinafter PIN No. 07/69], at http://www.imf.org/external/np/sec/pn/2007/pn0769.htm.

33 The remainder of this paragraph is a summary of a more detailed description of the surveillance mechanism provided in IMF, Factsheet: IMF Surveillance (2011), at http://www.irnf.org/external/np/exr/facts/surv.htm Google Scholar.

34 Leckow, Ross, The IMF and Crisis Prevention—the Legal Framework for Surveillance , 17 Kan. J.L. & Pub. Pol’y 285, 293 (2008)Google Scholar.

35 Decision No. 13919-(07/51), preamble (June 15, 2007) [hereinafter 2007 Surveillance Decision], in 34 Selected Decisions and Selected Documents of the International Monetary Fund 37, 37 (2009)Google Scholar [hereinafter Selected Decisions], available at http://www.imf.org/external/pubs/ft/sd/index.asp?decision=13919-(07/51).

36 For a detailed analysis of the three principles adopted as part of the IMF’s 1977 Surveillance Decision, with an insightful focus on their historic and economic background, see Gold, supra note 13, at 465–74.

37 2007 Surveillance Decision, supra note 35, para. 14.

38 Id., annex, para. 2.

39 Id. (emphasis added). The explicit limitation in (b)(A) to scenarios of undervaluation has most likely been included out of awareness that exchange rate overvaluation does, if anything, disadvantage a country in its efforts to trade internationally and that the competitive advantages addressed by IMF Article IV: 1 (iii) are those arising exclusively from scenarios of undervaluation. For discussion of the related economic mechanisms, see part III of this article.

40 Chairman’s Summing Up of June 15, 2007 Board Discussions, para. 8, in PIN No. 07/69, supra note 32.

41 Article IV of the Fund’s Articles of Agreement, supra note 17, para. 3.3.

42 Id.

43 2007 Surveillance Decision, supra note 35, annex, para. 3.

44 IMF, Review of the 1977 Decision on Surveillance over Exchange Rate Policies—Further Considerations, para. 50 (Feb. 14, 2007) [hereinafter Review of the 1977 Decision on Surveillance], at http://www.imf.org/external/np/pp/2007/eng/fc.pdf.

45 For an insightful analysis, see Lombardi, Domenico & Woods, Ngaire, The Politics of Influence: An Analysis of IMF Surveillance , 15 Rev. Int’l Pol. Econ. 711 (2008)CrossRefGoogle Scholar. For a succinct assessment of the IMF’s role as enforcer of the international law of exchange arrangements, see, for example, Barnett, Robert M., Exchange Rate Arrangements in the International Monetary Fund: The Fund as Lawgiver, Adviser, and Enforcer , 7 Temp. Int’l & Comp. L.J. 77, 89–92 (1993)Google Scholar.

46 This point of view, which has always been that of the IMF itself, has been broadly defended in the literature. See, e.g., Alexander, Kern, Dhumale, Rahul, & Eatwell, John, Global Governance of Financial Systems: The International Regulation of Systemic Risk 89, 111 (2006)Google Scholar.

47 IMF, 61 By-laws, Rules and Regulations, Rule K-l (2009), at http://www.imf.org/extemal/pubs/ft/bl/blcon.htm Google Scholar.

48 On this point, see Siegel, supra note 17, at 564 n.14.

49 In addition, some obligations flow vertically between the W TO as an institution and its members—for example, the obligation for WTO members under Article 25 of the Agreement on Subsidies and Countervailing Measures, infra note 88, to notify to the WTO on a yearly basis the entire set of subsidies that fall within the scope of Article 1.1 of the Agreement. Although these notification requirements are important, they are much less so than the major obligations under the WTO agreements, which flow only between WTO members.

50 It should be noted that in the future, the IMF’s Executive Board might well decide to adopt additional guiding principles in order to further specify the meaning of the chapeau obligation under IMF Article IV: 1. The IMF does not claim that the existing four specific principles for guiding IMF members in the conduct of their exchange rate policies, as contained in the 2007 Surveillance Decision, exhaust the chapeau obligation, whose language is both broad and flexible.

51 2007 Surveillance Decision, supra note 35, para. 5.

52 Id, para. 4.

53 Id., para. 5.

54 IMF, Factsbeet: IMF Surveillance—the 2007 Decision on Bilateral Surveillance (Mar. 23, 2011), at http://www.imf.org/external/np/exr/facts/surv07.htm Google Scholar.

55 Id.

56 2007 Surveillance Decision, supra note 35, para. 6.

57 Id.

58 IMF, The 2007 Surveillance Decision: Revised Operational Guidance 12 (App. Q2) (June 22, 2009), at http://www.imf.org/external/np/pp/eng/2009/062209.pdf Google Scholar.

59 U (App.Q3).

60 This definition of fundamental exchange rate misalignment is contained in IMF, Review of the 1977 Decision—Proposal for a New Decision, Companion Paper, para. 6 (June 21, 2007), at http://www.imf.org/external/np/pp/2007/eng/nd.pdf. The IMF’s Executive Board has endorsed this definition. See Chairman’s Summing Up of June 15, 2007 Board Discussions, supra note 40, para. 6.

61 The 2007 Surveillance Decision: Revised Operational Guidance, supra note 58, para. 8.

62 Note also that fundamental exchange rate misalignment is only one of several economic factors that will alert the IMF. According to the 2007 Surveillance Decision, with respect to

the observance by members of the Principles [A to D], the IMF shall consider the following developments as among those which would require thorough review and might indicate the need for discussion with a member:

  • (i)

    (i) protracted large-scale intervention in one direction in the exchange market;

  • (ii)

    (ii) official or quasi-official borrowing that either is unsustainable or brings unduly high liquidity risks, or excessive and prolonged official or quasi-official accumulation of foreign assets, for balance of payments purposes;

  • (iii)

    (iii) (a) the introduction, substantial intensification, or prolonged maintenance, for balance of payments purposes, of restrictions on, or incentives for, current transactions or payments, or

    • (b)

      (b) the introduction or substantial modification for balance of payments purposes of restrictions on, or incentives for, the inflow or outflow of capital;

  • (iv)

    (iv) the pursuit, for balance of payments purposes, of monetary and other financial policies that provide abnormal encouragement or discouragement to capital flows;

  • (v)

    (v) fundamental exchange rate misalignment;

  • (vi)

    (vi) large and prolonged current account deficits or surpluses; and

  • (vii)

    (vii) large external sector vulnerabilities, including liquidity risks, arising from private capital flows.

2007 Surveillance Decision, supra note 35, para. 15.

63 The 2007 Surveillance Decision: Revised Operational Guidance, supra note 58, at 12 (App. Q2).

64 Id. at 11 (Q6).

65 Review of the 1977 Decision on Surveillance, supra note 44, para. 48.

66 Leckow, supra note 34, at 292.

67 2007 Surveillance Decision, supra note 35, annex, para. 2(b) (emphasis added).

68 For a detailed analysis of the unsustainability of exchange-rate pegs, see Delias, Harris Google Scholar, Swamy, P. A. V. B., & Tavlas, George S., The Collapse of Exchange Rate Pegs , 579 Annals am. Acad. Pol. & Soc. Sci. 53 (2002)Google Scholar.

69 The price elasticity of demand is a measure of demand sensitivity to price changes. It is measured as elasticity; that is, it measures the relationship as the ratio of percentage changes between the quantity demanded of a good and changes in its price. Gasoline is an excellent example of a good that has inelastic characteristics in that people will pay almost anything for it. By contrast, the demand for apples is very elastic because as the price of apples increases, consumers can switch to other types of fruit. As a consequence, producers of a product with a very elastic demand can be expected to lobby in favor of a devaluation, whereas those producing more goods with inelastic demand will want to maximize overvaluation.

70 Gianviti, supra note 19, at 129–30.

71 When buying foreign exchange, countries usually buy foreign government bonds. If undertaken on a large scale, these purchases have a twofold effect. They help both to keep down the yields of such bonds and, more generally, to ensure low interest rates in the country whose currency is subject to the purchases in question. In line with this reasoning, it is commonly argued that Chinese exchange rate policy has helped the United States to sustain its massive balance-of-payments deficit and acts as an incentive for Americans (through maintaining U.S. interest rates low) to continue spending instead of starting to save—thereby reinforcing, instead of mitigating, global current account imbalances.

72 Analogously, when confronted with excess supply of its currency, and if unwilling to devalue its exchange rate accordingly, the country would intervene in foreign exchange markets and buy its currency to eliminate any excess supply. As considered above, such efforts to maintain an overvalued exchange rate usually come to an abrupt end as soon as the country runs out of foreign exchange, meaning that it can no longer intervene in foreign exchange markets as needed to maintain its overvalued exchange-rate peg.

73 For example, reports suggest that the Chinese USD reserves had grown to about USD 2.45 trillion by June 2010. China’s Foreign Exchange Reserves, 1977–2011, at http://www.chinability.com/Reserves.htm.

74 2007 Surveillance Decision, supra note 35, para. 15(i). See also the analysis provided above in part II of this article.

75 Staiger, Robert & Sykes, Alan O., “Currency Manipulation” and World Trade, 9 World Trade rev. 583 (2010)Google Scholar.

76 According to the economic law of one price, “[i]n an efficient market, all identical goods must have only one price.” Considerable empirical evidence suggests, however, that the law of one price fails dramatically at the international level. For a review of the related literature, see Engel, Charles, Expenditure Switching and Exchange-Rate Policy , 17 NBER Macroecon. Ann. 2002, at 231 (Gertler, Mark & Rogoff, Kenneth eds., 2003)CrossRefGoogle Scholar.

77 Staiger & Sykes, supra note 75, at 623.

78 That is, the buying and selling of government securities by the central bank to control the money supply. The Fed’s new round of quantitative easing, as mentioned in the introduction to this article, is a good illustration of what open-market operations may look like in practice.

79 IMF, Staff Report for the 2010 Article IV Consultation with the People’s Republic of China , para. 22 (July 9, 2010), at http://www.imf.org/external/pubs/ft/scr/2010/crl0238.pdf Google Scholar.

80 Qualifiers commonly used in summings up of meetings of the Fund’s Executive Board have been given a specific meaning to convey significant nuances in the board’s view in the absence of a formal decision. According to this established practice, the qualifier “a number of Directors,” for example, refers to about six to nine directors out of the twenty-four total. See IMF, Qualifiers Used in Summings Up of Executive Board Meetings , at http://www.imf.org/external/np/sec/misc/qualifiers.htm Google Scholar.

81 IMF, PIN No. 10/100, IMF Executive Board Concludes 2010 Article IV Consultation with China (July 27, 2010), at http://www.imf.org/external/np/sec/pn/2010/pnl0100.htm Google Scholar.

82 Understanding on Rules and Procedures Governing the Settlement of Disputes, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization [hereinafter WTO Agreement], Annex 2, 1869 UNTS 401, in World Trade Organization, The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts 355 (1999) [hereinafter The Legal Texts]. WTO legal texts are available online at http://www.wto.org/english/docs_e/legal_e/legal_e.htm.

83 Appellate Body Report, United States—Sunset Review of Anti-dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan, para. 81 (footnote omitted), W T/DS244/AB/R (adopted Jan. 9,2004). Materials on specific WTO disputes are available at http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm.

84 Panel Report, Japan—Measures Affecting Consumer Photographic Film and Paper, para. 10.56, WT/DS44/R (adopted Apr. 22, 1998).

85 Panel Report, Argentina—Measures Affecting the Export of Bovine Hides and the Import of Finished Leather, para. 11.18, WT/DS155/R & Corr. 1 (adopted Feb. 16, 2001).

86 See part III of this article.

87 Please note that in the remainder of this article, for the sake of improved readability, the General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, WTO Agreement, supra note 82, Annex 1A, in The Legal Texts, supra note 82, at 17 [hereinafter GATT 1994], will almost always be referred to as “GATT.” No ambiguity results since the rules that were contained in the GATT 1947 have been incorporated by reference into the GATT 1994 according to paragraph 1(a) of the introductory text of the GATT 1994. All GATT articles that were originally contained in the GATT 1947 can be easily recognized by their Roman numerals (I, II, I I I , . . .).

88 Agreement on Subsidies and Countervailing Measures, April 15, 1994, WTO Agreement, supra note 82, Annex 1 A, in The Legal Texts, supra note 82, at 231 [hereinafter ASCM]. For background information on the history of the ASCM, see, for example, Peter van den, Bossche, The Law and Policy of the World Trade Organization—Text, Cases and Materials 559–60 (2d ed. 2008)Google Scholar. It should be noted that parts of GATT Articles VI and XVI also contain provisions on subsidies and countervailing duties, but, as has been ruled by the Appellate Body, the rules on subsidies and countervailing duties contained in the GATT cannot be invoked independently from the ASCM. See Appellate Body Report, Brazil—Measures Affecting Desiccated Coconut, 18–19, WT/DS22/AB/R (adopted Mar. 20, 1997) (relating to GATT Article VI). As determined by ASCM Article 32.1, no specific action against a subsidy of another WTO member can be taken except in accordance with the provisions of the GATT, as interpreted by the ASCM. In a potential conflict between GATT Articles VI, XVI, and the ASCM, the rules contained in the latter would prevail as a result of the General Interpretative Note to Annex 1A to the WTO Agreement: "In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex lA to [the WTO Agreement], the provision of the other agreement shall prevail to the extent of the conflict." General Interpretative Note to Annex 1A, Apr. 15, 1994, WTO Agreement, supra note 82, in The Legal Texts, supra note 82, at 16. In any event, the rules contained in the ASCM are so comprehensive that they leave little scope for applying the relevant provisions in GATT Articles VI and XVI. Van den Bossche, supra, at 561 n.242.

89 See supra note 82.

90 For a transitional period of five years that ended on December 31,1999, and was not extended, the WTO recognized a third category of subsidies, the so-called non-actionable subsidies. ASCM, supra note 88, Arts. 8,9. This category was designed to enable WTO members lawfully to maintain certain subsidies, specifically for research and development purposes, for a transitional period of five years after the WTO came into being. All formally non-actionable subsidies are now potentially actionable. It should be added that not all ASCM rules apply fully to agricultural subsidies, for which specific rules exist in the WTO's Agreement on Agriculture, Apr. 15, 1994, WTO Agreement, supra note 82, Annex 1A, in The Legal Texts, supra note 82, at 33. Furthermore, the ASCM provides for some degree of special and differential treatment with regard to developing-country members. For more on both issues, which will not be addressed any further in this article, see, for example, van den Bossche, supra note 88, at 600-05.

91 As defined in ASCM Article 3. The procedural rules for multilateral remedial action against a prohibited subsidy are set out in ASCM Article 4.

92 A specific subsidy in the sense of ASCM Articles 1 and 2, which is not a “prohibited subsidy” in the sense of ASCM Article 3, may be “actionable” if it causes any of the “adverse effects to the interests of other Members” set forth in ASCM Article 5—namely, "(a) injury to the domestic industry of another Member; (b) nullification or impairment of benefits accruing directly or indirectly to other Members under [GATT]. . .; [and] (c) serious prejudice to the interests of another Member" (which is further defined in detail in ASCM Article 6). The procedural rules for multilateral remedial action against an actionable subsidy are set out in ASCM Article 7.

93 These three conditions follow from ASCM Articles 10 and 32.1 and GATT Article VI. For more detail, see van den Bossche, supra note 88, at 586.

94 These three elements of “injury” as set forth in footnote 45 to the ASCM reflect a key requirement that had already been enshrined in GATT Article VI:6(a) (emphasis added):

No contracting party shall levy any anti-dumping or countervailing duty on the importation of any product of the territory of another contracting party unless it determines that the effect of the dumping or subsidization, as the case may be, is such as to cause or threaten material injury to an established domestic industry, or is such as to retard materially the establishment of a domestic industry.

95 ASCM, supra note 88, Art. 11.1.

96 In the United States, for example, the U.S. International Trade Commission and the U.S. Department of Commerce are jointly responsible under Title VII of the Tariff Act of 1930 for conducting these investigations upon petition by U.S. industries. Whereas the department determines whether a petition actually concerns a subsidy in the legal sense, the commission assesses whether the industry branch concerned is being materially injured or being threatened with material injury by reason of the imports under investigation. Detailed information on relevant U.S. procedures, recent petitions, and case statistics, along with links to additional materials, is available at http://www.usitc.gov/trade_remedy/.

97 As provided for in GATT Article VL3 (and restated almost identically in footnote 36 to the ASCM), “The term ‘countervailing duty’ shall be understood to mean a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise.” The term “countervailing duty” thus designates a tariff surcharge that is imposed over a longer period of time. However, to ensure that countervailing duties are not imposed as a permanent measure, ASCM Article 21 provides detailed rules as to their duration and review. Inter alia, a countervailing duty may remain in force only as long and to the extent necessary to counteract subsidization that is causing injury (Article 21.1), and continued imposition of a countervailing duty over a duration of more than five years requires a review (these reviews being often referred to as “sunset reviews”) by the competent domestic authorities examining whether the countervailing duty is still warranted (Article 21.3). Any such review has to be completed within twelve months and has to satisfy the same evidentiary requirements as a new countervailing investigation (Article 21.4).

98 These procedural rules are set forth in ASCM Articles 10–23.

99 As set forth in detail in footnote 35 to the ASCM.

100 It cannot be stressed often enough, however, that due to the complexity of the matter and the various measurement uncertainties involved (beginning with the difficulty of objectively determining the precise extent to which a specific exchange rate is under- or overvalued), quantifying this tariff-cum-subsidy in a concrete scenario—for example, in relation to the long-standing conflict over the alleged undervaluation of the RMB—may be close to impossible.

101 For ease of reading, this article does not always explicitly refer to the various governmental measures involved in achieving and maintaining a durable undervaluation of the real exchange rate (all of which would have to be examined in detail in a potential WTO dispute on the issue), but refers, instead, simply to the overarching contested policy—namely, maintaining an undervalued real exchange rate.

102 As noted earlier, part V of this article examines to what extent the arsenal of unilateral trade could be lawfully relied upon to address the same issue.

103 See, e.g., Ahn, Dukgeun, Is the Chinese Exchange Rate Regime ‘WTO-Legal’? , in The US-Sino Currency DISPUTE, supra note 1, at 139–45 Google Scholar; Magnus, John & Timothy C, Brightbill, China’s Currency Regime Is Legitimately Challengeable as a Subsidy Under ASCM Rules , in The US-Sino Currency Dispute, supra note 1, at 147 Google Scholar; Trachtman, Joel P., Yuan to Fight About it? The WTO Legality of China’s Exchange Regime , in The US-Sino Currency Dispute, supra note 1, at 127 Google Scholar; Waibel, Michael, Retaliating Against Exchange Rate Manipulation Under WTO Rules , in The US-Sino Currency Dispute, supra note 1, at 133 Google Scholar; Benitah, Marc, China s Fixed Exchange Rate for the Yuan: Could the United States Challenge It in the WTO as a Subsidy? , ASIL Insights (2003), at http://www.asil.org/insighll7.cfm Google Scholar; Ioana, Ciobänaşu & Denters, Erik, Manipulation of the Chinese Yuan—May WTO Members Respond? , 9 Griffin’s View Int’l & Comp. L. 55 (2008), available at http://ssrn.com/abstract=1315290 Google Scholar; Herrmann, Christoph, Don Yuan: China’s “Selfish” Exchange Rate Policy and International Economic Law , Eur. Y.B. Int’l Econ. L. 31 (2010)Google Scholar; Hufbauer, Gary C., Wong, Yee, & Sheth, Ketki, US-CHINA TRADE DISPUTES: RISING TIDE, RISING STAKES 11-28 (2006)Google Scholar; Koops, Catharina E., Manipulating the WTO? Challenging Undervalued Currencies Under WTO Rules (Amsterdam Center for International Law Research Paper Series, 2010), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1564093 Google Scholar; Leviton, Matthew R., Is It a Subsidy? An Evaluation of China’s Currency Regime and Its Compliance with the WTO , 23 UCLA Pac. Basin L.J. 243 (2006)Google Scholar; Long, Han, SCM Agreement Says “No” to Charges Against RMB Exchange Rate as Export Subsidy , 5 Frontiers L. China 397 (2010)CrossRefGoogle Scholar; Mercurio, Bryan & Celine Sze Ning, Leung, Is China a “Currency Manipulator”?: The Legitimacy of China’s Exchange Regime Under the Current International Legal Framework , 43 INT’L LAW. 1257 (2009)Google Scholar; Staiger & Sykes, supra note 75, at 609–14.

104 See Memorandum from James L. Bacchus & Ira Shapiro, Greenberg Traurig LLP, to Jim Jarrett, Chairman, International Economic Affairs Policy Group, National Association of Manufacturers, Consistency with the WTO Obligations of the United States of H.R. 1498, the Hunter-Ryan Bill (Sept. 12, 2006) (on file with author); Response of Terence P. Stewart, Amy S. Dwyer, & J. Daniel Stirk, Law Offices of Stewart and Stewart, to Bacchus/Shapiro Analysis of WTO-Consistency of Hunter-Ryan Bill (HR 1498) (Sept. 22, 2006), at http://faircurrency.org/pdfs/Memo_on_Response_to_RH_BiU.pdf; Response of Wiley Rein & Fielding LLP, to Bacchus/Shapiro Analysis of the Consistency of H.R. 1498, the Hunter-Ryan Bill, with the WTO Obligations of the United States, at http://www.faircurrency.org/legalbackground.html.

105 Reaching a final conclusion on this issue would require a detailed analysis of all relevant measures at stake, which cannot be achieved in an abstract analysis like the present one.

106 ASCM, supra note 88, Article 1.1 provides, in full (footnote omitted):

For the purposes of this Agreement, a subsidy shall be deemed to exist if:

  • (a)

    (a) (1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e. where:

    • (i)

      (i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);

    • (ii)

      (ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits);

    • (iii)

      (iii) a government provides goods or services other than general infrastructure, or purchases goods;

    • (iv)

      (iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments; or

  • (a)

    (a) (2) there is any form of income or price support in the sense of Article XVI of GATT 1994;

  • (b)

    (b) a benefit is thereby conferred.

107 For a more detailed analysis of the requirement that subsidies be specific, including quotes from previous WTO disputes, see VAN DEN BOSSCHE, supra note 88, at 568–71.

108 In this sense, see, for example, Trachtman, supra note 103, at 130.

109 Panel Report, United States—Preliminary Determinations with Respect to Certain Softwood Lumber from Canada, para 7.24, WT/DS236/R (adopted Nov. 1, 2002) (footnote omitted).

110 For details on these measures, see the introduction to this part and the analysis provided in part III of this article.

111 In this sense, see van den Bossche, supra note 88, at 562.

112 Much of the existing literature on the potential legal treatment of exchange rate manipulation under WTO law merely states conclusorily that a financial contribution under the ASCM cannot be identified in the present context. Hufbauer, Wong, & Sheth, supra note 103, at 21–22, Koops, supra note 103, at 3–4, Mercurio & Leung, supra note 103, at 1294–95, Staiger & Sykes, supra note 75, at 31–32, and especially Long, supra note 103, at 404–07, deal with the issue in more detail, reaching either the same negative result or expressing at least great skepticism as to the existence of a “financial contribution.”

113 Response of Stewart et al., supra note 104, at 2–5; Response of Wiley Rein & Fielding LLP, supra note 104, at 3–4.

114 In the Memorandum from Bacchus & Shapiro, supra note 104, at 5–7, it is persuasively argued that the measures involved in the Chinese currency regime do not amount to a “financial contribution” under ASCM Article 1.1(a)(1).

115 The logic behind this argument is that if exporters, under a surrender requirement, are obliged to convert their export receipts into domestic currency at an undervalued exchange rate, the banking sector has to give them more units of domestic currency (which, on this simplistic argument, the government indirectly provides by printing money) per unit of foreign currency earned than they would be given if the exchange rate were not undervalued.

116 See Response of Wiley Rein & Fielding LLP, supra note 104, at 3–4.

117 Panel Report, United States—Measures Treating Export Restraints as Subsidies, para. 8.38, WT/DS194/R & Corrs. 1 & 2 (adopted Aug. 23, 2011) (footnote omitted).

118 This argument has been presented, for example, in the Response of Stewart et al., supra note 104, at 6.

119 See supra note 14 for the array of IMF-consistent exchange arrangements.

120 Without providing a definition of the expression “any form of income or price support,” GATT Article XVI: 1 merely states, in relevant part:

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 in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory . . . .

121 See Staiger & Sykes, supra note 75, at 610 n.52.

122 In light of the analysis provided in part III above, such a chain of causation might indeed be identifiable but can be expected to be extremely difficult to quantify.

123 Staiger & Sykes, supra note 75, at 610 n. 52. Staiger and Sykes are the only authors among those listed earlier, see supra notes 103 and 104, even to address the question as to whether maintaining an undervalued real exchange rate might amount to “any form of income or price support in the sense of [GATT] Article XVI.” Unless one adopts the narrow reading of the terms “income or price support” (as correctly suggested by Staiger and Sykes), one could go as far as to argue against the existence of a subsidy under ASCM Article 1 by claiming that to maintain an undervalued real exchange rate for currency A in terms of currency B constitutes a mere price support for currency B. It appears safe to say that such a result would run counter to the intended meaning of GATT Article XVI: 1, as noted above.

124 For more detailed developments on the general requirement under ASCM Article 1.1 (b), see, for example, van den Bossche, supra note 88, at 565–68.

125 Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, para. 149, W T/DS70/AB/R (adopted Aug. 20, 1999) [hereinafter Canada—Aircraft] (quoting the panel report).

126 Id, para. 154.

127 Id, para. 157.

128 As noted previously, as opposed to the necessarily general and abstract assessment provided in this article, a thorough analysis of both the legal and economic characteristics of the contested exchange measures would have to be conducted in any specific case to reach a reasoned conclusion.

129 See Herrmann, supra note 103, at 49.

130 Staiger & Sykes, supra note 75, at 611.

131 It is mainly because it is so difficult to determine the precise degree of under- or overvaluation of the real exchange rate that some authors, most notably Long, supra note 103, at 407–19, deny that a benefit is being conferred in the current Chinese scenario.

132 Koops, supra note 103, at 4.

133 Note that ASCM Article 1.1(b) reads: if “a benefit is thereby conferred” (emphasis added).

134 See, e.g., Trachtman, supra note 103, at 130–31.

135 As noted at the beginning of part IV, export subsidies are “prohibited subsidies” under ASCM Article 3, all of which are deemed to be “specific” under ASCM Article 2.3.

136 For more detail on the constituent elements of the definition of export subsidies under ASCM Article 3.1 (a) and on related WTO disputes, see, for example, van den Bossche, supra note 88, at 571–74.

137 Not all authors writing on the potential legal treatment of exchange rate manipulation under WTO law explicitly look into ASCM Annex I, but all who do so reach the same result. See Benitah, supra note 103; Hufbauer, Wong, & Sheth, supra note 103, at 22–23; Leviton, supra note 103, at 25–27.

138 Hufbauer, Wong, & Sheth, supra note 103, at 23; Koops, supra note 103, at 6.

139 Emphasis added.

140 See part III above.

141 As explicitly identified by the Appellate Body in Canada—Aircraft, supra note 125, at paras. 169–72.

142 Id., para. 167.

143 Panel Report, Australia—Subsidies Provided to Producers and Exporters of Automotive Leather, para. 9.55, WT/DS126/R (adopted June 16, 1999) (footnote omitted).

144 Appellate Body Report, Canada—Aircraft, supra note 125, para. 171.

145 Notable exceptions include Magnus & Brightbill, supra note 103; Response of Stewart et al., supra note 104; Response of Wiley Rein & Fielding LLP, supra note 104.

146 See, e.g.. Leviton, supra note 103, at 23–24; Koops, supra note 103, at 5–6.

147 See the analysis provided in parts I and II above.

148 In this sense, see, for example, Memorandum from Bacchus & Shapiro, supra note 104, at 9–10, Koops, supra note 103, at 5–6, and Leviton, supra note 103, at 259–63.

149 Appellate Body Report, Canada—Aircraft, supra note 125, para. 171.

150 See, e.g., Magnus & Brightbill, supra note 103, at 148–50; Response of Stewart et al., supra note 104, at 8–9; and Response of Wiley Rein & Fielding LLP, supra note 104, at 5–7.

151 Article 21.5 Appellate Body Report, United States—Tax Treatment for “Foreign Sales Corporations,” Recourse to Article 21.5 of the DSU by the European Communities, paras. 119–20, WT/DS108/AB/RW (adopted Jan. 29, 2002) [hereinafter U.S.—FSC (Article 21.5–EC)].

152 Appellate Body Report, United States—Subsidies on Upland Cotton, para. 578, WT/DS267/AB/R (adopted Mar. 21,2005).

153 Appellate Body Report, U.S.—FSC (Article 21.5—EC), supra note 151, para. 120.

154 Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. §§5301-5306.

155 The semiannual Treasury report that would have been due in April 2010 was issued on July 8, 2010, after having been postponed several times as part of the political struggle between China and the United States over the alleged undervaluation of the Chinese exchange rate. Like previous reports, neither the July 2010 report nor the February 2011 report labeled China an exchange rate manipulator. The latest Treasury reports, as well as additional background material, are available at http://www.treasury.gov/resource-center/international/exchange-rate-policies/Pages/index.aspx.

156 S. 3134, 111th Cong. (2010), at http://thomas.loc.gov/cgi-bin/query/z?clll:S.3134:

157 The first of these approaches is best represented by the Currency Exchange Rate Oversight Reform Act of 2007, S. 1607, 110th Cong. (2007), at http://thomas.loc.gOv/cgi-bin/query/zJcllO:S.1607:. This Schumer- Graham bill was approved by the Senate Finance Committee but went no further due to a jurisdictional conflict with the Senate Banking Committee. This bill was reintroduced in the 111 th Congress (2009 –10) on June 11, 2009, as the Currency Exchange Rate Oversight Reform Act of 2009,S.1254. The Currency Reform for Fair Trade Act of 2009, S.1027, 111th Cong. (2009), introduced under the leadership of Senators Debbie Stabenow (D-MI) and Jim Bunning (R-KY), stands for the second approach, at http://thomas.loc.gov/cgi-bin/bdquery/zJdlll:s.01027:

158 Section 101 (6) of the bill defined “fundamental misalignment” as a “significant and sustained undervaluation of the prevailing real effective exchange rate, adjusted for cyclical and transitory factors, from its medium-term equilibrium level.”

159 For a more detailed analysis of this Schumer-Stabenow-Graham bill and related legislation proposed through May 2010, see Zimmermann, supra note 1.

160 Dumping exists when the export price of a product is lower than its “normal value” (defined as the home market price, as a price to a third-country market, or as the fully loaded average production cost plus overhead and profit). GATT Article VI permits an importing country to levy antidumping duties on a product, in addition to normal tariffs, if dumping of that product causes material injury to the producers of the like domestic product. The WTO’s Antidumping Agreement provides disciplines limiting antidumping measures. Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, WTO Agreement, supra note 82, Annex 1A, in The Legal Texts, supra note 82, at 147 [hereinafter Antidumping Agreement].

161 Whereas subsidies are a trade-distorting state practice, the term “dumping” designates unfair, firm-level behavior—which is why GATT Article VI:5 states that “no product. . . shall be subject to both antidumping and countervailing duties to compensate for the same situation or export subsidization.” Firms practicing dumping (usually private companies, but these firms could also be publicly owned) offer exceptionally attractive prices (often below production costs) on one market, but not on others. Such a practice is harmful since it is not sustainable. For a succinct overview of both the economic and legal literatures on dumping, see Sykes, Alan O., Trade Remedy Laws (U. Chi. John M. Olin Law & Econ. Working Paper No. 240, 2005), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=698381 Google Scholar.

162 Notably in S. 1607, supra note 157.

163 For an insightful legal analysis, see, for example, Julia Ya, Qin, “WTO-Plus “ Obligations and Their Implications for the World Trade Organization Legal System , 37 J. World Trade 483 (2003)Google Scholar.

164 See Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001), available at http://docsonline.wto.org.

165 For the Antidumping Agreement, see supra note 160.

166 Note, however, that at the very latest, fifteen years after the date of China’s accession (that is, December 11, 2016), the general rules will have to be applied to China independent of whether it fulfills the criteria of a market economy under the domestic law of other WTO members. See Protocol on the Accession of the People’s Republic of China, supra note 164, Art. 15(d).

167 See Staiger & Sykes, supra note 75, at 615.

168 Id.

169 Tariff Act of 1930, Title VII, at http://ia.ita.doc.gov/regs/title7.html.

170 H.R. 2378, 111th Cong. (2009), at http://thomas.loc.gov/cgi-bin/bdquery/z?d111:h2378:.

171 See, e.g., Politi, James & Dombey, Daniel, US Congress Backs Action on Renminbi , Fin. Times (Sept. 30, 2010), at http://www.ft.eom/cms/s/0/c5f2495c-cbef-lldf-bd28-00l44feab49a.html Google Scholar.

172 H.R. 639, 112th Cong. (2011), at http://thomas.loc.gOv/cgi-bin/bdquery/z?d112:HR00639:.

173 S. 328, 112th Cong. (2011), at http://thomas.loc.gOv/cgi-bin/bdquery/z?d112:SN00328:.

174 H.R. 1498, 109th Cong. (2005), at http://thomas.loc.gov/cgi-bin/query/z?c109:H.l498:.

175 Sander Levin, then still chairman of the House Ways and Means Committee, had already proposed, as an amendment in the nature of a substitute, the final version of the earlier mentioned Ryan-Murphy bill, passed by the House of Representatives on September 29, 2010.

176 See H.R. REP. No. 111-646, 7–9 (2010), available at http://democrats.waysandmeans.house.gov/media/pdf/11 l/final%20report.pdf.

177 A more detailed and extended version of the analysis presented in this part has been included in Zimmermann, Claus D., IMF-WTO Interaction: Institutional, JurisdictionalandProceduralAspects , in Unity or Fragmentation of International Law: The Role of International and National Tribunals (Ole Kristian, Fauchald & Nollkaemper, Andre eds., forthcoming 2012)Google Scholar. That essay addresses the issue of IMF-W TO interaction generally; instead of approaching the problem exclusively in terms of a potential WTO dispute on exchange rate manipulation, it examines—in a comparative perspective that takes in international environmental, labor, and investment protection—institutional and procedural issues related to the interaction of the international trading and monetary regimes.

178 [Author’s note: This quotation of GATT Article XV has been adjusted according to Article 2(a) of the introductory text of GATT 1994, which stipulates that all references to “contracting party” in the now incorporated provisions of GATT 1947 shall be deemed to read “Member.” In addition, the quoted parts of GATT Article XV are among those provisions for which, according to Article 2(b) of the introductory text of the GATT 1994, references to the contracting parties acting jointly shall be deemed to be references to the WTO. Subsequent quotes of GATT provisions in this article have been changed accordingly without additional express notice.]

179 Emphasis added.

180 Appellate Body Report, Argentina—Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, WT/DS56/AB/R & Corr. 1 (adopted Apr. 22, 1998).

181 Id, para. 82.

182 Id.,para. 84.

183 Id., para. 86.

184 Panel Report, India—Quantitative Restrictions on Imports of Agricultural Textile and Industrial Products, WT/DS90/R (adopted Sept. 22, 1999), upheld by Appellate Body Report, India—Quantitative Restrictions on Imports of Agricultural Textile and Industrial Products, WT/DS90/AB/R (adopted Sept. 22, 1999) [hereinafter India—Quantitative Restrictions].

185 Id., para. 5.11 (emphasis added).

186 Id, para. 5.13.

187 Id., para. 5.12. For a detailed analysis of the findings in India—Quantitative Restrictions, supra note 184, with respect to the consultation requirement under GATT Article XV:2, see Siegel, supra note 17, at 581-84.

188 Appellate Body Report, India—Quantitative Restrictions, supra note 184, para. 152.

189 Panel Report, Dominican Republic—Measures Affecting the Importation and Internal Sale of Cigarettes, WT/DS302/R (adopted May 19, 2005), modified by Appellate Body Report, Dominican Republic—Measures Affecting the Importation and Internal Sale of Cigarettes, WT/DS302/AB/R (adopted May 19,2005) [hereinafter Dominican Republic—Import and Sale of Cigarettes]. In this dispute, the panel found that the Dominican Republic’s imposing a foreign exchange fee on imported cigarettes was not justifiable as an exchange restriction within the meaning of GATT Article XV:9(a) and that it constituted “another charge or duty” inconsistent with GATT Article II: 1 (b). For an insightful discussion of relevant aspects of this dispute, see, for example, Viterbo, Annamaria, Dispute Settlement of Exchange Measures Affecting Trade and Investments: The Overlapping Junsdictions of the IMF, WTO and the ICSID , at 14 (SIEL Online Proceedings Working Paper No. 34/08, 2008), at http://ssrn.com/abstract=1154673 Google Scholar.

190 Panel Report, Dominican Republic—Import and Sale of Cigarettes, supra note 189, para. 7.139 (emphasis added).

191 General Agreement on Trade in Services, Apr. 15,1994, WTO Agreement, supra note 82, Annex 1 B, in The Legal Texts, supra note 82, at 295 [hereinafter GATS].

192 Panel Report, India—Quantitative Restrictions, supra note 184, para. 3.309.

193 Emphasis added. For explanation of bracketed substitutions, see supra note 178.

194 Siegel, supra note 17, at 570.

195 Id. at 582–83.

196 Id. at 571.

197 As will be explained further below, the precise relationship between paragraphs 4 and 9 of GATT Article XV:9 remains somewhat ambiguous, although it seems that GATT Article XV:9(a) can be convincingly interpreted to prevail as lex specialis, in which case it constitutes a general exception to GATT.

198 A surrender requirement mandates exporters to exchange into domestic currency any foreign exchange received as payment. This requirement enables the authorities to absorb any excess supply of foreign currency on the domestic market and thus to avoid the appreciation of the domestic currency. See the analysis provided in part III of this article.

199 It is questionable whether outright price controls as a means of keeping inflation down would necessarily be considered a governmental measure within the scope of GATT Article XV:9(a). In a concrete case, any decision as to whether a specific measure was to be regarded as falling under the scope of the exception of GATT Article XV:9 (a) (“exchange controls or exchange restrictions”) could obviously result only from a detailed analysis of the measures legal and economic characteristics.

200 For a detailed analysis of the precise terms of the provisions contained in Articles VIII and XIV of the IMF Agreement, see Siegel, supra note 17, at 584–90.

201 Article XXX(d) states, in relevant part:

Payments for current transactions means payments which are not for the purpose of transferring capital, and includes, without limitation:

  • (1)

    (1) all payments due in connection with foreign trade, other current business, including services, and normal short-term banking and credit facilities;

  • (2)

    (2) payments due as interest on loans and as net income from other investments;

  • (3)

    (3) payments of moderate amount for amortization of loans or for depreciation of direct investments; and

  • (4)

    (4) moderate remittances for family living expenses.

202 IMF, Decision No. 1034-(60/27) (June 1,1960), in 34 Selected Decisions, supra note 35, at 517, 518, available at http://www.imf.org/external/pubs/ft/sd/index.asp?decision=1034-(60/27).

203 For detail on this point, see Siegel, supra note 17, at 586.

204 It should be noted that the GATS contains a similar exception, which, however, is not framed in precisely the same terms. Whereas the exception under GATT Article XV:9(a) covers “the use . . . of exchange controls or exchange restrictions in accordance with the [IMF Agreement],” the first part of GATS Article XI:2 refers to “the use of exchange actions which are in conformity with the [IMF Agreement]” (emphasis added). Providing a detailed analysis of this issue would go beyond the scope of this article. It appears safe to say, however, that, although it would obviously have been ideal if the drafters of GATS Article XI:2 had employed the same terms as those existing already in the corresponding provision under the GATT, the difference appears to be essentially one of semantics. The term “exchange actions” under GATT Article XI:2 appears to be identical in scope to the exchange measures referred to under GATT Article XV:9(a)—that is, restrictive exchange measures (“exchange restrictions”) plus nonrestrictive exchange measures (“exchange controls”). However, since neither GATT Article XV:9(a) nor GATS Article XI:2 has ever been subject to interpretation in the context of dispute settlement, one cannot but acknowledge that the issue remains uncertain. For a detailed analysis of the exception under GATS Article XI:2, including its second part, which limits the scope of the exception in relation to certain restrictions on capital transactions, see Siegel, supra note 17, at 596-99.

205 Siegel, supra note 17, at 589. The remainder of this paragraph is built on the excellent analysis provided by Siegel, supra note 17, at 589–90.

206 Id. at 586, 590.

207 IMF Article VI:3, which establishes only minor limits for IMF members in their regulation of international capital movements, reads as follows:

Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payments for current transactions or which will unduly delay transfers of funds in settlement of commitments, except as provided in Article VII, Section 3(b)] [dealing with the scarcity of the IMF’s holdings] and in Article XIV, Section 2 [transitional provisions].

208 For more on this point, see Gianviti, Francois, The IMF and the Liberalization of Capital Markets , 19 Hous. J. Int’l L. 773, 775–76 (1997)Google Scholar.

209 In this sense, see, for example, LASTRA, ROSA M., Legal Foundations of International Monetary Stability 396 (2006)Google Scholar; Siegel, supra note 17, at 590; Lichtenstein, Cynthia, International Jurisdiction over International Capital Flows and the Role of the IMF: Plus Ça Change. . . , in International Monetary Law—Issues for the New Millennium 61, 66 (Giovanoli, Mario ed., 2000)Google Scholar.

210 For example, Article 3 of the Agreement on Trade-Related Investment Measures, April 15, 1994, WTO Agreement, supra note 82, in The Legal Texts, supra note 82, at 143, provides: “All exceptions under GATT 1994 shall apply, as appropriate, to the provisions of this Agreement.”

211 April 15, 1994, WTO Agreement, supra note 82, in The Legal Texts, supra note 82, at 391. This ministerial declaration is an integral part of the Final Act. For background information on the eleventh-hour discussions leading to the inclusion of the declaration in Final Act, see Siegel, supra note 17, at 593–95.

212 See Siegel, supra note 17, at 594.

213 See van den Bossche, supra note 88, at 53.

214 Opened for signature May 23, 1969, 1155 UNTS 331 (entered into force Jan. 27,1980) [hereinafter VCLT]. As of May 1, 2011, the VCLT has been ratified by 111 states.

215 With respect to the provisions contained in GATT Article XIX and those in the Agreement on Safeguards, Apr. 15, 1994, WTO Agreement, supra note 82, Annex 1A, in THE LEGAL TEXTS, supra note 82, at 275, this point has been explicitly confirmed by the WTO Appellate Body in Argentina—Footwear. Appellate Body Report, Argentina—Safeguard Measures on Imports of Footwear, para. 81, WT/DS121/AB/R (adopted Jan. 12, 2000).

216 See van den Bossche, supra note 88, at 47–48.

217 See General Interpretative Note to Annex 1A, supra note 88.

218 For background information on the discussions leading up to the inclusion of the declaration in the Final Act, see Siegel, supra note 17, at 594, which supports the analysis presented here.

219 The WTO Appellate Body stated in U.S.—Shrimp:

A treaty interpreter must begin with, and focus upon, the text of the particular provision to be interpreted. It is in the words constituting that provision, read in their context, that the object and purpose of the states parties to the treaty must first be sought. Where the meaning imparted by the text itself is equivocal or inconclusive, or where confirmation of the correctness of the reading of the text itself is desired, light from the object and purpose of the treaty as a whole may usefully be sought.

Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products, para. 114, WT/DS58/AB/R (adopted Nov. 6, 1998) (footnote omitted).

220 VCLT Article 32 (“Supplementary means of interpretation”) provides:

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 3 1 , or to determine the meaning when the interpretation according to article 31 :

  • (a)

    (a) leaves the meaning ambiguous or obscure; or

  • (b)

    (b) leads to a result which is manifestly absurd or unreasonable.

221 See van den Bossche, supra note 88, at 45.

222 The existing literature on GATT Article XV:4 is sparse. Detailed analyses of relevant aspects of this provision can be found in Jorge Miranda, Currency Undervaluation as a Violation of GATT Article XV: 4, in The US-Sino Currency Dispute, supra note l, at 115, and Jackson, John H., World Trade and the Law of Gatt 479–91 (1969)Google Scholar. See also Ahn, supra note 103, at 139–42; Bacchus & Shapiro, supra note 104, at 11–13; Herrmann, supra note 103, at 46–48; Hufbauer, Wong, & Sheth, supra note 103, at 16–20; Mercurio & Leung, supra note 103, at 1285–93; Proctor, Charles, Mann on the Legal Aspect of Money 570–01 (6th ed. 2005)Google Scholar; Proctor, Charles, USA v China and the Revaluation of the Renminbi: Exchange Rate Pegs and International Law , 17 Eur. Bus. L. Rev. 1333, 1348–49 (2006)Google Scholar; Siegel, supra note 17, at 591–92.

223 Jackson, supra note 222, at 479.

224 Id. at 482.

225 Jackson, id. at 486–91, provides a detailed, insightful account of the tedious process for concluding such special exchange arrangements in the early GATT years.

226 For more on this issue, along with references to the related GATT documents, see id. at 489–91.

227 In this sense, see, for example, Hufbauer, Wong, & Sheth, supra note 103, at 19; Koops, supra note 103, at 10; Trachtman, supra note 103, at 128–29.

228 See Ahn, supra note 103, at 141; Miranda, supra note 222, at 121–22.

229 Proctor, supra note 222, at 570.

230 Jackson, supra note 222, at 483–85, discusses a GATT case of 1952 involving Greece where the issue arose without being ultimately decided.

231 In Dominican Republic—Import and Sale of Cigarettes, one of the third parties, China, had expressed its hope that the panel would clarify the relationship between GATT Articles XV:4 and XV:9(a), but the panel did not address this issue in its findings. See Panel Report, Dominican Republic—Import and Sale of Cigarettes, supra note 190, paras. 5.56–5.58.

232 See Siegel, supra note 17, at 591.

233 GATT B.I.S.D. (3d Supp.) at 195, 197 (1955) (quoted and discussed in Jackson, supra note 222, at 485–86).

234 In addition to long-standing U.S. criticism, European leaders have increasingly been making their voices heard over the course of the past year in urging China to let the RMB appreciate. See, e.g., Torello, Alessandro & Dalton, Matthew, EU Urges China to Let Currency Appreciate , Wall St. J. (ONLINE), Oct. 5, 2010 Google Scholar, available at ProQuest, Doc. ID 756952030.

235 David, Gauthier-Villars, Sarkozy Looks to Boost Image via China , Wall St. J. (ONLINE), Oct. 1, 2010, available at ProQuest, Doc. ID 756064120.Google Scholar

236 See Gianviti, supra note 19, at 132.

237 For the exchange arrangements recognized by the IMF, see supra note 14.

238 According to the IMF’s revised surveillance priorities for 2008 to 2011, surveillance is aimed at, inter alia, “promot[ing] a rebalancing of sources of global demand, through both macroeconomic and structural policies, so as to achieve sustained world growth while keeping global imbalances in check.” IMF, Statement of Surveillance Priorities—Revisions of Economic Priorities and Progress on Operational Priorities, Decision No. l4436-(09/102) (Sept. 25,2009), in 34 Selected Decisions, supra note 35, at 52, 53, available at http://www.imf.org/external/pubs/ft/sd/index.asp?decision=14436-(09/102); see also IMF, Press Release No. 09/336, IMF Executive Board Revises Surveillance Priorities for 2008-2011 (Sept. 29, 2009), at http://www.imf.org/external/np/sec/pr/2009/pr09336.htm.

239 Gianviti, supra note 19, at 137.

240 Gianviti cites high interest rates as an example of such a policy by a deficit country. Imposed to achieve domestic stability through controlling inflation and reducing the fiscal deficit, high interest rates will attract foreign capital, thus leading to an appreciation of the domestic currency, which, in turn, will negatively affect the competitiveness of domestic products. Id.

241 See, e.g., Bergsten, C. Fred, We Can Fight Fire with Fire on the Renminbi , Fin. Times (Oct. 3, 2010), at http://www.ft.eom/cms/s/0/070e525c-cfld-11df-9be2-00144feab49a.html?ftcamp=rss Google Scholar.

242 This G-20 initiative has been combined with a cooperative process of mutual assessment among G-20 members in consultation with the IMF and the World Bank.

243 G-20, Leaders’ Statement: The Pittsburgh Summit, annex, para. 2 (Sept. 24-25, 2009) (“G20 Framework for Strong, Sustainable, and Balanced Growth”), at http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf.

244 G-20, The G-20 Toronto Summit Declaration, paras. 11-12 (June 26-27, 2010), at http://www.g20.org/Documents/g20_declaration_en.pdf.

245 As explained in detail in the introduction to this article, this shift was announced only a few days before the G-20 Toronto Summit, on June 19, 2010.

246 Brian Love & David Storey, G20 Drops China-Sensitive Plaudits on Yuan Reform, REUTERS (June 27,2010), at http://www.reuters.com/article/idUSTRE65QlAQ20100627. For the summit declaration, see supra note 244.

247 The G-20 Toronto Summit Declaration, supra note 244, Annex I, para. 12.

248 See, e.g., Giles, Chris, Beattie, Alan, & Oliver, Christian, G20 Shuns US on Trade and Currencies , Fin. Times (Nov. 12, 2010), at http://www.ft.eom/cms/s/0/e65d6a44-ee2e-lldf-8b90-00144feab49a.html Google Scholar.

249 See G-2Q, The Seoul Summit Document, para. 12 (Nov. 11-12,2010) (attached to The G20 Seoul Summit Leaders’ Declaration), at http://www.g20.Org/Documents2010/ll/seoulsummit_declaration.pdf.

250 See The G20 Seoul Summit Leaders’ Declaration, supra note 249, para. 9.1.3.

251 If the Fed’s plans for quantitative easing succeed, the price level in the United States will rise, thus offsetting any competitiveness gains resulting from the depreciation of the USD (in nominal terms, resulting from the Fed’s move). To the extent that specific steps to prevent prices from adjusting upward do not accompany it, quantitative easing will thus not produce a durable undervaluation of USD real exchange rates. And as explained in detail in this article, it is only such durable undervaluation that will significantly affect international trade flows. Much of the harsh criticism of the Fed’s plans on this issue seems thus unwarranted. See The Ghost at the Feast , Economist (Nov. 12, 2010), at http://www.economist.com/blogs/newsbook/2010/ll/g20 Google Scholar.

232 The Seoul Summit Document, supra note 249, para. 6.

253 G-20 Finance Ministers and Central Bank Governors, Communiqué (Feb. 18-19, 2011), at http://www.g20.org/pub_communiques.aspx.

254 See Atkins, Ralph & Peel, Quentin, G20 Strikes Compromiseon Global Imbalances , Fin. Times (Feb. 19, 2011), at http://www.ft.eom/cms/s/0/1a12713e-3c56-11e0-b073-00144feabdc0.html Google Scholar.

255 G-20 Finance Ministers and Central Bank Governors, Communiqué (Apr. 14–15, 2011), at http://www.g20.org/pub_communiques.aspx.

256 See, e.g., Giles, Chris, G-20 Agrees on Criteria for IMF Scrutiny of Countries , Fin. Times (Apr. 15, 2011), at http://www.ft.eom/cms/s/0/1a12713e-3c56-11e0-b073-00144feabdc0.html Google Scholar.