Currency manipulation and the WTO

Delroy S. Beckford, Contributor

Currency devaluation is often championed as an acceptable means of promoting export competitiveness, as though such a policy move will secure the benefits for which it is designed without any countervailing action by policymakers in the targeted export market, or by countries competing in the targeted export market.

As one contributor remarked recently, the "Exchange rate has to be adjusted as part of the effort to improve competitiveness for Jamaican businesses".

The statement betrays the 'all other things being equal or held constant' presumption, but also a presumption about policy and regulatory autonomy without a consideration of the attendant legal implications. Matters that were once thought to be within the exclusive province of policy are now constrained by strictures reflected in international obligations.

Turning to the first presumption, there is no gainsaying that as countries strive for a greater share of global markets in their export sectors, or to protect against injury to their domestic manufacturers, a significant part of their policy instrument involves the manipulation of currency to make exports more attractive or as a response to currency manipulation by a trading partner to stave off an influx of imports which can result in injury to domestic manufacturers.

Competitive currency devaluation may also be a response by trading partners competing in the targeted export market to nullify any actual or perceived competitive edge arising from the exchange action.

The initial action and response is often described as currency manipulation which may be defined as existing when a government buys or sells foreign currency to push the exchange rate of its currency away from its equilibrium value or to prevent the exchange rate from moving toward its equilibrium value.

THE NEW TRADE POLICY WAR

The widespread use of this policy has now been dubbed 'the new trade policy war' whereby countries seek to gain against, or counter advantages obtained by, their trading partners.

The flexibility with which countries embark on this policy has now prompted countries to be considering whether to reform existing international rules on the use of such measures which many observers regard as likely to have a negative impact on trade if, as appears likely, retaliatory currency manipulation measures increase.

In response to China's then impending accession to the WTO, for example, Japan devalued its yen to counter what many observers regarded as an undervalued yuan.

Similarly, the US has toyed with the idea of introducing legislation to treat currency manipulation as a form of illegal subsidy.

Although many developing countries may be ill-equipped to pursue retaliatory measures with any degree of success, it is or should be of significant concern to them because of the possible impact on domestic production and the growth of export markets where other countries pursue such measures against their trading partners.

A devaluation in response to perceived or actual under-valuation of a trading partner's currency has potential effects on third countries by making their exports more expensive in the markets of those countries pursuing retaliatory devaluation.

According to Article IV, Section I of the IMF's Articles of Agreement, IMF members commit to:

'Avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members.'

Article IV is perhaps almost now a dead letter because the IMF has never publicly declared a member country to be in violation of the prohibition against currency manipulation since the adoption of the Article IV language on currency manipulation in 1978.

Disciplining currency manipulation under IMF rules therefore appears less likely than in other fora.

WTO rules do provide some basis on which such action can be addressed, although there is uncertainty on the scope of the applicable provisions to address effectively this form of trade distortion.

Were the WTO to be the forum to address such a dispute, Article IV of the IMF Articles of Agreement would become relevant since the WTO is to consult with the IMF on such matters in adjudicating disputes involving currency and balance of payments issues.

The consultation process here is limited, being required in cases concerning monetary reserves, balances of payments and exchange arrangements, and in any event would not relieve a panel from making its own assessment of the matter despite the obligation of WTO panels to accept the findings of the IMF on whether 'exchange arrangements' are in accordance with the IMF Agreement.

If, as appears to be the case, currency manipulation becomes a market access issue whereby it is viewed as a form of subsidy for exports or tariff for imports, the WTO may be the forum to address such issues.

To address such measures, Article XV: 4 of GATT provides that members:

'Shall not, by exchange action, frustrate the intent of this Agreement, nor by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund'.

Exchange action that is consistent with the IMF Articles of Agreement are not to be regarded as frustrating the intent of a GATT provision, but for a breach of Article XV:4 to be found, independent of exchange action consistent with the IMF Agreement, there should be no 'appreciable departure from the intent of the specific GATT provision'.

EXCHANGE ACTION

But an infringement of a GATT provision is not sufficient for a breach of Article XV: 4 because the term 'frustrate' is given some special meaning, that is, there must be some significant departure from the intent of the provision by the infringement. When this is the case is anybody's guess, and the existing rules therefore require some precision to discipline currency manipulation.

An 'exchange action' is broad enough to cover currency manipulation and, if currency manipulation amounts to a form of tariff on imports, this may impair the value of tariff concessions made.

In this respect, an exchange action may also amount to a breach of Article II of GATT which provides for binding tariff commitments by indirectly adjusting tariff commitments without negotiation and compensation as required under GATT rules.

Article II of GATT requires countries to give treatment no less favourable than that in their schedule of concessions and that countries do not apply ordinary customs duties in excess of what is provided for in their schedule of concessions.

Currency manipulation, if it results in undervaluation, limits the purchasing power of the undervalued currency against foreign currencies and thereby raises the price of foreign goods in a manner which could amount to treatment less favourable than what is provided in a country's schedule of concessions whereby the amount of the undervaluation or devaluation becomes a de facto import duty.

An undervalued currency may also appear as a subsidy in the sense that exported goods are made cheaper than otherwise would be the case if the correct currency value were assigned to the goods being sold.

The Agreement on Subsidies and Countervailing Measures, however, despite calls to the contrary, does not seem to be the appropriate agreement to counter such measures.

Even if devaluation amounts to a government contribution to exporters by making exported goods less expensive than they otherwise would be, the benefits of such devaluation are usually not specific to any industry as would be required for adoption of countervailing measures.

And, it would be difficult to argue that the benefits of the devaluation are contingent on exportation or the substitution of domestic products for imported goods.

As the rules now stand, there is not much precision on addressing when competitive devaluation is to be regarded as a violation of WTO rules and much depends on how current misgivings with currency manipulation by developed and developing countries will be resolved.

For now, the issue is on the table at the WTO as of critical concern as to whether existing rules are sufficient or amendments to existing rules are to be contemplated.

Dr Delroy S. Beckford, an attorney-at-law, is adjunct senior lecturer, international trade law, at the Faculty of Law, UWI, Mona, and author of 'Power and Judicial Activism in the WTO: The Appellate Body's Interpretation of Trade Remedy Agreements'.