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China's currency devaluation and WTO issues.


The value of China's currency, the renminbi (RMB), and the conduct of China's exchange rate policy have generated intense debate in academic and international policy circles. The RMB was pegged from 1994 until mid-2005 at 8.28 yuan to the US dollar. China shifted in 2005 to a policy of loosely pegging the RMB to a basket of major currencies. Since then, the RMB has appreciated against the dollar, and the current RMB/dollar exchange rate stands at roughly 6:30. Over the same period, RMB generally depreciated against the Euro, falling from 10.06 in June 2005 to 10.79 in June 2008. With the 2007/2008 financial crisis, however, the Euro has depreciated and the RMB/Euro exchange rate presently stands at 8.99. Throughout this period, China has intervened actively in foreign exchange markets to prevent the RMB from appreciating faster by selling RMB and buying other major currencies (mostly US dollars).

A number of economic commentators argue that China's policies amount to market-distorting currency manipulation. For example, C. Fred Bergsten of the Peterson Institute for International Economics recently suggested that the RMB must appreciate by approximately 40 per cent against the dollar to correct current "global imbalances" and urged the United States to take multilateral, and if necessary unilateral action, to pressure China to change its ways. (1) Michael Mussa and Arvind Subramanian have expressed similar views. (2)

Politicians have become involved. Trade officials from both the US and Europe have argued that Chinese currency practices unfairly distort trade, amounting to the equivalent of a subsidy to exports and a tariff on imports that would violate World Trade Organization (WTO) rules if imposed directly. US President Barack Obama stated in November 2009, for example, that China's current trade surplus is "directly related to its manipulation of its currency's value". He concurrently promised to "use all diplomatic means at his disposal to achieve change in China's manipulation of the value of its currency, a practice that contributes to massive global imbalances and provides Chinese companies with an unfair competitive advantage". (3) During the 2012 US elections season, Mr. Mitt Romney, one of the two presidential candidates, promised--while bashing President Obama, his opponent, of failing to act against China's "currency manipulation"--that if he was to be elected, he would label China a "currency manipulator" from "day one". (4)

Over the past few years, various proposals for action against China have been put forward in the US Congress. These range from insisting that the Treasury Department refer the matter to the International Monetary Fund (IMF), to requiring that the US Trade Representative bring a formal complaint to the WTO, treating China's alleged currency manipulation as a source of dumping or countervailable subsidies that would permit the imposition of antidumping or countervailing duties on Chinese imports.

IMF case studies have shown that the IMF has never identified a certain member engaging in exchange manipulation, or indicated that the acts of any of its members amount to foreign exchange manipulation.

Theoretically, the RMB exchange rate issue can become the subject matter of WTO dispute settlement proceedings only when China's trade partner(s) (e.g., the US and/or the European Union) lodge a complaint against China in the WTO dispute settlement body. Before moving to an action in the WTO, the governments of China's trade partners must take into consideration the translation of China's exchange rate policies (and specifically the magnitude of its exchange rate "misalignment") into equivalent real trade policies that could then be more readily evaluated under the rules of the WTO, e.g., under Article XV of the General Agreement on Tariffs and Trade (GATT) 1994, Article XXIII of the GATT or Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM).

However, I argue that, before lodging the complaints to the WTO, it is necessary for China's trade partners to assess whether the WTO has jurisdiction over such complaints. For the WTO, it is also advisable to assess the WTO-consistency of the Chinese RMB issues before becoming assured of the appropriateness of such complaints in the WTO forum.

The following sections of the article deal with the issue of WTO's jurisdiction over China's RMB exchange rate in various scenarios, i.e., where China's partners lodge a complaint in the WTO dispute settlement body by invoking Article XV, Paragraph 4 of the GATT, Article 6 and Article 3 of SCM and Article XXIII of the GATT.


Article XV, paragraph 4 of the GATT provides that [contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund. If China's trade partners invoked this rule to challenge China's RMB exchange rate issue, they would infer that China's devaluation of its RMB makes it easier for China-made products to enter its trade partners' markets at disguised lower prices, and thereby frustrates the intent of the GATT or IMF provisions.

China's trade partners may, for various reasons, allege that the long-term devaluation of a major currency may endanger the world trading system. However, it is impractical for them to base their WTO complaint on this. The IMF and GATT resulted from an integrated grand design for the post-WWII global economic infrastructure--the Bretton Woods Institutions--which were created precisely to address issues of global economic imbalances, or externalities, caused as a consequence of countries pursuing unilateral trade policy objectives. (5) According to the design, the IMF is concerned with the impacts of exchange rate policies on trade imbalances. By contrast, the GATT's overall function is to reduce and eliminate measures that restrain or distort the volume of international trade. In other words, there is a distribution of labour between them, by which exchange rate issues fall under the purview of the IMF, while trade falls within the ambit of the GATT and the succeeding WTO. Although the two institutions do overlap in their functions, the overlapping is peripheral. If the WTO ruled that China's exchange rate frustrates the intent of the GATT and undermines the world trading system, it is fair to say that the WTO would have been intruding into the domain of the IMF.

It is useful to bear in mind in this regard that the IMF allows its members to maintain various exchange rate systems and thus does not outlaw fixed exchange rate systems. (6) In other words, China, under the IMF is entitled to maintain either a dollar-pegged exchange rate system or its current managed floating system.

Moreover, the GATT affirms that nothing in it "shall preclude the use by a contracting party of exchange controls or exchange restrictions in accordance with the Articles of Agreement of the International Monetary Fund". (7) Therefore, unless the IMF assesses the IMF-inconsistency of China's currently managed floating exchange rate system, it is premature and hence inappropriate for the WTO to assess the inconsistency of China's exchange rate system with Article XV, paragraph 4 of the GATT.

A close look at the provisions of the IMF and the two cases that the IMF has dealt with concerning foreign exchange acts of its members--Sweden's exchange rate consultation in 1982 and Korea's exchange rate consultation in 1987--reveal that the IMF has been reluctant to identify a certain member as engaging in exchange manipulation or to indicate that the acts of any of its members as foreign exchange manipulation. For example, Sweden maintained a fixed exchange rate regime during the 1980s, albeit with large discrete adjustments such as a 10 per cent devaluation in 1981 and a further 16 per cent devaluation the following year. (8) The size of Sweden's 1982 devaluation was opposed by other Nordic finance ministers and central bank governors as well as IMF staff and the managing director, Jacques de Larosiere. This prompted the new government to modify its original plan to devalue the krona by 20 per cent. Indeed, the IMF regarded Sweden in the early 1980s as a recalcitrant state, unwilling to face the economic realities of the post-Bretton Woods era and initially unresponsive to the IMF call for a policy revolution to improve its economic performance. However, the IMF, at least in its official documents, did not identify Sweden as a member engaging in exchange manipulation or indicated that the acts of any of its members was foreign exchange manipulation. (9) The same was true in the case of Korea's exchange rate consultation in 1987. (10)

The IMF, in its report for the 2006 Article IV consultations, noted that "movement in the renminbi's real value over a considerable period of time has not been in line with most fundamental factors that are generally considered to be important in determining the exchange rate's real value". Moreover, "all of these developments point to the currency as being undervalued and that this undervaluation has increased further since last year's Article IV consultation". (11) In February 2008, the then Managing Director of the IMF, Dominique Strauss-Kahn, at the conclusion of his visit to China stated: "On exchange rate policy, we welcome the authorities' objective of allowing greater flexibility over time. However, we encourage a faster pace of appreciation that would be helpful for addressing China's key economic challenges and would also contribute to preserving global economic stability". (12)

To say the least, even if the IMF outlaws China's exchange rate system, a finding that an exchange rate is "fundamentally misaligned" or "manipulated" under IMF Article IV: 1(iii) does not automatically establish a violation of the GATT Article XV(4). Whether the WTO has jurisdiction where China's partners lodge such a complaint depends on whether the exchange system has frustrated the intent of the GATT. Many critics who attribute the bilateral trade imbalance to China's RMB exchange rate take it for granted that one of the purposes of the world trading system is to maintain the trade balance. However, the history of the GATT has indicated that maintaining the trade balance was ironically not in the minds of the framers of the world trading system. Pursuant to the preamble of the GATT, the intents of the GATT include "raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, developing the full use of the resources of the world and expanding the production and exchange of goods". Although a global trade balance can arguably raise standards of living, ensure full employment and a large and steadily growing volume of real income and effective demand, develop full use of the world's resources and expand the production and exchange of goods, there is no clear-cut reference to maintaining a global trade balance. This indicates that in the eyes of the GATT framers, a global trade imbalance was irrelevant to the intent of the provisions of the GATT. If this were merely a result of omission, the negotiators of the Uruguay Round should logically have rectified the omission. It is easy to see that a global trade balance is not among the new purposes that were added to the preamble of the original GATT in 1947, when the Marrakesh Agreement Establishing the World Trade Organization was finalised in 1994. (13) In accordance with the Vienna Convention on the Law of Treaties, a treaty shall be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose". (14) Thus, no expansive interpretation of the intent of the GATT and Marrakesh Agreement is allowed which encompasses "global trade balance".

A further deduction can be made with respect to the General Agreement on Trade in Services (GATS), which is in parallel to the GATT. In the GATS, there is no counterpart provision of Article XV, paragraph 4 found in the GATT. Logically, a global trade balance will come into effect only when trade in goods and services are taken into consideration in the meantime. It would not be enough for the GATT to require WTO members to maintain a global trade balance while GATS imposes no obligation in this regard on WTO members. It is therefore safe to argue that a "global trade balance" requirement in the area of trade in goods would become meaningless or that the GATT has no intention of imposing a global trade balance requirement in the area of goods trading.

When the GATT was designed, in the interests of maintaining bilateral trade balances, the US repudiated the practice of discriminative tariffs and quantitative restrictions. A typical example is the inclusion of rigid restrictions on the application of exceptions to the GATT's general rules. But the US practice cannot hold that maintaining bilateral balances is among the intents of the GATT. As a matter of fact, bilateral trade imbalances, which occur from time to time, have not been found to adversely affect global trade. It is now safe to argue that bilateral trade imbalances per se, do not frustrate the intent of the world trading system. In sum, the US preference cannot find justification except for multilateralism, which is instrumental to maintaining global trade balance. As illustrated above, the global trade balance has been excluded from the clearly defined intent of the GATT. In short, since maintaining "global trade balance" will not be imposed on WTO members as an extra-WTO obligation, it is unrealistic to expect the WTO dispute settlement mechanism to allow for such interpretation of Article XV, paragraph 4 of the GATT.


Exchange rates are of great significance to international trade. Thus, the GATT framers heeded the complexity of exchange rates and their effects on trade. (15) Consequently, the GATT and SCM Agreement adopted the provision that exchange rate arrangements could constitute subsidies. In retrospect, when multiple currency practices or multiple exchange rates were found to constitute an export subsidy (16) and could amount to a partial depreciation of a country's currency that should be met with anti-dumping measures, Article VI of the GATT was accordingly amended in 1947. (17) The GATT, Article VI, paragraphs 2 and 3, Item 2 reads: "Multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties under paragraph 3 [of the GATT Article VI regarding countervailing duties and subsidies] or can constitute a form of dumping by means of a partial depreciation of a country's currency which may be met by action under Paragraph 2, Article VI of the GATT regarding antidumping duties and dumping." In 1960, a GATT report on Article XXVI, paragraph 5, stated that contracting parties have the explicit obligation to inform all the parties of any multiple exchange rates with subsidy effect. The List of Export Subsidies in the SCM Agreement, reached during the Uruguay Round, also covered foreign exchange and exchange rate arrangements, such as the currency retention schemes in Item (b) and exchange risk programmes inadequate to cover the long-term operating costs and losses of the programmes in Item (j) of the List. (18)

The rules barring the manipulation of exchange rates to gain unfair competitive advantages have been increasingly employed by China's trading partners to try to prove that the RMB exchange rate has constituted export subsidies. Needless to say, the SCM Agreement, particularly its Article 3, also poses a question of jurisdictional division between the IMF and WTO. It is still generally understood that all the acts pertaining to foreign exchange fall under the purview of the IMF. More importantly, the application of the provision prohibiting subsidies must be preconditioned on the premise that the definition of subsidies must be met. The definition in the SCM contains three basic elements: (i) a financial contribution; (ii) by a government or any public body within the territory of a member; and (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist. In the course of a protracted negotiation, some members argue there could be no subsidy unless there was a charge on the public account. Other members contend that forms of government intervention that do not involve an expense to the government nevertheless distort competition and should thus be regarded as subsidies. The SCM Agreement basically adopted the former approach by requiring a financial contribution, e.g., grants, loans, equity infusions, loan guarantees, fiscal incentives, provision of goods or services and purchase of goods. In the Chinese context of foreign exchange actions, it is difficult to say that a foreign exchange act bestows a financial contribution to exports because nearly two-thirds of China's trade is processing trade, which involves import of raw materials and export of final products. Moreover, subsidies must be those that are closely related to export performance or local purchase requirement, and are addressed to specific regions or specific enterprises in specific regions. Where a subsidy is widely available within an economy, such a distortion in the allocation of resources is presumed not to occur. Foreign exchange acts are inherently contradictory with the specificity, because currency fluctuations are generally recognised as one of the measures that are widely available to governments to make macroeconomy adjustments. Therefore, it will be difficult for China's trade partner(s) to prove the specificity of China's exchange acts. In light of the relevance of the article, it remains merely a theoretical possibility that China's trade partner(s) lodge a complaint by invoking Article 3 of SCM. According to Professors Robert W. Staiger and Alan O. Sykes, even an equivalence between a devaluation and a tariff-cum-subsidy does not imply that a devaluation warrants WTO action. (19)


Paragraphs 1(b) and (c) of the GATT, Article XXIII, entitled "Nullification or Impairment", are concerned with non-violation complaints. If any contracting party should contend that any benefit accruing to it, directly or indirectly, under this Agreement is being nullified or impaired, or that the attainment of any objective of the Agreement is being impeded as the result of paragraph 1(b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or paragraph 1(c), the existence of any other situation, the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be involved, thus triggering WTO dispute settlement proceedings.

China's trade partners might argue that the RMB undervaluation impedes the volume of imports due to the severely weakened purchasing power of Chinese consumers, and could thus raise a "non-violation" complaint, pursuant to the GATT, Article XXIII. They could argue that China's exchange rate practice is not necessarily a violation of a WTO commitment per se, but that the benefits derived from the concession agreement that China has reciprocally negotiated vis-a-vis the other WTO members, and that would otherwise have accrued to them, is being impeded as a result of China's RMB exchange rate undervaluation.

However, as Professors Staiger and Sykes pointed out, the evidentiary problem as to the exact amount of undervaluation is an obvious obstacle to bringing a successful complaint forward. (20) Moreover, in the context of rigid application of the non-violation clause, there is little chance for the Dispute Settlement Body to render rules based on this provision.

A non-violation complaint suggests that a member state has adopted a new policy action that undermines its WTO commitments. It is a formidable challenge for any WTO member to argue that China's exchange rate practice is one that it did not exercise when it joined the WTO in 2001. Exchange rate policies are also peculiar in the sense that no WTO member can legitimately expect another member to maintain basically the same exchange rate policy that was in place when it joined the multilateral organisation, seeing that monetary policies are prone to change in order to meet national economic concerns. (21) In other words, exchange rate policies are by nature ill-suited to form the basis of a non-violation complaint.


An analysis of the relevant WTO rules applicable to exchange rate policies does not provide a clear-cut or easy answer. The author questions whether the WTO Dispute Settlement Body will assert jurisdiction over China's RMB issue when China's trade partners might at their will attempt to lodge a complaint against the RMB rate in the WTO; the WTO shall restrain from assuming its jurisdiction. A case like this could also set a dangerous precedent for expansive interpretation of vague WTO provisions, and considerably broaden the trade organisation's authority in peripheral trade-related areas.

The author further believes that even if China's trade partners lodged a complaint against the RMB rate in the WTO, the WTO would fail to provide an effective remedy to the issue. The suggestion that one can characterise China's policies as the equivalent of an illegal tariff and an illegal export subsidy is problematic. The author does not necessarily advocate that China's policies be ignored, but urges a great deal of caution towards proposals that would sweep them into the domain of unfair trade practices and bring to bear the attendant arsenal of unilateral or multilateral trade sanctions. Therefore, it is doubtful that China's trading partners can readily make a convincing case that China has violated its WTO commitments by intervening in currency markets in a manner that frustrates the intent of the GATT.

(1) Fred Bergsten, "The Dollar and the Renminbi", Statement before the Hearing on US Economic Relations with China: Strategies and Options on Exchange Rates and Market Access, Subcommittee on Security and International Trade and Finance, Committee on Banking, Housing and Urban Affairs, United States Senate, 23 May 2007.

(2) Michael Mussa, "IMF Surveillance over China's Exchange Rate Policy", Paper presented at the Conference on China's Exchange Rate Policy, Peterson Institute for International Economics, 19 Oct. 2007; Arvind Subramanian, "New PPP-based Estimates of Renminbi Undervaluation and Policy Implications", Peterson Institute of International Economics, Policy Brief 10-08, p. 6.

(3) The New York Times, "Obama Says He Will Raise Yuan Issue with China", Reuters, 9 Nov. 2009.

(4) See < currency-romney.

(5) Robert W. Staiger and Alan O. Sykes, "Currency Manipulation and World Trade", NBER Working Paper 14600, National Bureau of Economic Research, Dec. 2008, p. 5.

(6) Article 4 of the International Monetary Fund.

(7) Article XV, paragraph 9 (1) of GATT.

(8) T.M. Anderson, "Macroeconomic Strategies towards Internal and External Balance in the Nordic Countries", Scandinavian Journal of Economics 92, no. 2 (1990): 196.

(9) IMF staff and the managing director, Jacques de Larosiere, held that Sweden's tardiness in adjusting to the two major oil price increases of the 1970s was responsible for weak economic performance in the decade to 1982. See IMF, Sweden, Staff Report for the 1986 Article IV Consultation, SM/86/178.

(10) In the 1980s, the US Treasury classified South Korea as an exchange rate manipulator. In 1987, the IMF sent a special mission to Korea to investigate an exchange rate problem (so-called "supplemental consultation"). See for example, Morris Goldstein, "Currency Manipulation and Enforcing the Rules of the International Monetary System", in Reforming the IMF for the 21st Century, ed. Edwin M. Truman, 2006, p. 150.

(11) IMF Country Report no. 06/394, p. 17, paragraph 24.

(12) "Statement by IMF Managing Director Dominique Strauss-Kahn at the Conclusion of his Visit to China", IMF Press Release no. 08/26, 15 Feb. 2008.

(13) In addition to restating the purposes in the preamble to the GATT 1994, the preamble to the Marrakesh Agreement refers to "sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development".

(14) Article 31.1 of Vienna Convention on the Law of Treaties.

(15) See H.D. White, "The Monetary Fund: Some Criticisms Examined", Foreign Affairs 23 (1945): 195-210.

(16) Multiple rate, also called multiple currency measure, means that one currency (or one country) has two or more exchange rates, with different exchange rates applied to different international economic and trade activities, which is the outcome of foreign exchange control.

(17) United Nations Conference on Trade and Employment, 2nd Session of the Preparatory Committee of the UN Conference on Trade and Employment Verbatim Report, E/PC/T/A/PV/32, 23 July 1947.

(18) Annex I to SCM Agreement, at <> [19 Oct. 2012].

(19) Staiger and Sykes, "'Currency Manipulation' and World Trade: Three Reasons for Caution", at <> [19 Oct. 2012]. See also Christoph Herrmann, "Don Yuan: China's 'Selfish' Exchange Rate Policy and International Economic Law", in European Yearbook of International Economic Law 2010, ed. C. Herrmann and J.P. Terhechte (Berlin, Heidelberg: Springer-Verlag, 2010).

(20) Staiger and Sykes, "Currency Manipulation and World Trade". Various economists and lawyers have employed various approaches to measure the misalignment of Chinese currency devaluation, but they fail to reach the same conclusion. Results may vary from 20 to 60 per cent. See also Yin-Wong Cheung et al., "Measuring Misalignment: Latest Estimates for the Chinese Yuan", at <>.

(21) Dukgeun Ahn, "Is the Contemporary Chinese Exchange Rate Regime "WTO-legal"?", in The US-Sino Currency Dispute: New Insights from Economics, Politics and Law, ed. Simon Evenett, VOX, April 2010, p. 4.

Kong Qingjiang ( is Professor of Law at China University of Political Science and Law. He received his PhD in law from Wuhan University. His research areas include trade law, trade-related intellectual property rights and Chinese practice of international law.
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Title Annotation:COMMENTS & NOTES
Author:Qingjiang, Kong
Publication:China: An International Journal
Article Type:Report
Geographic Code:9CHIN
Date:Dec 1, 2012
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