Currency Manipulation: The IMF and WTO
Jonathan E. Sanford
Specialist in International Trade and Finance
September 27, 2010
Congressional Research Service
7-5700
www.crs.gov
RS22658
CRS Report for Congress
P
repared for Members and Committees of Congress
Currency Manipulation: The IMF and WTO
Summary
Congress has been concerned, for many years, with the possible impact that currency
manipulation has on international trade. The International Monetary Fund (IMF) has jurisdiction
for exchange rate questions. The World Trade Organization (WTO) is responsible for the rules
governing international trade. The two organizations approach the issue of “currency
manipulation” differently. The IMF Articles of Agreement prohibit countries from manipulating
their currency for the purpose of gaining unfair trade advantage, but the IMF cannot force a
country to change its exchange rate policies. The WTO has rules against subsidies, but these are
very narrow and specific and do not seem to encompass currency manipulation. Recently, some
have argued that an earlier ruling by a WTO dispute resolution panel might be a way that
currency issues could be included in the WTO prohibition against export subsidies. Congress is
currently considering legislation to amend U.S. countervailing duty law, based on this precedent,
that the proponents believe is consistent with WTO rules. Others disagree as to whether the
previous case is a sufficient precedent.
Several options might be considered for addressing this matter in the future, if policymakers
deem this a wise course of action. The Articles of Agreement of the IMF or the WTO Agreements
could be amended in order to make their treatment of currency manipulation more consistent.
Negotiations might be pursued, on a multilateral as well as a bilateral basis, to resolve currency
manipulation disputes on a country-by-country basis without changing the IMF or WTO
treatment of this concern. Some countries might argue that the actions of another violate WTO
rules and seek a favorable decision by a WTO dispute resolution panel. Finally, the IMF and
WTO could use their interagency agreement to promote better coordination in their treatment of
this concern.
.
Congressional Research Service
Currency Manipulation: The IMF and WTO
Contents
International Monetary Fund ....................................................................................................... 1
World Trade Organization ........................................................................................................... 2
Policy Options in the Multilateral Sphere .................................................................................... 3
Amend the Articles of the IMF .............................................................................................. 4
Amend the WTO Agreements................................................................................................ 4
Pursue Multilateral Negotiations ........................................................................................... 5
Obtain Adjudication .............................................................................................................. 5
Improve the IMF-WTO Agreement ....................................................................................... 6
Contacts
Author Contact Information ........................................................................................................ 7
Congressional Research Service
Currency Manipulation: The IMF and WTO
his report describes how the International Monetary Fund (IMF) and World Trade
Organization (WTO) deal with the issue of currency manipulation. It also discusses
T apparent discrepancies in their charters and ways those differences might be addressed.
International Monetary Fund
The IMF is the leading international organization in the area of monetary policy. With the end of
the cold war, its membership is now nearly universal. Only North Korea, the Vatican, and four
other mini-countries in Europe—none having its own currency—are not members of the Fund.
The IMF makes loans to countries undergoing financial or balance of payments crises; provides
technical assistance to governments on monetary, banking and exchange rate questions; does
research and analysis on monetary and economic issues; and it provides a forum where countries
can discuss international finance issues and seek common ground on which they can address
common problems.
Although the IMF is a monetary institution, the promotion of world growth and balanced
international trade are also among its basic goals. Article I of its Articles of Agreement says,
among other things, that the IMF was created in order to “facilitate the expansion and balanced
growth of international trade, and to contribute thereby to the promotion and maintenance of high
levels of employment and real income and to the development of the productive resources of all
members as primary objectives of economic policy.” It was also created to “assist in the
establishment of a multilateral system of payments in respect to current transactions between
members and in the elimination of foreign exchange restrictions which hamper the growth of
world trade.”
Between 1946 and 1971, the IMF supervised a fixed parity exchange rate system, in which the
value of all currencies was defined in terms of the U.S. dollar and the dollar was defined in terms
of a set quantity of gold. Countries could not change their exchange rates from the level
recognized by the IMF by more than 10% without the Fund’s consent. Moreover, said the original
language of the IMF Articles, “A member shall not propose a change in the par value of its
currency except to correct fundamental disequilibrium.”1 This system broke down in 1971 when
the United States devalued the dollar twice without any consultation with the IMF. After a period
of turmoil in world currency markets, an amendment to the IMF Articles was adopted in 1978. It
said that countries could use whatever exchange rate system they wished—fixed or floating—so
long as they followed certain guidelines and they did not use gold as the basis for their currencies.
The new language of Article IV, which went into effect in 1978, said that countries should seek,
in their foreign exchange and monetary policies, to promote orderly economic growth and
financial stability and they should avoid manipulation of exchange rates or the international
monetary system to prevent effective balance of payments adjustment or to gain unfair
competitive advantage over other members. Some countries claim that their exchange rate
policies are not in violation of Article IV because they are not seeking to gain competitive
advantage (though this may be the result of their actions) but rather to stabilize the value of their
currency in order to prevent disruption to their domestic economic system. To date, the IMF has
not publicly challenged this statement of their objective.
1 This language is quoted from Section 5 of the original language of Article IV as approved by the 1944 Bretton Woods
conference and confirmed by all member countries when the IMF officially came into existence in 1946.
Congressional Research Service
1
Currency Manipulation: The IMF and WTO
The Fund was required to “exercise firm surveillance over the exchange rate policies of all
members and [to] adopt specific principles for the guidance of all members with respect to those
policies.” The IMF adopted the requisite standards in 1977 (before the Amendment went into
effect) and it updated them in 2007. The 1977 agreement said that, among other things,
“protracted large-scale intervention in one direction in exchange markets” might be evidence that
a country was inappropriately manipulating the value of its currency. The 2007 agreement added
a requirement that “A member should avoid exchange rate policies that result in external
instability.” When a country’s current account (balance of payments) is not in equilibrium, the
IMF said in its explanation of the new provision, the exchange rate is “fundamentally misaligned”
and should be corrected.2
The IMF can exercise “firm surveillance” but it cannot compel a country to change its exchange
rate. Nor can it order commercial foreign exchange dealers to change the prices at which they
trade currencies. It can offer economic advice and discuss how changes in countries’ exchange
rates might be in their own interest. It can also provide a forum, such as its new multilateral
consultation mechanism or discussion on the IMF executive board, where other countries can
urge a country to change its exchange rate procedures. However, in the end, the authority to make
the change resides with the country alone.
World Trade Organization
The WTO is the central organization in the world trade system. When the WTO was created in
1995, countries were required to accept as a condition of WTO membership the existing trade
rules embodied in the General Agreement on Tariffs and Trade (GATT). They also had to accept
new rules governing other areas of international commerce, such as services and trade-related
international property rights. The agreement establishing the WTO says that the members
recognize “that their relations in the field of trade and economic endeavor should be conducted
with a view to raising standards of living, ensuring full employment and a steady growing volume
of real income and effective demand, and expanding the production of and trade in goods and
services” and to do this in a manner “consistent with their respective needs and concerns at
different levels of economic development.”3
Unique among the major international trade and finance organizations, the WTO has a
mechanism for enforcing its rules. If a country believes another country has violated WTO rules,
to its detriment, it may request the appointment of a dispute settlement panel to hear its
complaint. The other country cannot veto the establishment of a panel or adoption of a WTO
decision by WTO members. The panel reviews the arguments in the case and renders judgment
based on the facts and WTO rules. If the losing party does not comply with the ruling within a
reasonable period of time, the WTO may, if requested by the complaining party, authorize it to
impose retaliatory measures (usually increased customs duties) against the offending country or
to take other appropriate retaliatory measures against that country’s trade.
Whether currency disputes fall under the WTO’s jurisdiction is a debatable issue. The WTO rules
specify that countries may not provide subsidies to help promote their national exports. Most
analysts agree that an undervalued currency lowers a firm’s cost of production relative to world
2 IMF. IMF Surveillance—the 2007 Decision on Bilateral Surveillance. Factsheet, June 2007.
3 Agreement Establishing the World Trade Organization, 1995, preamble.
Congressional Research Service
2
Currency Manipulation: The IMF and WTO
prices and therefore helps to encourage exports. It is less clear,, however, whether intentional
undervaluation of a country’s currency is an export subsidy under the WTO’s current definition of
the term.4 Countries are entitled, under WTO rules, to levy countervailing duties on imported
products that receive subsidies from their national government.
The term “subsidy” has a precise definition in the WTO. It requires that there must be a financial
contribution by a government to the exporter or some other form of income or price support.
Government financial support can take a variety of forms, such as direct payments to the exporter,
the waiver of tax payments or special government purchases or the provision of low-cost goods or
services (other than general infrastructure) that lowers the cost of production. Currency
manipulation would not appear to qualify under the WTO definitions.
In addition, an export subsidy is a subsidy that is “contingent on export performance.” They must
also be “specific to an industry” and not provided generally to all producers.5 In the past, most
legal analysts have found that intentional undervaluation of a currency is not a subsidy that is
“contingent on export performance” and not “industry specific” because everyone who exchanges
currency gets the same rate even if they are not doing exports. More recently, other analysts have
asserted, based on an interpretation of the findings in a WTO dispute settlement case,6 that a
subsidy may still be export contingent, even if it is available in some circumstances that do not
involve exportation. Thus, they believe, subsidies provided through currency misalignment would
be a prohibited subsidy under WTO rules even if non-exporters benefit from the exchange rate.
Until the world financial system frayed in the 1970s, the IMF exercised strict control over
exchange rates. It was inconceivable that a country could persistently value its currency at a level
below that approved by the IMF. When the IMF’s rules were changed in 1978, so that it no longer
governed world exchange rates, the GATT rules were not adjusted to reflect the new reality of
international finance. When the WTO was created in 1995, it adopted the existing GATT rules as
its own without fundamental change.
Policy Options in the Multilateral Sphere
A number of countries have been suspected or accused in recent years of manipulating the value
of their currency for the purpose of gaining unfair trade advantage. The George W. Bush
Administration had numerous conversations with China about exchange rate issues. Nonetheless,
Bush Administration officials were careful never to say publicly that China was manipulating its
currency in violation of IMF rules. During his confirmation hearing on January 23, 2009, by
contrast, then Treasury Secretary-designate Timothy Geithner reported that “President Obama,
backed by the conclusions of a broad range of economists, believes that China is manipulating its
currency.” The Administration has not pursued this line of thought, however, in its subsequent
discussions with the Chinese government.
4 Agreement on Subsidies and Countervailing Measures, Articles 1 to 3.
5 WTO Agreement on Subsidies and Countervailing Measures, Articles 2-3.
6 See WTO, Dispute Settlement 108: United States – Tax Treatment for “Foreign Sales Corporations,” at
http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds108_e.htm. The legislation reported by the House Ways and
Means Committee on September 24, 2010 (see below) is based on this interpretation of WTO rules.
Congressional Research Service
3
Currency Manipulation: The IMF and WTO
If the Treasury Department were to find, in its semi-annual reports to Congress on the topic, that
China or any other country were manipulating its currency in order to gain unfair trade advantage,
certain provisions of the 1988 trade act would be triggered. To date, neither the prior Clinton or
Bush or the current Obama Administrations have made such a finding. If such a finding were
made, the U.S. Government could press the government of the offending country to revalue its
currency. This would likely involved renewed efforts through the IMF to mobilize international
support on this issue. It is less clear, though, whether the new Administration would also take this
complaint about currency manipulation to the WTO in order to seek remedies through its
procedures.
As noted before, the IMF Articles of Agreement prohibit this currency manipulation for the
purpose of gaining unfair trade advantage, but the Fund has no capacity to enforce that
prohibition. By contrast, the WTO has the capacity to adjudicate trade disputes, but to date it has
done nothing to suggest that trade issues linked to currency manipulation are within its zone of
responsibility. If policymakers want to address this situation, several options might be considered.
Amend the Articles of the IMF
One option might be changes in the IMF’s Articles of Agreement that would give the Fund more
authority over international exchange rates and more authority to require that countries comply
with its rules. This would restore, to some degree, the power the IMF exercised over exchange
rates from 1946 to 1971. Two objections might be raised, however.
First, an 85% majority vote of the IMF member countries is necessary if any change in the IMF
Articles is to become effective. Most countries seem to believe that the present system of floating
and fixed exchange rates is working reasonably well and there seems to be little desire, on the
part of the members, to amend the IMF’s current rules.
Second, few countries want the IMF to have the kinds of power over their economies that it
would need to compel violators comply with its rules. For example, if the IMF had the power to
declare that China’s currency was undervalued and to require adjustments, it would also have the
power to declare the U.S. dollar or the Euro were overvalued and to require the United States or
the Euro zone countries to make changes in their domestic policies in ways that would correct the
situation.
Amend the WTO Agreements
Another possibility might be a formal change in the WTO agreements that would define currency
manipulation as a prohibited form of export subsidy. It is not easy to amend WTO agreements,
however, since the process basically requires the unanimous consent of all Members. Countries
that manipulate their currencies could easily block the approval of the amendment. However, they
would have to argue that currency manipulation is an acceptable trade practice notwithstanding
the language of the IMF’s Article IV. It seems more likely that any such change in the WTO rules
will be the result of discussions during multilateral trade negotiations, in which restrictions on
currency manipulation will be balanced by other changes desired by the countries that believe
currency manipulation is an acceptable trade practice.
Congressional Research Service
4
Currency Manipulation: The IMF and WTO
Pursue Multilateral Negotiations
Recently, the Administration has indicated that it will be raising the issue of misaligned
currencies and their impact on international trade at international meetings involving world
leaders. In particular, Treasury Secretary Timothy Geithner told Congress that the Administration
is working through multilateral channels, such as the G-20 meeting of world leaders, the Asia-
Pacific Cooperation (APEC) forum, and the IMF to obtain international support for the effort to
press China to revalue its currency.7 They also are seeking discussion about the international
financial imbalances and steps that might be taken to address that concern. The Administration
has been talking regularly with the Chinese about this and other related topics for several years.
Arguably, resolving the U.S.- China disagreement about exchange rates is a desirable objective.
However, one might argue, unless the agreement among world leaders also includes measures
that would make WTO and IMF treatment of these issues more consistent, the question whether
undervalued currencies provide improper export subsidies is likely to arise again in the future.
Obtain Adjudication
One way for the issue to be resolved could be through WTO adjudication of disputes involving
the United States and other countries. In the past, currency issues have not been pursued via the
WTO dispute settlement process. The United States might seek WTO adjudication of this issue by
taking China or other countries to a dispute resolution panel, on the basis of a claim that China’s
currency policy improperly subsidizes Chinese exports.
Alternatively, the United States could take action under its domestic trade laws to address the
problem and let other countries decide what they will do about the issue. Congress is considering
legislation (H.R. 2378, reported by the House Ways and Means Committee on September 24,
2010) which would seek to address the question of undervalued exchange rates in a way that the
sponsors believe is consistent with WTO rules. It provides that countervailing duties may be
imposed to address possible subsidies that might result when other countries’ currencies are
fundamentally undervalued. It says that these subsidies may be treated as being “contingent upon
export performance” (a key element of the WTO definition) even if others not exporting also
benefit from the subsidy. If this legislation is enacted into law and duties are levied on Chinese
imports, some analysts believe that China will assert that it is inconsistent with WTO rules and
will seek remedies through the WTO dispute settlement process.
There may be a role for the IMF in this adjudication process, if world leaders decide that it should
be involved. Article XV of the GATT agreement says that, when disputes between signatory
countries involve questions about balances of payments, foreign exchange reserves or exchange
arrangements, GATT countries shall “consult fully with the International Monetary Fund” and
shall accept the IMF’s determination as to matters of fact and as to whether a country’s exchange
arrangements are consistent its obligations under the IMF Articles of Agreement. GATT Article
XV also says that countries “shall not, by exchange action, frustrate the provisions of this
agreement nor, by trade action, the intent of the provisions” of the IMF Articles of Agreement.
7 U.S. Treasury. Testimony of Treasury Secretary Timothy Geithner. China’s Currency Policies and the U.S.-China
Economic Relationship. Testimony before the Senate Banking Committee and House Ways and Means Committee.
September 16, 2010, at http://www.treas.gov/press/releases/tg858.htm.
Congressional Research Service
5
Currency Manipulation: The IMF and WTO
Traditionally, these references to “exchange arrangements” have been seen as referring (as they
did when the GATT was created in 1947) to currency controls, exchange licenses, transaction
taxes and other official actions that limit a potential purchaser’s ability to get the foreign
exchange needed to purchase goods from abroad.8 The GATT allows countries to impose
temporary import restrictions when they face balance of payments difficulties (Article XII) or
when they are at risk for a serious decline in their foreign exchange reserves (Article XVIII).
In recent decades, however, the term “exchange arrangements” has expanded to reflect new
developments in the world economy. The language of Article IV, adopted by the IMF in 1978,
says (section 2) that each member country shall notify the IMF of the exchange arrangements it
intends to apply, in other words, whether its currency will float in value or be pegged to another
currency. It says the IMF shall oversee the international monetary system to ensure that each
country’s exchange arrangements are compatible with its obligations under Article IV. IMF
Article IV also says that, in its oversight of countries’ exchange arrangements, the Fund shall
exercise firm surveillance over the exchange rate policies of its member countries. In effect, a
case can be made that the term “exchange arrangements” arguably has become synonymous with
the concept “exchange rate regime” and “exchange rate policies.”
As it is used in GATT Article XV, the term “exchange arrangement” refers to issues that are the
sole province of the IMF. Thus, one could argue that the meaning of the term in the GATT should
reflect its current meaning at the IMF and not the meaning prevalent in 1947. An undervalued
currency encourages exports by reducing their cost and it discourages imports by making them
more expensive than they might be otherwise. Consequently, one might argue that countries with
this type of exchange arrangement are engaging in “exchange action” that may have the effect of
frustrating “the provisions of the [GATT] agreement.”
There has never been a definitive ruling by the GATT or WTO on the meaning of Article XV,
including how provisions of the GATT agreement might be frustrated by exchange action. Some
might argue that currency undervaluation raises the price of imports in a way that unilaterally
rescinds tariff concessions approved during multilateral trade talks.
Accordingly, a case could be made that the WTO should use the broader meaning of the term
“exchange arrangements” and take currency valuation arrangements into account in its dispute
settlement process. There has also been increased interest, in recent years, in the issue of currency
manipulation and its impact on world trade and financial relationships. It could be argued,
therefore, that this might be an appropriate and perhaps auspicious moment for issues relating to
the trade impact of currency manipulation to be raised in the WTO dispute adjudication process.
Improve the IMF-WTO Agreement
Another option is to strengthen the current interagency agreement between the WTO and the IMF.
The present agreement was signed in 1996 and updated in mid-2006. Among other things, it says
(paragraph 1) that the two organizations “shall cooperate in the discharge of their respective
mandates.”9 It says (paragraph 2) the two agencies “shall consult with each other with a view to
8 See, for example, John H. Jackson, World Trade and the Law of GATT. New York: The Bobbs-Merrill Company,
1969, pp. 479-495.
9 Agreement Between the International Monetary Fund and the World Trade Organization, updated June 30, 2006.
Congressional Research Service
6
Currency Manipulation: The IMF and WTO
achieving greater coherence in global economic policymaking.” It also says (paragraph 8) that the
two agencies shall communicate with each other about “matters of mutual interest.”
Article XV of the GATT agreement says that the GATT (now WTO) shall cooperate with the IMF
in order to “pursue a coordinated policy with regards to exchange questions that are within the
jurisdiction of the Fund.” It is unreasonable to expect that the WTO should be expected to enforce
the rules of the IMF. Nevertheless, one might expect that conversations about the ways the
activities of one organization might be hindering the other “in the discharge of” its assigned
duties could transpire. Their different policies towards the question of exchange rate manipulation
do not seem to encourage “greater coherence in global economic policymaking.”
Changes in the existing inter-agency agreement can be effected by a majority vote in each
institution. No such agreement can change their basic rules. However, it might seek to remedy
their disparate treatment of currency manipulation in order to further their agreement to
“cooperate in the discharge of their respective mandates” and to promote “greater coherence in
global economic policymaking.” The IMF and WTO could also work with each other to identify
and mitigate situations where their rules and procedures were not consistent or not mutually
supportive and areas where changes in policy or institutional arrangements might be
recommended to their member countries.
Author Contact Information
Jonathan E. Sanford
Specialist in International Trade and Finance
jsanford@crs.loc.gov, 7-7682
Congressional Research Service
7