May 16, 2016
Currency Exchange Rate Policies and the
World Trade Organization Subsidies Agreement
Some Members of Congress have expressed concerns that
to raise tariffs on imports of U.S. products above its bound
foreign countries are “manipulating” their currencies
commitment levels.
through their exchange rate policies. Such concerns have
focused on policies that are seen as weakening the value of
For additional background on the debate over countries’
the countries’ currencies against the U.S. dollar. Some
exchange rate policies and a discussion of other
commentators have suggested that these practices amount
international forums for addressing concerns with these
to an export subsidy. They argue that although that subsidy
policies, see CRS Report R43242, Current Debates over
may benefit U.S. consumers through lower prices, it may
Exchange Rates: Overview and Issues for Congress, by
also harm U.S. import-competing firms and their workers.
Rebecca M. Nelson.
Legislation introduced in the 114th Congress would amend
Can Currency Exchange Rate Policies
Title VII of the Tariff Act of 1930, 19 U.S.C. §§1671 et
Constitute a “Subsidy”?
seq., to treat an undervalued currency as an export subsidy
Under WTO rules, the United States cannot impose CVDs
under U.S. trade law; describe a methodology to determine
on imports from a WTO member considered to be
how much the currency is undervalued (i.e., the subsidy);
manipulating its currency exchange rate unless such
and apply that calculation for the imposition of
practices provide a countervailable “subsidy” to that
countervailing duties (CVDs). E.g., H.R. 820; S. 433. If
member’s industry within the meaning of ASCM Article 1.
enacted, such legislation could ultimately allow the U.S.
This article states that a subsidy exists when a government
Department of Commerce (DOC) to impose CVDs on
or other “public body” makes a “financial contribution”
certain injurious imports from foreign countries whose
within the territory of a WTO member that confers a
currencies had become undervalued as a result of
“benefit.” This analysis assumes that the financial
government action.
contribution is made in the territory of a WTO member.
Summary
Government or “Public Body”
This In Focus analyzes whether the United States could,
A subsidy may exist not only when a government makes a
consistent with World Trade Organization (WTO) subsidies
financial contribution, but also when another “public body”
rules in the Agreement on Subsidies and Countervailing
of a member makes such a contribution. The Appellate
Measures (ASCM) and the General Agreement on Tariffs
Body has held that determining whether an entity is a public
and Trade 1994 (GATT), impose CVDs on imports from a
body involves a fact-specific inquiry, but that generally
WTO member country to offset what the U.S. determines is
such entities must possess, exercise, or be vested with
an illegal subsidy conferred by that member on its domestic
governmental authority. US—Anti-Dumping and
industries through undervaluation of its exchange rate. This
Countervailing Duties (China), WT/DS379/AB/R, paras.
In Focus does not examine the consistency of exchange rate
317-318.
policies with other provisions of the WTO agreements.
Under WTO jurisprudence, the government need not
As discussed below, it may be difficult to argue that
delegate such authority explicitly to the entity in a law. If,
currency exchange rate policies constitute a countervailable
in fact, a government has meaningful control over an entity
export subsidy as defined under WTO law. In particular,
and its conduct, this can serve as sufficient evidence that
such monetary and fiscal policies do not clearly fit within
the entity exercises government authority when it performs
ASCM provisions that define an export-contingent subsidy,
a governmental function. However, mere “formal links”
as these provisions have been interpreted in dispute
between the government and entity, such as a government’s
settlement cases.
stake in the entity, are not sufficient by themselves. Id.
The WTO’s dispute settlement process would ultimately
“Financial Contribution”
determine whether CVDs on imports from countries that are
Not all government measures or practices that benefit a
manipulating their exchange rates are consistent with WTO
domestic producer or exporter constitute subsidies. The
agreements. If the U.S. maintains CVDs on products in the
ASCM enumerates five general categories of measures or
absence of a countervailable “subsidy” as defined in WTO
practices that are subsidies:
law, the WTO’s Dispute Settlement Body (DSB) ultimately
may authorize a complaining member to engage in trade
(a)(1)(i) a government practice involves a direct
retaliation. See, e.g., ASCM Arts. 10, 32.1, 32.5. For
transfer of funds (e.g. grants, loans, and equity
example, the DSB could authorize a complaining member
infusion), potential direct transfers of funds or
liabilities (e.g. loan guarantees);
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Currency Exchange Rate Policies and the World Trade Organization Subsidies Agreement
(ii) government revenue that is otherwise due is
exchange rate policies to increased sales and higher profits
foregone or not collected (e.g. fiscal incentives such
of exporters. E.g., Claus D. Zimmerman, Exchange Rate
as tax credits);
Misalignment and International Law, 105 Am. J. Int’l L.
423, 449-451 (2011).
(iii) a government provides goods or services other
than general infrastructure, or purchases goods;
In addition, the member imposing CVDs might encounter
(iv) a government makes payments to a funding
difficulty in calculating the benefit conferred. See ASCM
mechanism, or entrusts or directs a private body to
Art. 14. There is no universally used or accepted
methodology for determining a currency’s market value.
carry out one or more of the type of functions
Several methodologies are used by the International
illustrated in (i) to (iii) above which would normally
Monetary Fund and other organizations to make
be vested in the government and the practice, in no
assessments of exchange rates. However, these produce
real sense, differs from practices normally followed
widely different results. Any attempt to establish a CVD
by governments; or
rate for affected imports could potentially be challenged by
... there is any form of income or price support in
the affected country in the WTO as arbitrary.
the sense of Article XVI of GATT.
Can Currency Exchange Rate Policies
None of the first four categories of financial contributions
Confer a “Prohibited” Export Subsidy?
appears to cover government exchange rate policies. For
If a WTO panel held that exchange rate policies qualified as
example, category (i) includes government practices
a “subsidy,” then a WTO member could not impose CVDs
involving direct transfers of funds. To weaken its currency,
on imports from a country that conferred such a subsidy
a government might, for example, sell domestic currency in
unless the subsidy were “specific” under the ASCM. The
exchange for foreign currency or assets denominated in
ASCM defines four types of specificity: (1) enterprise; (2)
foreign currency in foreign exchange markets. However,
industry; (3) regional; and (4) subsidies deemed specific
such transactions, which involve a government’s
because they are prohibited subsidies contingent upon
macroeconomic policies, appear to differ from the types of
export performance or the use of domestic over imported
direct transfers of funds to private entities contemplated in
goods. ASCM Art. 2. If exchange rate manipulation were a
this category (e.g., grants, loans, and equity infusions). It is
“subsidy,” it would arguably be broadly available to a wide
also not clear that exchange rate policies are direct transfers
variety of enterprises, industries, and regions in the
of funds to producers and exporters because these entities’
subsidizing member’s territory. Thus, commentators have
export earnings depend on demand by third parties in
focused on whether exchange rate policies could be
foreign markets for their products.
“specific” because they are “prohibited” export subsidies
(i.e., subsidies whose grant is at least partly contingent upon
One might argue that a category (i) “financial contribution”
the export of goods).
exists when currency from export transactions is exchanged
for an undervalued currency. See, e.g., H.R. 820. However,
Questions have been raised about whether a subsidy
it is not clear that a member’s exchange rate policies could
resulting from currency exchange rate policies would be “in
be imputed to such a transaction when analyzing whether it
fact tied to actual or anticipated exportation or export
meets the other elements of a countervailable subsidy under
earnings.” ASCM n.4. Some have argued that such policies
WTO law. Exchange rate policies affect the entire economy
may qualify even if they also grant a subsidy to firms that
rather than being directly targeted at exporters.
do not export, citing U.S.—Tax Treatment for Foreign Sales
Corporations (Article 21.5—EC), WT/DS108/AB/RW,
It could also be argued that exchange rate policies provide
paras. 119-120. However, even if this is a correct
“income ... support” to producers or exporters. WTO
interpretation of precedent, it may still be difficult to argue
adjudicators have not engaged in significant interpretation
successfully that an export-contingent subsidy exists. The
of this phrase, but a recent panel decision suggests it should
fact that a government grants a subsidy to firms that export
be interpreted narrowly. Panel Report, China-GOES, ¶ 7.85,
does not necessarily mean a sufficient “tie” between the
WT/DS414/R (“[I]t is not clear that [this provision] was
subsidy and anticipated exportation exists. ASCM Art. 4;
intended to capture all manner of government measures that
Canada—Aircraft, ¶ 171. The Appellate Body has held that
do not otherwise constitute a financial contribution, but
existence of an export subsidy depends partly on “whether
may have an indirect effect on a market.”).
the granting authority imposed a condition based on export
performance in providing the subsidy.” Id. at ¶ 170. It is not
“Benefit” Conferred
clear that exchange rate policy “subsidies” would be
Assuming that exchange rate policies that lead to currency
contingent upon exports, as their grant appears conditioned
undervaluation could constitute a “financial contribution,” a
upon the exchange of foreign currency for undervalued
“subsidy” exists only when some “benefit” has been
currency and not upon the export of products.
conferred on a member’s exporters or producers. Here, the
analysis focuses on the advantage to the recipient of the
Brandon J. Murrill, Legislative Attorney
government financial contribution and whether it is
received “on terms more favourable than those available to
IF10406
the recipient in the market.” Appellate Body Report,
Canada—Aircraft, WT/DS70/AB/R, paras. 157-158.
Commentators have noted that establishing a “benefit”
might be complicated by difficulties in linking the foreign
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Currency Exchange Rate Policies and the World Trade Organization Subsidies Agreement


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