UNIVERSITY OF BARCELONA

Master of Laws in International Economic

Law and Policy 2013/2014 FINAL RESEARCH PAPER

Reform and regulation of the international monetary system:

From the back door or the front door?

Author: Ramsés Llobet Bentarif

Supervisor: Prof. Ramon Torrent Macau

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Abstract

The present final research paper investigates, after providing a brief overview of the history

of the international monetary system and the global economic governance, the recent

discussion about the two ways solve the exchange rate misalignments: (i) under the WTO

law in spite of the fact that exchange rates are not its subject matter; or (ii) by reforming the

IMF and introducing as official exchange rate the international currency standard of SDRs

in order to correct the “exorbitant privilege” of the US and hence the global imbalances.

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TABLE OF CONTENTS

INTRODUCTION ............................................................................................................. 4

PART A. THE EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM AND THE ISSUE

OF EXCHANGE RATES ..................................................................................................... 7

1. From the Bretton Woods system to the Silent Revolution ............................................. 7

2. Cooperation in post-Bretton Woods system and the financial crisis ........................... 12

PART B – EXCHANGE RATE MISALIGNMENTS AND THE WTO LAW: FROM THE BACK DOOR

................................................................................................................................... 17

1. Nature of obligations and the legal relationship between WTO and the IMF ............. 17

2. The IMF Article IV:1 and the 2007 reform of bilateral surveillance ........................... 20

3. Are the exchange rate misalignments a subject matter of the WTO? On GATT Article

XV and the “frustrator” approach .................................................................................... 24

4. Currency manipulation as a subsidy under the SCM Agreement ............................... 30

PART C – THE TRIFFIN PARADOX AND INTERNTATIONAL CURRENCIES: FROM THE FRONT

DOOR .......................................................................................................................... 34

1. The exorbitant privilege and the Triffin Dilemma ...................................................... 34

2. The Special Drawing Rights and International Currencies......................................... 40

CONCLUSIONS ............................................................................................................. 46

Bibliography and Notes ............................................................................................... 49

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INTRODUCTION

Since its creation in 1944, the global economic governance was managed by the well-

known Bretton Woods system compound with its two main institutions, the International

Monetary Fund and the World Bank, plus the GATT1947/WTO. Although these three

institutions got the same purpose to assist and manage the international economy, each one

had its own subject matter. While, on one hand, the issue of exchange rates and finance has

been historically considered as a subject matter of the IMF, on the other hand, the subject

matter of the GATT1947/WTO has been the gradual trade liberalisation among countries in

order to avoid the protectionist war. Nonetheless, it is important to stress on the fact that if

we want to achieve the well-management of the global economic governance it is going to

be necessary the correct cooperation and collaboration between these institutions and their

Members state.

As a consequence, in words of Robert Triffin, of the “exorbitant privilege” of the US

economy to have its own currency as the international reserve currency giving it the ability

to running a huge balance of payments deficit (through exporting US dollars) without enter

in a balance of payments crisis because the US purchase imports in its own currency.

Consequently, large imbalances (US registered a huge deficit while Germany and Japan

were registering huge surpluses) were established between the three main capitalist

economies. By approaching the 1970, the international monetary system was completely

unstable as a result of the large imbalances in the international economy and the question

then, as it is now, is who is going to adjust? And the answer was nobody. In 1971, Nixon

administration, which had the possibility to be reelected in the next elections, rather to

deflate their economy they decided to take unilateral actions in order to force the other

economies to revalue their currencies. In this context, the US imposed its domestic

objectives in front of the international objectives and suspended the convertibility into gold

and open a new paradigm were floating exchange rates were allowed meaning the end of

the par value system and thus the collapse of Bretton Woods system.

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As a result, a new role was given to the IMF in the second amendment of its agreement in

order to give more policy space and autonomy to the world economies regarding the

monetary issues and the exchange rates and according to the political will of the period.

The post-Bretton Woods era was performed by ad hoc meetings among the main world

economies and the G-20 for the purpose to negotiated monetary accords. In the 2008 crisis,

the concerns about the global imbalances raised again with the new economic actor of

China. The developed countries, mainly the US and EU, accused China and its exchange

regime of maintaining an undervalued exchange rate which it is allegedly manipulated. For

instance, the Nobel prize Paul Krugman have suggested that China is subsidizing its

exports via its exchange rate policy by maintained a massive foreign exchange intervention

over years resulting in a combination of an export subsidy and import tariff (Krugman,

2010).

In spite of the fact of the developed countries accusations, the exchange rate policy of

China is in accordance with the IMF Article IV (the chapeau) which assess if IMF member

is intending to manipulate its exchange rate in order to obtain unfair competitive advantage

and thus consistent the its IMF obligations. The same US which in the early 1970 forced

the collapse of the Bretton Woods system and the second amendment of the IMF and,

among others, its Article IV, in the present it is blaming on other countries on their excess

of exchange rate policy maneuver. It not should be surprising that the same retractors of

China exchange regime that are not in accordance with the IMF outcomes are trying to

submit their demands by the “back door” of the global economic governance regarding the

exchange rate policies, by the WTO law instead of the IMF framework even though that

exchange rate has been always a subject matter of the IMF.

With this in mind, the complainants are arguing that persistent exchange rate misalignments

do have significant distortion effects on ad valorem applied and bound tariffs negotiated in

the WTO (Thorstensen, Ramos and Müller, 2012: 8). Alternatively to the IMF mechanisms

they claim to address those exchange rate misalignments under the “frustrator” approach

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provided by the untested GATT1 Article XV: 4 by alleging there has been a frustration of

trade objective under GATT Article II. Moreover, some other authors claim that a currency

that is significantly deviated from its equilibrium value for more than the time needed to

address economic imbalances is equivalent to a subsidy, legally and economically

speaking, and as a consequence some currency competitive devaluations may fall under the

scope of the SCM2 agreement (Lima-Campos and Gil, 2012: 37). On the contrary, by

addressing all the complaints on its currency policy, the Governor of the People’s Bank of

China, Mr Zhou Xiao-chuan, proposed a new reserve currency system centred on

strengthened SDR3 (Zhou, 2009). The idea, quoting the “bancor” reserve proposed by

Keynes in the 1940s, is to create an international reserve currency that is disconnected from

individual nations avoiding then to confer any “exorbitant privilege” to a single country and

thus trying to address the exchange rate misalignments by the “front door” of the global

economic governance, by the IMF framework. With a new reform in the IMF and its new

agenda, its proposal calls for a general increase in SDR allocation, as well as broadening of

the scope of using SDR, in order to replace current dollar standard and creating a new

international monetary system which will address the currency distortions to the

Multilateral Trading System.

Having in mind all the above mentioned, this research paper is going to be divided in three

different parts. Part A is going to provide a brief overview of the international political

economy of the past century regarding the evolution of the international monetary system

and the global economic governance. Part B will set main mechanism of international

economic law, both the IMF and WTO law, regarding the exchange rate misalignments

exploring the relationship of both international organizations and their nature. Part C will

deal on the economic consequences of the “exorbitant privilege” and the proposal of SDRs

as a new reserve currency in order to address the systemic global imbalances. Finally, some

conclusions will close this paper by questioning which of both “doors” will be used.

1 General Agreement on Tariffs and Trade.

2 Agreement on Subsides and Countervailing Measures.

3 Special Drawing Rights.

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PART A. THE EVOLUTION OF THE INTERNATIONAL

MONETARY SYSTEM AND THE ISSUE OF EXCHANGE RATES

So much of barbarism, however, still remains in the transactions of the most civilized nations, that

almost all independent countries choose to assert their nationality by having, to their own

inconvenience and that of their neighbours, a peculiar currency of their own.

John Stuart Mill4

1. From the Bretton Woods system to the Silent Revolution

In some way, there is much truth in the assertion which says that “money makes the world

go round”. In spite of the fact that the actual wealth of nations, in words of Adam Smith, is

indeed the production of goods and services, money is the main mean used by people

across nations which allows to purchase and sell these goods and services5, that is the

activity known as international trade. Since the creation of Nations States in modern times,

the emergence of national currencies has been seen not only as a tool to articulate the

international trade rather it is also a tool of the notion of sovereignty which is exclusive to

the territory of the State. In this sense, the price of a currency in terms of another it is

known as the exchange rate (Krugman, Obstfeld and Melitz, 201: 329). As a matter of fact,

the international monetary system has been one of the core elements in the creation of the

global economic governance of the past century and its central issue is to correct the

mismanagements of those exchange rates resulted of sovereignty exercises.

4 Mill, John Stuart. 1985. Principles of Political Economy. New York: D. Appleton And Company. pp. 479

5 Cf. Smith, Adam. 1776. An inquiry into the Nature and Causes of the Wealth of Nations.

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Almost seventy years have passed from the creation of the main pillars that compose the

global economic governance which was the result from the agreements in the 1944

conference of Bretton Woods and in the 1947 at the Geneva round. The creation of this new

institutional architecture was essentially based in order to answer specific problems that

arose in that context. Its main objective was to avoid again the appearance of the causes

that resulted what in the inter-war period was known as the conflict of “capitalist blocs”

and the trade wars. (Torrent, 2010: 6).

In a polarized world, marked by an abusive treaty of Versailles6, the German hyperinflation

and the 30s Great Depression, the countries were competing with each other and imposing

what in the economic field is known as “beggar-thy-neighbour” policies, i.e. traditional

instruments of protectionism and monetary measures with direct influence to the trade

flows (e.g. competitive currency devaluations). The protectionist war was undoubtedly one

of the main causes what the led emergence of a bloody II World War.

Hence, at being the international trade with the finance and monetary stability the main

economic issues of relevance in the Brettoon Woods conference, the necessity of create a

new international institutional system able to coordinate and regulate the use of different

trade and economic policy tools in order to avoid the resurgence of the trade wars was an

evidence. The institutions that born ex post of the conference, popularly called as the

Bretton Woods system, were what currently are known as the World Bank7 (WB) and the

International Monetary Fund (IMF). By adding the creation of General Agreement on

Tariffs and Trade8 (GATT) in 1947, which later in 1995 became part of the institutional

body of the World Trade Organization (WTO), the foundations of the global economic

governance were established.

6 Cf. Keynes, John Maynard. 1919. The Economic Consequences of Peace.

7 Indeed, the WB is composed by two institutions: the International Bank for reconstruction and Development

(IBRD) and the International Development Association (IDA). 8 The main essence of GATT was discussed in the Bretton Woods conference, but it does not materialized in

the Bretton Woods agreement because consensus was not achieved due to the position of the United States.

Later on 1947 the GATT was agreed in the first Geneva Round, and its institutional body, the WTO, was

created in 1995.

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Even though that, as a whole, these international institutions were designed lato sensu in

order to set the rules of the international economic relations through the multilateral system,

stricto sensu each one of them pursues its own subject matter. Being these the economic

development under the WB9, finances and monetary issues under the IMF, and the trade

flows with a gradual liberalization of them under the GATT/WTO. Due to the capital flows

liberalization were not one of the main problems that led the II World War during the inter-

war period, this issue was left behind from the scope of the new regulatory international

framework (O’Hara, 1999: 44).

The rationale of the Bretton Woods international monetary system relies under the adjust

mechanism, through surveillance and financing, the imbalances in the balance of payments

among countries. This constitutes the main core of the politics of international monetary

arrangements (Walter and Sen, 2009: 96). In this sense, the IMF is the main international

finance institution facilitating temporary liquidity in the short run to those countries that are

facing payments problems.

The creation of the IMF also chased the objective of prevent restrictive monetary practices,

mainly the quantitative restrictions and the competitive currency devaluations. IMF Article

IV: 1 sets that all the national currencies must be subjected to either US dollar or gold while

maintaining their exchange rate within a range of 1 per 100 US dollar value established by

the IMF. Nonetheless, IMF Article VI: 3 sets the permission of using capital controls due to

the prioritization of domestic monetary policy. Therefore, one of the main mechanisms

installed in the IMF was the system of “fixed but adjustable10

” exchange rate or also known

as the par value system. This system was intended to prevent competitive currency

devaluations and to stabilize the characteristic volatility of floating exchange rates allowing

some flexibility of adjustment under international surveillance. While the US dollar

9 I want to stress on the fact that by talking on the international monetary system and the trade relations in this

paper, in hereafter each time I will mention the Bretton Woods system I am going to elude the WB because

his purpose do not suit on the subject matter of this paper.

10

In theory the adjustment required consultation through the multilateral system of the IMF in order to

prevent competitive devaluations.

10

maintained the fix price of 35 US dollars in exchange of 1 gold ounce, the rest of countries

were free to maintain their reserves in either gold or US dollars. They would be able to

exchange their reserves of gold or US dollars by the fix price using either the “gold

window” of the US Treasury or in the gold private markets.

Having reached the 1960s, as a consequence of the incredible growth in the international

private markets and following the increasing demands of liquidity in order to satisfy the

globalisation process, the gold-US dollar standard began to weaken. The Belgian economist

Robert Triffin argued that the gold-US dollar standard was intrinsically unstable due to his

low capacity to satisfy the growing demands of an international trade which was

progressively dependent of the liquidity US payments deficit and the dollar glut (Triffin,

1978: 21). Hence to the “exorbitant privilege11

” , repeatedly blamed by the French

government, of the US and its currency thanks to its central position as a provider of

liquidity to the rest of the world, the US were able, and currently still, to run larger trade

and current account deficits without worsening its external position commensurately

(Gourinchas, Rey and Govillotm, 2010: 1). Triffin raised the idea of using the “bancor”, the

Keynes proposition in the 1940s of using a supranational currency used in international

trade as a unit of account, as a new international currency created and managed by the IMF

in order to replace the gold-US dollar standard.

With this in mind, in the 1970s the governments tried to give a solution to the liquidity

problem by the creation of a new reserve asset which substituted the US dollar, the Special

Drawing Rights (SDRs). These SDRs are assets which their sole purpose is to serve as a

source of liquidity for the governments in order to negotiate their debts coming from the

balance of payments deficits. Although there was a first distribution of SDRs in the early

1970s, they were left aside and its usefulness was marginal. The only solution for avoid the

collapse of the Bretton Woods system was to restore the trust of a weak US dollar as a

consequence of a huge deficit in the US balance of payments. In front of this situation only

were able three different solutions: (i) to devalue the US dollar in relationship to gold, (ii)

11

Term coined by the French Minister of Finance Giscard d’Estaing in the 1960s.

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deflate the US economy to correct its deficit, or (iii) that the other countries began to

expand more their economic activity, especially the major capitalist economies. We should

remember that in the context of 1970s the main major capitalist economies, also known as

the finance G3, were the US, Germany and Japan. The problem was that none of the three

solutions was really achievable, the one due to technical problems and the other two due to

political problems. On the first hand, the American policymakers did not found any sense to

devalue the US dollar in relationship to gold because, as a reaction, Germany and Japan

would devalue their currencies in response (Oatley, 2012: 219). On the other hand, neither

the USA nor Germany were in the political situation to change their economic policies. The

USA because was in the middle of the Cold War and was unwilling to reduce his budget

expenses. While Germany was also unwilling o expand their economic activity and revalue

its currency because its aversion to the inflation which came from the past experience of

Germany in the inter-war period and the depressing hyperinflation.

When Richard Nixon achieved the presidency in the 1969, he showed to be contrary to take

reduction deficit policies. Moreover, he blamed on the other governments and pointed out

that the facing international monetary problems were caused of the surpluses of both

Germany and Japan (Dam, 1982: 186). In spite of the fact that the systematic problem was

not solve, US continued exporting US dollars. In 1971 there were many speculative attacks

against the US dollar and Washington faced a serious balance of payments crisis. In a

situation where nobody wanted to adjust, the US decided to take unilateral economic

measures and Nixon vowed “we’ll fix those bastards” (Paterson et al, 2010: 386). In the

august of the same year, the Nixon administration decided to close the gold window,

suspending the convertibility to US dollars in gold, and to impose an import tax in order to

increase the cost of imports. These unilateral decisions meant the collapse of the Bretton

Woods system, the end of the gold standard and the supremacy of the US dollar as a key

currency. In December, during a meeting with the representatives of the ten leading trade

economies, the US Treasury Secretary George Shultz stressed: “Santa Claus is dead”. By

announcing the death of “Santa Claus” the former US Treasury Secretary suggested that the

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US would not act as a global monetary savior if that meant altering the chances of President

Nixon to be reelected (Keegan, 2004).

Furthermore, the decision to abandon the gold standard in 1971 implied the end of the par

value system, so a process of modification mutatis mutandis of the practices of the IMF

was required, this process is known as the “silent revolution” (Boughton, 2001: 1 – 50).

The range of these modifications had a direct impact on the rules of the IMF. One of the

most important changes was the reformulation of the IMF Article IV which transformation

implied the shift from the par value system to the flexible surveillance system by limiting

the role of the IMF only to financing purposes in order to aid the balance of payments in

danger of the countries in a new world of floating exchange rates.

The reason of the crisis of the Bretton Woods system was mainly because a large creation

of international liquidity by the hand of the USA. On this issue we have emphasize a point:

this problem is not solve at all. This is not only due to the lack of a “lender of last resort”

but on the fact that some national currencies, in particularly the US dollar, still being the

key currencies, more even with the absence of the original disciplines and legal rules

(Torrent, 2010: 8)

2. Cooperation in post-Bretton Woods system and the financial crisis

The rupture of the multilateral monetary system, the fall of the gold standard and the

reconversion of the IMF through the “silent revolution” were consequence of the growing

desires of pursue domestic economic policies with more autonomy where the national

sovereign do not see limitations in front of an administrative institution at supranational

level. The shift from “fix bud adjustable” exchange rate to a floating exchange rate system

gave the chance to the governments to use different macroeconomic policies in order to

pursue different goals at the same time that governments were not enforced to eliminate

their payments imbalances.

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With the end of the Bretton Woods system, the global economic governance was found

itself inside a new paradigm where the resolution of the most international monetary

problems had to be carried by ad hoc intergovernmental accords and meetings between the

major capitalist economies rather than the basis of permanent institutions such as IMF. In

this new paradigm the 1970s were marked with a period of relatively low current accounts

imbalances. This period of relatively stability was followed by a 1980s of current account

imbalances. In 1984 the USA reached the major current account deficit not registered in the

world while Japan and Germany were running large current account surpluses. These

current account imbalances were product of divergent macroeconomic policies among the

three major capitalist countries (Oatley, 2012: 226).

A weak US dollar from the 1970s found the way to acquire strength in the 1980s due to the

ability of the US to attract capital flows from the surplus countries through interest rates

relatively high. In this context, a large current account deficits and ongoing appreciation of

the US dollar started to push some domestic demands on using trade policy protectionist

tools, in particular to Japanese products (Suzuki, 2000: 140). In order to appease the

growing domestic protectionist demands, in the 1985 the president Ronald Reagan, through

an exercise of diplomacy, tried to find out a solution to those international currency

misalignments and the current account imbalances by setting a meeting with the finance G5

at the Plaza Hotel in New York. This meeting had as an outcome the Plaza Accord where

the 5 governments agreed to reduce the value of the US dollar in front of the Japan and

Germany currencies.

Hence, in the subsequent years was devalued in big proportion and with the intention to

avoid a major devaluation, in the 1987, the finance G5 set a new meeting at the Louvre in

Paris. In the same way, a new agreement, called the Louvre Accord, was the outcome of

this meeting which it agreed by the parties the end of the US dollar devaluation period and

the exchange rate realignment. As a matter of fact, in the Louvre meeting was raised the

proposal of do a step forward to some institutionalization of the cooperation on exchange

14

rate issues through the creation of a “target zone12

” but the proposal was left behind due to

the lack of supports. Approaching the XXI century, marked by the creation of a European

monetary union and the ongoing economic growth of the BRICS, a twist was given with

the apparition of a new finance G3 composed by US, China and the European Union (EU).

This new G3, in comparison with its predecessor, is characterised for being less

institutionalised and with more political asymmetries that turns it in a weaker actor of the

global economic governance.

In the middle of the 2000s, the world was in the midst of a boom period that seemed

endless, the economic growth was increasing while the investments and the international

trade were expanding. Nevertheless, in the middle of this expansive period a big number of

countries were running simultaneously current account deficits, including the USA. At the

same time, China was registering a huge surplus in its current account. Even though these

global imbalances were not the main cause of the 2008 financial crisis13

, they have been a

relevant co-determinant which has empowered the acceleration of those economic policies

that cause the crisis. Especially due the US ability to finance their macroeconomic

asymmetries through the foreign borrowing (Obstfed and Rogoff, 2009: 3).

Consequently, there is the growing opinion of some researchers that the monetary policy

chosen in the 2005 by China of fixing their exchange rate pegging it at the US dollar is

resulting to an increasingly depreciation of the remminbi (rmb), the Chinese currency.

Those who are arguing the devaluation of the rmb as a fact are pointing out three different

indicators that confirm they thesis: (i) from 2005 China obtained an increased sharp surplus

in their current account; (ii) the fact of an incredible and sustained accumulation of foreign

exchange reserves, usually linked by the famous concept of the “global savings glut14

”

connected by Ben Bernanke; and (iii) the growing intensity of investment capital in China

(Walter, 2010: 4 and 9).

12

A target zone tries to restrict the movement of an exchange rate, avoiding the pitfalls of both a pegged

exchange rate and a floating exchange rate. 13

Today is widely known that the main causes of the financial crisis were the leverage and housing bubbles. 14

Ben Bernanke, the former chairman of the FED, used this expression for describe his concerning about the

significant increase in the global supply of savings and its implications in the US monetary policy.

15

In addition, the interdependence between Asiatic countries – mainly China – with the

western countries – mainly USA –, where the first ones with a huge save are lending money

and exporting commodities to the second group, by adding the Chinese monetary policy of

fix exchange rate pegged at the US dollar and the current account deficit of USA has

created a de facto revived Bretton Woods system widely known as Bretton Woods II

(Dooley, Flokerts-Landau and Garber, 2007: 21).

In the 2010, when the crisis was still hitting hard, the president Barack Obama contacted

with the leaders of the main world economies that were suffering the bad consequences of

the crisis in order to formally request them to impulse action against the crisis through

expansive monetary and fiscal policies that allow incentive the growth of their economies.

The response of Germany was that by now the main interest is to consolidate the economy

and avoid an increase of the inflation. It is curious to see how more the things are changing,

the more the things remain the same. The political conflicts that cause the collapse of

Bretton Woods system with the purpose to avoid them are persisting today. This shows that

there is still much work to do in terms of global economic governance and the need to lay a

foundation to reform the international monetary system. In this direction, some authors

point out that the creation of what they consider the new pillar of the global economic

governance, the Financial Stability Board (FSB), it is a sign that governments want to

prioritize the shift of permanent institutional economic governance “Bretton Woods-type”,

such as WTO and IMF, to a more informal intergovernmental economic governance, such

as the FSB and the G20 (Wouters and Odermatt, 2013: 21). Nonetheless, the current

situation of exchange rate misalignments will require the revision and the reform of some

mechanism of the international economic institutions in order to correct these global

imbalances and give a response to the political concerns.

In our current days, China has been in the middle of the discussion regarding the

mismanagement of currency misalignments. This discussion has been on the agenda of the

global economic governance during the past years. The view that the rmb is clearly

undervalued is shared almost globally. Not only the US, but also the IMF, the EU and

Brazil have repeatedly demanded a quicker appreciation of the Chinese currency. The

16

sceptics of the Chinese monetary policy argue not only if that its exchange rate is in breach

with some IMF mechanisms, they also claim that some WTO disciplines are being distorted

by exchange rate misalignments. Therefore they claim that exchange rate misalignments

must be subjected to WTO mechanisms. We are going to these and other issues in the next

part.

17

PART B – EXCHANGE RATE MISALIGNMENTS AND THE WTO

LAW: FROM THE BACK DOOR

“Exchange rates are, and have always been, a highly sensitive subject in the WTO.”

Pascal Lamy15

1. Nature of obligations and the legal relationship between WTO and the IMF

The long-standing relationship between the IMF and the WTO comes since creation of the

IMF and the contracting parties of the GATT in the 1944-7. Their linkage is obvious in the

sense that their institutional framework was designed to avoid “beggar-by-neighbor”

policies. Taking into account the close relationship between the money and finances with

the trade some mechanisms were needed to ensure this link but, of course, having in mind

their own subject matter and trying to avoid the overlap of obligations and functions.

First of all, in order to achieve a complete understanding of the nature and end of these

institutions, we need to mention some elemental differences about their scope and

functions. Regarding the goal of the IMF and WTO, even though we can ensure that both

institutions work for the same purpose of avoiding bad practices in international economic

relations, we must point out that their subject matter and purposes are strictly different. In

particular, the WTO tries to safeguard the international trade by a gradual liberalization and

15

From the WTO Seminar on Exchange Rates and Trade on 27 March 2012

18

avoiding the discrimination16

among its members while the IMF seeks preventing

competency currency devaluations and ensure the adjustment of balance of payments. On

the other hand, it is important to stress the difference of the nature of their obligations and,

as consequence, their different modes of operation. In the WTO the multilateral system

plays a central role, its trade obligations are characterized by the reciprocal nature where

parties undertake obligations to other parties. The WTO as an organization provides the

framework of implementation and administration of the different agreements and a forum

of discussion where the member’s substantives rights and obligations flow from one

member to another through a mechanism for formal dispute resolution regarding supposed

violations of the rules set by the WTO Agreements. The WTO performs a limited range of

activities such as trade policy reviews and the fulfillment of administrative liabilities, as an

institution the WTO do not have power to impose sanctions to any member that fails to

comply with its obligations from the WTO Agreements.

On the contrary, in the case of the IMF the members’ obligations are owed to the institution

rather than to other members. In this sense, we can see in the IMF a double role. On one

hand, multilateral system as far as the institution must oversee the effective operation of the

international monetary system and, on the other hand, the bilateral system established by

the vertical organization where members seek fulfill their commitments individually in

front of the eyes of the IMF as an organization. The IMF Articles requires the obligation to

their members to withdraw constraints affecting other members disregarding if any member

has submitted a complaint requesting such withdraws. In the case of persistent violations,

the IMF as organization has the authority to impose a different range of sanctions, e.g.

suspensions of voting right or withdrawal of eligibility to use the IMF financial resources.

To sum the above mentioned, the approach and means that are used by both organizations

in order to reach their goals are not symmetrical. In spite of the fact that the WTO is an

international organization, it does not operate from the same “institutional” perspective as

the IMF (Siegel, 2002: 564).

16

MFN and NT clauses.

19

From a legal point of view, the jurisdictional aspect of both institutions can be seen in two

different categories that should be mentioned. On the first hand, (i) by those provisions in

the WTO Agreements that address cooperation with the IMF in order to avoid the conflict

of rights and obligations between the both institutions; and, on the other hand, (ii) by the

recent resolution of the WTO dispute settlement mechanism that have arose the question

whether the WTO panels should consult the IMF and, if so, what should be the legal effects

of the consultation. We will focus on the first category because it concerns the issue of

exchange rates misalignments while the second category addresses others policy tools such

as balance of payments derogations17

due to the fact that no case on exchange rate

misalignments has been revised for the WTO dispute settlement mechanism yet.

Although there is no explicit Article in the IMF which links its relations with the WTO, the

IMF Article X authorizes communications and relationships with other international

organizations having responsibilities in related fields. However, in the case of the WTO,

there are some provisions in the GATT and the GATS, e.g. GATT Article XV: 1, which

explicitly addresses cooperation with the IMF. This shows that the legal relationship

between both international organizations is “one-sided” where the WTO is required to

consult the IMF under specific circumstances and not vice versa.

Under GATT 1994, the Article XV on “Exchange Arrangements” explicitly sets seek

cooperation with the IMF in order to coordinate policy with regard of exchange questions

and quantitative restrictions. In Article XV: 2 may be found an obligation to consult with

the IMF on specified situations. In spite of the fact that this same obligation does not

require the WTO to accept the IMF view on the issue consulted, nevertheless the WTO is

required to accept some factual findings under the competitions of the IMF, e.g. statistical

findings. Article XV: 9 (a) states that nothing in this Agreement (GATT) shall preclude the

use of exchange controls or exchange restrictions that are consistent with the IMF Articles.

In case of overlapping jurisdiction of overlapping jurisdiction, GATT Article XV: 2 and 9

work together in order to avoid conflicting rights and obligations between WTO and IMF.

17

Cf. India Balance of Payments case: India – Quantitative Restrictions on imports of agricultural, textile and industrial products. (WT/DS90/AB/R)

20

As a result, it may create an exception to GATT obligations for a measure that the IMF

determines is an exchange measure and if it is consistent with the IMF Articles (Siegel,

2002: 607). A further analysis of the Article XV will be given below in the third section of

this Part B.

In the case of the GATS, Article XI: 2 states that nothing in GATS shall affect rights and

obligations of the IMF Articles. Article XII of GATS contains an analogous statement to

the GATT about the effects of consultations with the IMF.

Finally, in 1996 the IMF and the WTO signed a formal cooperation agreement 18

which

includes several provisions on reciprocal attendance on meetings, document exchange and

bureaucratic matters in order to facilitate cooperation between both organizations.

2. The IMF Article IV:1 and the 2007 reform of bilateral surveillance

As was pointed out in the previous part, exchange rates are the subject matter of the IMF.

Even during the period of post-Bretton Woods system and the second amendment of the

IMF Agreement, what we called as the “silent revolution”, IMF had been playing a central

role on the issues of exchange rate misalignments. In this sense, the IMF Article IV: 1 is

known as the chapeau which establishes general obligations for the IMF members in order

to conduct their respective exchange arrangements. This provision also includes a non-

exhaustive list of four specific obligations which reads as follow:

“In particular, each member shall:

(i) endeavour to direct its economic and financial policies toward the objective of fostering

orderly economic growth with reasonable price stability, with due regard to its

circumstances;

(ii) seek to promote stability by fostering orderly underlying economic and financial

conditions and a monetary system that does not tend to produce erratic disruptions;

18

Agreement between the IMF and the WTO (1996), may be found in the IMF webpage:

https://www.imf.org/external/pubs/ft/history/2012/pdf/3b.pdf

21

(iii) 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; and

(iv) follow exchange policies compatible with the undertakings under this Section”19

During the second amendment of the IMF Agreement the IMF Article IV: 1 was

reformulated and its first two obligations were introduced. The reformulation of the IMF

Article IV: 1 during the second amendment of the IMF Agreement shows the political

concern of the context to leave the maximum regulatory autonomy to the IMF members in

determining their economic policies which, inter alia, one of them is clearly the exchange

rate policies. This issue is reflected in the two first obligations – (i) and (ii) – widely

determined as obligations of soft nature20

which pretends set a significant degree of

sovereignty to members while reflecting the relevant relationship between member’s

exchange rate and its domestic policies (IMF, 2006: 2). However, even though the

obligations set in the paragraph (iii), where the goal of avoiding to pursue exchange rate

policies which seek unfair competitive advantage is reflected, are considered of hard

nature, this is not the case for the paragraph (iv) which in words of the IMF legal

department: “In terms of the meaning of this obligation, however, this provision is the least

specific of all of the obligations identified under Article IV, Section 1 and the legislative

history reveals that, at the time of its adoption, there was some uncertainty as to its

meaning” (IMF, 2006: 16). The concerns about the meaning are turning around on the

question if exchange rate policies may fall or not in the interpretation of the term “exchange

policies” in paragraph (iv) which turns it in ambiguous obligation. Moreover, conflicts may

arise between obligations in paragraph (iv) and obligations in paragraph (i) of fostering

economic growth with some reasonable price stability. Among these four obligations,

exchange rate misalignments are addressed in Article IV: 1 (iii) by assessing if a member is

manipulating exchange rates, later we will develop this explanation.

19

Article IV: Obligations Regarding Exchange Rate Arrangements, may be found in the IMF webpage:

https://www.imf.org/external/pubs/ft/aa/#art4 20

Legally speaking, the term soft law is referred to those legal instruments which have a weaker binding force

while, in contrast, the term hard law means the opposite.

22

As a result, we can consider the IMF Article IV: 1 not especially demanding rule, leaving to

member a maximum regulatory autonomy by determining their exchange rate policies. In

the same way, determining whether an IMF member is breach of these provisions is not

only economically complex, but also political sensitive. Even more when until today the

IMF has never found even a single IMF member to be in breach of the obligations under

IMF Article IV: 1 (Zimmermann, 2011: 426).

As mentioned earlier, the IMF has a double role: the bilateral element and the multilateral

element. This double role is set in the Article IV: 3 (a) of the IMF Agreement. Article IV: 3

(b) provides the element of bilateral surveillance which represents one of the most

important mechanisms of the IMF as far in the post-Bretton Woods governance the fixed

but adjustable system was shift to the flexible surveillance. In 2007 New Decision on

Bilateral Surveillance Over Members' Policies was adopted in order to modernize the

bilateral surveillance system. Although this Decision does not create additional obligations,

it provides guidance and interpretation to IMF members on IMF Article IV: 1 and how to

deal with scenarios of exchange rate misalignments. The Decision contains the next four

principles:

“A. A member shall 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.

B. A member should intervene in the exchange market if necessary to counter disorderly

conditions, which may be characterized inter alia by disruptive short-term movements in

the exchange rate of its currency.

C. Members should take into account in their intervention policies the interests of other

members, including those of the countries in whose currencies they intervene.

23

D. A member should avoid exchange rate policies that result in external instability.” (IMF,

2007)21

.

Principle A is eo ipso a mirror of the obligation set in the IMF Article IV: 1 (iii).

Consequently a formal finding of breach of Article IV: 1 (iii) directly means also a breach

of principle A. The annex of the decision specifies two scenarios where a member would be

acting inconsistently with the IMF Article IV: 1 (iii): “(a) the member was manipulating

its exchange rate or the international monetary system and (b) such manipulation was

being carried out for one of the two purposes specifically identified in Article IV, Section

1(iii)” (IMF, 2007)22

. As a matter of fact, in the same annex is explained stricto sensu the

meaning of “manipulation” understanding it as any action through policies that affects and

it is targeted at the level of an exchange rate.

Nonetheless, it is important to stress that by fulfilling the criteria of the label “manipulator”

does not mean that the alleged government may be in breach in any obligation of the IMF.

Indeed, any government which uses a policy of fix exchange rate pegged to any other

currency or basket of currencies is ipso facto a manipulator, only those who are trying to

gain unfair competitive advantage over other members would be considered in breach to

their obligations with the Fund. In this sense, the annex further provides the two situations

where a member may be inconsistent with the IMF Article IV: 1 (iii): “(A) the member is

engaged in these policies for the purpose of securing fundamental exchange rate

misalignment in the form of an undervalued exchange rate and (B) the purpose of securing

such misalignment is to increase net exports”23

. However, the wording “intent” which

remains unchanged in the IMF Article IV: 1 (iii) since the second amendment of the IMF

Agreement makes difficult, as always has been, to find out a behaviour or policy

inconsistent with the obligation. In fact, it was already pointed out by the IMF’s Legal

21

Quoted from the webpage of the IMF, may be found here:

https://www.imf.org/external/np/sec/pn/2007/pn0769.htm#decision 22

Idem. Annex “Article IV, Section 1(iii) and Principle A”. 23

Idem.

24

Department: “the potential applicability of the obligation to avoid manipulation is

constrained by the need to determine intent;” (IMF, 2006: 2).

In contrast to principle A, a violation of principle B, C24

or D would not automatically

create a breach of obligations. Actually, the innovation in the 2007 Surveillance Decision

was the principle D which establishes the need to avoid the external instability, the other

principles (A, B and C) were already sets before the Decision. Principle D extends the

scope of the bilateral surveillance mechanism to any scenario of “external instability” as a

consequence of exchange rate misalignment. However, in the paragraph 6 of the Decision it

is clearly state that a member considered to be promoting domestic stability will not be

required to fulfill the interest of external stability, hence to no fulfill principle D. In the eyes

of the IMF, an exchange rate is considered in misalignment “when the underlying current

account differs from the equilibrium current account” (IMF, 2007: 4). Once again, we need

to remember that formal finding of exchange rate misalignment do not automatically mean

a breach of IMF Article IV: 1 (iii) due to an exchange rate misalignment could be a result

from an external shock. The IMF will assess if any exchange rate is fundamentally an

exchange rate misalignment or not.

To sum up, even those four principles (more precisely, principles A and D) which pretends

to clarify the scope and obligations of the IMF Article IV: 1 (iii), this Article remains as

powerless as before due to the political sensitivity of the wording “intent”. A new reform of

the IMF Agreement will be required in order to strength the bilateral surveillance

mechanism of the IMF.

3. Are the exchange rate misalignments a subject matter of the WTO? On GATT

Article XV and the “frustrator” approach

24

Principles B and C can be ignored for the purposes of this paper as far as they deal with issues of IMF

Article IV consultations.

25

In 2012 Pascal Lamy, the former Director-General of the WTO, opened a WTO Seminar

entitled “On Exchange Rates and Trade”. This seminar pretended to open a space of

dialogue within the WTO due to the growing interest about exchange rates and its

implications to trade policy. As DG Lamy pointed out, exchange rates have been always an

important issue in the WTO. The excess of volatility of exchange rates is clearly correlated

with the trade flows, a subject matter of the WTO. However, despite of the relevance

influence of exchange rates with the trade flows, Lamy assessed that the current monetary

problems are consequence of the lack of an international monetary system, as it was the

Bretton Woods system. He also stressed that the trade policy alone cannot be the answer to

current imbalances of the international monetary system and the WTO system cannot try to

correct this exchange rate misalignments unilaterally. Not only because exchange rates are

not a subject matter of the WTO, in spite of the fact that is an issue of interest, also because

it may evoke to a new trends of protectionism war: “trade measures cannot correct policy

imbalances elsewhere, and be an answer to non-trade policy concerns. Tit-for-tat trade

measures would be a recipe for protectionist crossfire” (Lamy, 2012).

In contrast to Lamy’s opinion, in the recent years it has appeared a new trend in the

academic literature which pretends to establish a clear relationship between exchange rate

policy and trade policy from the perspective of the WTO and the multilateral trade system.

The concerns about the exchange rate misalignments and its trade consequences have risen

since the 2008 crisis and the new attention to the global imbalances, focusing mainly in

China exchange regime. For instance, Fred Bergsten and Joseph Gagnon from the Peterson

Institute for International Economics have argued that a several number of countries,

stressing on China, have been intervening the exchange markets to keep their currencies

undervalued and boosting their trade surpluses and competitiveness at expenses of the US

economy. They estimated that as a result of those interventions, the US trade and current

account deficits have been 200 billion to 500 billion of US dollars larger per year, resulting

between 1 million to 5 million of job losses (Bergsten and Gagnon, 2012: 2). In overall,

following the logic behind of the globalization and the open economies, a weaker exchange

rate of one country implies a strong exchange rate of other countries. Leading to a situation

26

which some authors have called it as a “currency wars25

” where some countries are trying

to prevent their exchange rates from appreciating (Cline and Williamson, 2010: 9).

As we have seen earlier, the main approach to deal with the exchange rate misalignments

from IMF perspective is by assessing whether an exchange policy is consistent with the

obligations of the IMF Article IV: 1 (iii). The critics of China exchange regime call this

perspective as the “manipulator26

” approach. Those same authors who are arguing that

exchange rate misalignments should be dealt also by the WTO are proposing to introduce

an alternative approach called the “frustrators” of trade objectives approach (Thorstensen,

Marçal and Ferraz, 2013: 20).

The “frustrators” approach is ceteris paribus based on the economic assumption that

undervalued exchange rates have real effects on trade resulting on tariff-cum-subsidies, i.e.

both to increases in import tariffs and to export subsidies. Under this assumption, due to an

a relatively undervalued currency facing other relatively overvalued currency, the price of

export goods from the overvalued currency country to the undervalued currency country

will face a de facto increase on import tariffs. While the export goods from the undervalued

currency country to the overvalued currency country will be benefit of a de facto reduction

on import tariffs, in other words, an export subsidies for the undervalued currency country

and hence distorting the trade. With this in mind, the exchange rate policy could be

inconsistent with some provisions in GATT, mainly by its Article XV: 4, and therefore

challengeable under the WTO dispute settlement in order to withdraw such policy. It is

important to underline that the “frustration” of GATT provisions does not necessarily imply

that there has been a “manipulation” in the sense of IMF Article IV: 1 (iii) because of a

frustration of trade objectives do not necessarily fulfill the “intent” criteria of the

manipulator approach (Thorstensen, Ramos and Muller, 2013: 11).

25

Term introduced by the finance minister of Brazil, Guildo Mantega. 26

Despite of the fact, as we have seen earlier, that a member could fulfil the IMF “manipulator” criteria

without necessary be in breach of with the IMF Article IV: 1 (iii).

27

The proposal of the frustration approach is based on the GATT Article XV entitled

“Exchange Arrangements” which deal with the exchange actions and its impacts on trade.

Earlier, in the beginning of this second part, we have talked about the WTO and IMF

cooperation which from a GATT perspective is set in the Article XV. First of all, it is

necessary to stress in the wording use in Article XV stricto sensu there is no mention to

exchange rate misalignments but lato sensu it may be found implicitly in some exchange

terms used throughout the Article, concretely: exchange arrangements (Article XV: 1);

exchange action (Article XV: 4); and exchange controls or restrictions (Article XV: 9).

Paragraph 1 of Article XV establishes the cooperation between IMF and WTO while

paragraph 2 sets the consultation process and the acceptance of the statistical findings

regarding disputes regarding problems concerning monetary reserves, balances of payments

or foreign exchange arrangements. WTO Appellate Body made this interpretation of Article

XV: 2 in the case Argentina – Textiles and Apparel: “The only provision of the WTO

Agreement that requires consultations with the IMF is Article XV: 2 of the GATT 1994.

This provision requires the WTO to consult with the IMF when dealing with "problems

concerning monetary reserves, balances of payments or foreign exchange arrangements.

However, this case does not relate to these matters. Article 13.1 of the DSU gives a panel

… a grant of discretionary authority: a panel is not duty-bound to seek information in each

and every case or to consult particular experts under this provision.” (WTO, 1998: 32).

This interpretation clearly states that a WTO panel dealing with monetary issues only will

be required to consult problems concerning monetary reserves, balances of payments or

foreign exchange arrangements. In this sense, other monetary issues do not require the

panel to consult the IMF due to the discretionary authority granted in Article 13.1 of the

Understanding on Rules and Procedures Governing the Settlement of Disputes Agreement

(DSU). Until today, two other WTO disputes have raised the issue of consultation provided

by GATT Article XV: 2, India – Quantitative Restrictions and Dominican Republic –

Import and Sale of Cigarettes. None of those two last cases has clarified to determine

whether the consultation requirement in Article XV: 2 extend to dispute settlement

proceedings. Some authors have underlined the necessity of the WTO to draw a clear line

28

between the consultations its extension to dispute proceedings and the panel discretionary

right under DSU Article 13 (Zimmermann, 2011: 462). Furthermore, to consult the IMF

does not imply that WTO has to leave its decisional power to the IMF on the issues

consulted.

GATT Article XV: 4 is the provision which could open the door to the critics of China

exchange regime to bring undervalued exchange rate as a claim in the WTO dispute

settlement mechanism. From a WTO perspective, the “frustrator” approach is based on

Article XV: 4 which establish that “contracting parties shall not, by exchange action,

frustrate the intent of provisions of this Agreement”. With this in mind, if undervalued

exchange rate actually results in a tariff-cum-subsidies it may increase the applied ad

valorem tariffs above the bound tariffs27

sets in the schedules of concession and thus

frustrate the intents of GATT Article II: 1 (Thorstensen, Ramos and Muller, 2012: 21).

Some authors have suggested that the wording use in GATT Article XV: 4, by using

“exchange action”, denotes that the drafters intended to have a very broad meaning,

including multiplicity of modalities of exchange-rate based-measures, pointing out that

challenging undervalued exchange rate is perfectly viable (Miranda, 2010: 125). Moreover,

Joel Trachtman from Fletcher School of Law and Diplomacy have suggested that GATT

Article XV: 4 is a confusing provision when is read in conjunction with its “ad note”

interpreting that “Article XV: 4 might not be intended to provide an independent basis for

claims against national exchange action, but instead is intended to reduce the coverage of

other substantive provisions.” (Trachtman, 2010: 129).

27

In order to reach the WTO goal of avoid the protectionist war, the Members have to negotiate in the trade

rounds specific commitments to their import tariffs with the purpose to ensure the gradual liberalization of

trade. Those limited rates of import tariffs given in the schedules of concessions are the bound tariffs. It is

necessary to distinguish between bound tariffs and applied tariffs. The first limits the maximum level a

member can impose in its import tariffs while the second is the actual level imposed on import tariffs.

Members have the flexibility increase or decrease their applied tariffs so long as they didn't raise them above

their bound levels. In trade policy the difference between bound tariffs and applied tariffs is known as the

policy manoeuvre space.

29

Regarding Article XV: 4 and the possibility to bring undervalued exchange rates to dispute,

controversy arises once we have looked on the GATT Article XV: 9. In the first section of

this part we have mentioned Article XV: 9, which states that “Nothing in this Agreement

shall preclude the use by a contracting party of exchange controls or exchange restrictions

in accordance with the Articles of Agreement of the IMF…”. This provision is a general

exception which states that no exchange control or exchange restriction may be in breach

with any provision of GATT 1994, and thus not challengeable into a dispute, while this

kind of economic policies remain consistent with the provisions of the IMF (more

precisely, with the IMF Article IV). In fact, Article XV: 9 is a clear link to IMF Article IV

which pretends to avoid the overlapping competences between both international

organizations, the WTO and the IMF. In this sense, if we accept Article XV: 9 as a general

exception if the alleged exchange policy it is in accordance with the IMF provisions then

we can assert that the WTO “frustrator” approach is in the end the IMF “manipulator”

approach.

Nevertheless, incoherence is set in the Article XV due to the ambiguous relationship

between Article XV: 4 and Article XV: 9. Which of those provisions must prevail if in a

dispute claiming on an undervalued exchange rate is inconsistent with Article XV: 4 but on

the other hand fulfilling the criteria of Article XV: 9? Some authors have pointed out that

the precise wording of Article XV: 9 of “exchange controls” and “exchange restrictions”

give this provision the status of lex specialis and thus prevail in front of the Article XV: 4

and its broad wording of “exchange action” (Zimmermann, 2010: 463). On the other hand,

other authors have suggested that the Ministerial Declaration on Fund/WTO Relations

eliminates this uncertainty giving prevalence to the Article XV: 9 (Siegel, 2002: 613). Until

today, no dispute has brought these issues to discussion and therefore all conclusions

remain as speculations. In the future, WTO must clarify this ambiguity in order to give

more coherence between provisions of the GATT and its relationship with the IMF

Agreement.

30

4. Currency manipulation as a subsidy under the SCM Agreement

Alternatively to the “frustrator” approach of the GATT Article XV: 4, other authors have

argued that a currency which is significantly undervalued for long time is equivalent to a

subsidy, in the sense of the WTO, and hence challengeable by the Subsidies and

Countervailing Measures Agreements (SCM) (De Lima, 2012: 37). Robert Staiger and

Alan Sykes from Stanford University have carefully pointed out that in a long run the

prices of a country which devalues its currency will adjust leaving import and export

volumes unchanged, therefore equivalence between a tariff-cum-subsidy and devaluation

need not imply that devaluation warrants WTO action (Staiger and Sykes, 2010: 110).

With the aim to analyze whether an undervalued exchange rate may be challengeable under

the SCM, first we will introduce the basic notions of the SCM Agreement. The SCM

Agreement is one of the thirteen agreements which compose the WTO law, its purpose is to

regulate the relationship among countries from the perspective of their subsidies and their

potential effect to the trade liberalization. SCM Article 1.1 provides three narrow criteria

that must be satisfied in order for a subsidy to exist: (i) there must be a financial

contribution, (ii) must be provided by the government or any public body, and (iii) must

confer a benefit.

In spite of the fact that alleged subsidy can fulfill the definition provided in Article 1.1, a

subsidy must be “specific” in terms of SCM Article 2 in order to be subjected to the SCM

Agreement. We can differ four types of “specificity”: (1) enterprise-specificity, when a

government subsidizes a particular company); (2) industry-specificity, when the

subsidization targets a particular sector; (3) regional specificity, when the subsidization

targets producers in specified geographical parts within the territory; and (4) prohibited

subsidies, when subsidization target export goods or goods using domestic inputs.

With this in mind it is necessary to distinguish three categories of subsidies: (a) prohibited

subsidies (red light), (b) actionable subsidies (yellow light and dark amber light), and (c)

non-actionable subsidies (green light). As a matter of fact we will focus on the first two

categories.

31

On one hand, prohibited subsidies are those subsidies recognized as a trade distorting

nature and thus prohibited per se. This category is provided by SCM Article 3 and mainly it

focus on export subsidies and local content subsidies (subsidies the use of domestic goods

over imported goods). A detailed list of those subsidies which comprises the export

subsidies is annexed to the SCM Agreement. On the other hand, actionable subsidies are

those that are not prohibited but they may be subjected to action if adverse effects are

established. Remedies for both prohibited (SCM Article 4) and actionable subsidies (SCM

Article 7) can be held either under multilateral track, and thus challengeable in the WTO

dispute settlement system, or under unilateral track by imposing countervailing measures,

e.g. countervailing duties.

With the above mentioned in mind, to claim an alleged undervalued exchange rate as a

tariff-cum-subsidy under the multilateral track then the argumentation must follow the logic

of export subsidy as a prohibited subsidy in the sense of SCM Article 3.1. Therefore,

regarding undervalued exchange rates, it will be necessary to answer if (1) whether is a

financial contribution, (2) whether is provided by the government or any public body, (3)

whether is a benefit, and (4) if it meets the “specificity” criteria. If just one of those criteria

do not fulfill clearly then an undervalued exchange rate is unlikely to be successfully

contested under the SCM Agreement.

(1) – Financial Contribution

There many different specific actions that would potentially enable a country to maintain an

artificially low exchange rate, e.g. increased reserve requirements, sterilization combined

with capital controls, outright price controls, among others. Even though the concept of

“financial contribution” is broad, SCM Article 1.1 provides an exhaustive list (Van den

Bossche and Zdouc, 2013: 751). Article 1.1 (a) gives four categories (i)-(iv) identifying

financial contribution, i.e. direct transfer of funds; government revenue, otherwise due, that

is foregone; provision or purchase by a government; payments to a funding mechanism or

through a private body; and, finally, income and price support in the sense of GATT

Article XVI.

32

Among those categories, as a matter of straightforward interpretation, the different actions

required in order to maintain an undervalued exchange rate do not fulfill a financial

contribution in the sense of Article 1.1 (Zimmermann, 2011: 447). However, some authors

argued that an income or price support is present when a government buys foreign

currencies at high prices regardless the market price (De Lima, 2012: 18). In spite of the

fact that this argumentation is not persuasive, other authors have pointed out that a narrow

reading “limiting it to programs specifically geared to such matters (as in the agricultural

sector), exchange market transactions would not appear to qualify” (Staiger and Sykes,

2010: 610). In fact, in China – GOES (2012) the panel found that the term “price support”

it does no capture every government measures that has incidental and random effect on

price (Van den Bossche and Zdouc, 2013: 757).

(2) – Provided by government or any public body

As far the exchange rate is pegged to a currency or any basket of currencies, an ipso facto

public body action is held. This requirement is the only one which is clearly meet.

(3) – Benefit

In Canada – Aircraft the panel interpreted the term “benefit”: “the ordinary meaning of

"benefit" clearly encompasses some form of advantage. … In order to determine whether a

financial contribution (in the sense of Article 1.1(a)(i)) confers a "benefit", i.e., an

advantage, it is necessary to determine whether the financial contribution places the

‘recipient’ in a more advantageous position than would have been the case but for the

financial contribution” (WTO, 1999: 176). The Appellate Body agreed with the panel to

focus on the “recipient” in order to analyze if benefit meets. Staiger and Sykes have

stressed that an increase in exports do not necessarily leads to a higher profits (2010: 611).

Moreover, identify that the exporters sector is gaining benefit from an undervalued

exchange rate is one thing, on the other hand quantifying this benefit is other different.

Assessing the actual benefits of an undervalued exchange rate may be a quiet difficult if not

impossible task.

33

(4) – Specificity

As listed above, specificity criteria are set in four different types: (1) enterprise-specificity,

(2) industry-specificity, (3) regional specificity, and (4) prohibited subsidies. In order to

impose multilateral or unilateral trade remedies under WTO law, any policy alleged to be a

subsidy must be “specific” in the sense of SCM Article 2 and thus fulfill one of the four

different types. Trachtman suggested the difficulty to argue that the benefits, if there are, of

the China exchange regimes are limited to an enterprise/group of enterprise or to an

industry/group of industries in means of SCM Article 2, resulting it difficult to make a case

under SCM Article 5 (Trachtman, 2010: 130-1). On the contrary, De Lima defends that “a

currency that is kept at an artificially low level might be a subsidy contingent in fact upon

export performance since companies will only obtain the benefit of extra units of local

currency in exchange for any foreign currency if they export” (2010: 26).

Therefore among the four different types of specificity that may suit in a case of

undervalued exchange rate are the prohibited subsidies (SCM Article 3), i.e. export

subsidies and subsidies on the use of domestic over imported goods. The Annex I of the

SCM Agreement provides a non-exhaustive list of eleven types of export subsidies where

none of among all the measures needed in achieving and maintaining an undervalued

exchange rate is listed. However, as stressed in footnote 4 of SCM Article 3, a closely

examination will be necessary in order to determine if there is a de facto export subsidy. In

this sense, Michael Waibel from Cambridge University said that in spite of the fact that the

benefit result of an allegedly undervalued currency is ambiguous, those alleged benefits are

also not sector-specific and broadly shared, and even if a benefit is conferred it does not

appear to be contingent on export performance (Waibel, 2010: 135-6).

Overall, this shy analysis presented in this section indicates that even though the

potentiality to promote exports, in economic terms, due an undervalued exchange rate, it is

unlikely that such policy could be successfully challenged as an export subsidy under

existing framework of the WTO law.

34

PART C – THE TRIFFIN PARADOX AND INTERNTATIONAL

CURRENCIES: FROM THE FRONT DOOR

"A fundamental reform of the international monetary system has long been overdue. Its necessity

and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar."

Rober Triffin28

1. The exorbitant privilege and the Triffin Dilemma

In the Bretton Woods era (1944 – 1971) the formal reserve currency was the standard US

dollar-gold. United States was a winner nation from the IIWW which do not suffered the

bad consequences of the war in the same way as the European continent. In the recent post

war period, United States had more than a half of the combined GDP of Great Powers (UK,

France, Germany, Italy, Austria, the Soviet Union, and Japan) (Harrison, 1998: 10). The

United States was the largest importer, the main source of trade credit and the leading

source of foreign capital; in this context it made sense to link the US dollar as a reserve

currency with the gold. Even though that the Keynes idea of the “bancor”, a supranational

key currency, did not succeed.

In 1960, one of the most famous analysts of the international monetary system, the

economist Robert Triffin, published a paper called “Gold and the Dollar Crisis: The Future

of Convertibility”. In its paper, Triffin argued that the Bretton Woods system would not last

due an inherent systematic problem: the US, as sole country, was not in a position to give

liquidity to the international trade. What Triffin pretended to argue in its dilemma, indeed,

28

This quite can be found in the IMF webpage:

https://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm.

35

was that none country alone and its currency must carry the enormous task of give liquidity

to the world economy. In the paradigmatic case of the Bretton Woods era and the United

States, apart from gold whose supply was small and erratic, the increase demand for

international liquidity could be satisfied only if the US, the reserve centre, ran a payments

deficit to supply and export more US dollars to the world demand, thus undermining

confidence in the dollar (Williamson, 2009: 1). Then, the Triffin Dilemma rest in a choice

of the reserve centre country which issues the key currency, in this case US, to either adjust

its current account deficit through decreasing the world liquidity or run an ongoing current

account deficit in order to satisfy the world demand. The Triffin solution to its Dilemma

was to recover the Keynes idea of the “bancor” and create a supranational synthetic reserve

asset as a key international currency. Actually, the Triffin analysis was a successful

prophecy as far as it predicted the collapse of the Bretton Woods system. On the other

hand, the final solution was to suspend the convertibility of US dollars into gold and

turning the US dollar as the new reserve asset instead to replace it by a new international

currency.

As a matter of fact, many economist noted that the United States pay relatively low returns

on their liabilities to foreigners, while at the same time earns relatively high returns on its

foreign assets because the sustainability and accumulation of large external deficits. This is

usually viewed as a result of US and its central position in the international monetary

system and, especially, its role as the main financial centre issuing an international

currency. In the literature this is known as the “exorbitant privilege” and its positive

“excess returns” on net foreign assets facilitates the sustainability of large negative external

positions (Habib, 2010: 5). Actually, a more controversial benefit of the US dollar’s key

currency status is the real resources that other countries provide the United States in order

to obtain US dollars loans. More than 500 billion of US dollars circulate outside the United

States, for which foreigners have had to provide the US with 500 billion of actual goods

and services (Eichengreen, 2011: 11). The literature on the topic of the exorbitant privilege

36

and the Triffin Dilemma is extensive29

. Generally speaking, we can summarize it in three

points:

First, from being the reserve currency status, there are additional revenues from

seigniorage, i.e. the interest free loan generated by issuing additional currency to foreigners

who hold US dollars.

Second, the US households and companies are able to raise capital more cheaply due to

very large purchases of US Treasury by foreigners.

Third, greater inflows of foreign capital mean that the dollar exchange rate is higher than it

would be without reserve currency status.

All these three points are clearly correlated. The argumentation is easy to see. As a

consequence of the position of the US dollar as a key reserve currency, all the global

demand is continuously exporting currency from United States. On the other hand, United

States can run large expenditures and buy inputs around the world in exchange to offer to

the foreign countries a “safe haven” where save their surpluses, namely the US Treasury

debt. Countries around the world not only use US dollars as a mean of exchange and source

of liquidity for the international trade, governments and central banks also increase their US

dollars assets due to strategic and political reasons, i.e. nonfinancial reasons. This implies a

potential benefits to United States as a result to its central position: United States obtains an

excess of profits because of the seigniorage which allows them to run a trade and current

account deficit without the necessity of correct their imbalances. Moreover, as pointed out

by Eichengreen, with cheap finance that other countries provided the US in order to obtain

29

We can highlight Pierre-Olivier Gourinchas and Hélène Rey (2007) “From World Banker to World Venture

Capitalist U.S. External Adjustment and the Exorbitant Privilege”; Maurizio Michael Habib (2010) “Excess

returns on net foreign assets the exorbitant privilege from a global perspective”; Barry Eichengreen (2011)

“EXORBITANT PRIVILEGE The Rise and Fall of the Dollar and the Future of the International Monetary

System”; Matthew Canzoneri , Robert Cumby, Behzad Diba and David López-Salido (2013) Key Currency

Status: an Exorbitant Privilege and an Extraordinary Ris; and Pietro Cova, Patrizio Pagano and Massimiliano

Pisani (2014) “Foreign exchange reserve diversification and the exorbitant privilege”.

37

US dollars needed to back an expanding volume of international transactions underwrote

the practices that culminated in the crisis (2011: 13).

This is not the first time that somebody is pointing out the US external deficit as one of the

main reasons linked to financial crisis of 2008. Maurice Obstfeld and Kenneth Rogoff

highlighted that in spite of the fact that global imbalances did not cause financial crisis,

they were important codeterminant: “The magnitude of global imbalances up to 2008 both

reflected that underlying fragility and allowed the system to become ever more fragile over

time” (2009: 31). Nonetheless, which role plays the United States inside those so called

global imbalances?

Figure 1 shows that it is not a “global” problem of current account imbalances. Indeed,

there is a very large US deficit that is matched by the three main countries with large

surpluses. In fact, the situation of those imbalances is similar to imbalances during 1970s

which caused the end of the Bretton Woods system and surrounded the international

economy in a new economic crisis. On the other hand, even though some individual

38

countries in the European Union have had relatively large deficits or surpluses, the EU as a

whole had a moderate current account deficit. In a sum, the so-called global imbalances are

mainly an US-East Asian phenomenon, with some secondary small imbalances within the

EU and some other resource exporting and resource importing nations (Blecker, 2011: 5). It

is curious to see that the current situation of the imbalances between the US external deficit

and the surpluses of Japan and China look pretty similar to the same "global" imbalances

between US with Japan and Germany in 1970s which ended to the Bretton Woods system.

Actually, what seemed obvious in the past today is even more obvious: the exorbitant

privilege of United States is an incentive which allows the home country to pursue

domestic economic goals at expenses to create the so-called global imbalances due to the

particular characteristic of the US as a reserve country to run large external deficits without

the necessity to adjust.

The above statement tries to link the global imbalances with the exorbitant privilege of the

US and, moreover, in spite of the fact that those global imbalances are not by themselves

the only determinant of the economic crisis of 1970s or 2000s, they have been an important

codeterminant.

Figure 2

39

After removal of the gold standard in 1971, the value of currencies became dependent on

economic fundamentals of each country. And since then, the US has been fattening its debt

and trade, budget and current account deficits, to fuel world economic growth. As Figure 2

shows, after each specific crisis, the Fed has responded by easing monetary conditions to

stimulate growth. Especially, lowering the price of money that banks can lend to discretion.

In the 2000s, with the expenses of the Iraq war and the earlier explosion of the dot-com

bubble, the Nobel Prize Paul Krugman suggest to Allan Greenspan, the former chairman of

the Fed, to create a new housing bubble: “To fight this recession the Fed needs more than a

snapback; it needs soaring household spending to offset moribund business investment.

And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a

housing bubble to replace the Nasdaq bubble” (Krugman, 2002). The credit boom that

followed, stimulated the economic growth not only in America but in the middle planet.

The liquidity provided by the Fed (conveniently distributed by the international financial

system), brought up the bags and facilitated the creation of other real estate bubbles in

countries like Greece, Spain, Ireland and the UK, among others. In any case, all

governments were complicit in the madness of irrational spending. Without savings, the US

economy had only been able to grow through checkbook hits; leveraging, because while

flowing credit and prices rose, everyone liked risk. As everyone knows, the party finished

in 2008. But for the Chinese there was something else. In March 2009, the Governor of the

Central Bank (PBOC), Zhou Xiaochuan, published an essay in which he indicated that the

causes of the crisis had to be sought in the Triffin paradox. The approaches of Belgian

economist had been forgotten for 30 years and now turned on the news: why? Well,

because Asian realized that the Fed had abused its role as lender of "last resort"; allowing

the design and placement of the exotic financial derivatives that had brought the world to

the brink of Great Depression II.

40

2. The Special Drawing Rights and International Currencies

In March 2009, with the aim to address all the international complaints regarding the

exchange rate policy of China, the Governor of the People’s Bank of China, Zhou

Xiaochuan, came up with a proposal to base a new reserve currency system centred on

strengthened Special Drawing Rights (SDRs) (Zhou, 2009). In its paper, Zhou mentions the

policy dilemma of the being a key currency country and the Triffin Dilemma of using a

domestic currency as international currency. Influenced by Keynes idea of “bancor”, the

paper proposes to create an international reserve currency disconnected from individual

nations, highlighting the role of SDRs: “when a country’s currency is no longer used as the

yardstick for global trade and as the benchmark for other currencies, the exchange rate

policy of the country would be far more effective in adjusting economic imbalances”

(Zhou, 2009: 2). The paper finally calls for a general increase in SDRs allocation, as well as

broadening of the scope of using SDRs, which its management must be centralized to the

IMF. Nevertheless... What exactly are SDRs?

In the literature, the term SDRs has been used widely in order to refer three different

concepts: (i) the “official” SDRs created in 1969 and illustrated in the Fund’s Articles

(Chelsky, 2011: 1); (ii) as a unit of account which could be used to price goods and traded

assets, to peg currencies and to report data from the balance of payments (Williamson,

2009; 5); (iii) as a potential new class of reserve asset issued by the Fund (Zhou, 2009).

First notable allocation of SDRs was made in 1970-2 of 9.3 billion. A second allocation

was made in 1979-81 of 12.1 billion, with no further allocation for almost 30 years. In

2009, in response to the financial crisis, a third modest allocation of 250 billion was made

but, nonetheless, SDRs still account for less than 5 per 100 of total global reserves. SDRs

are account entries on the books of the International Monetary Fund quite different from the

other accounts of the IMF. The benefits of participating in an international monetary system

with SDRs as a key currency is that any country with SDR balances can use them to meet

balance of payments deficits with other countries.

41

With SDRs, a country can finance part of its deficit by instructing the IMF to draw down

the balance in its SDR account in exchange for an equivalent amount of convertible

currency. The IMF then designates one or more member countries to transfer convertible

currency to the deficit country in exchange for an equivalent increase in SDR balances. On

the other hand, a country without a current balance of payments deficit may engage in

voluntary transfers of SDR’s with another country in order to restore a better balance in the

components of its international reserves. Such action requires the mutual agreement of both

participating countries and the approval of the IMF. This provision is of special importance

to a reserve currency country like the US which has a substantial volume of outstanding US

dollars liabilities to foreign central banks. Countries which hold SDRs will receive interest

on these balances at a rate to be decided by the Board of Governors of the IMF. There are

basically two obligations to participation in the SDR arrangement and they are converse to

the benefits. Just as countries with a deficit can finance part of it by drawing down their

SDR holdings, countries with surpluses must be prepared to accept part of the surpluses in

the form of SDRs. This synthetic asset is composed by a basket of currencies, the value of

the SDR is determined using the four currencies issued by IMF Members whose exports

have been the largest value over the previous five years and had been determined under

IMF Article XXX as a “freely usable”, i.e. “(i) widely used to make payments for

international transactions and (ii) widely traded in the principal exchange markets”

(Chelsky, 2011: 2). Currently, between the period from 2011 to 2015, the basket

composition is made of US Dollars (41,9%), Euros (37,4%), Yen (9,4%) and Pounds

sterling (11.3%).

More specifically, enhancing the role of the SDRs could pursue the following objectives:

Reduce the impact of exchange rate misalignments: the SDR basket of currencies

characteristic provides a less volatile unit of account and store of value than its

components when it is measured in domestic currency terms. This potential benefit

would allow the SDRs to play a central role in the international monetary system

evolution.

42

Develop a new reserve asset: issued by the Fund in sufficient volume, SDRs could

offer a safe haven in front of disorderly diversification out of the existing stocks of

assets.

Reduce reserve imbalances and strengthen the global safety net: SDRs allocations

could be used as a policy to incentive against the excess accumulation of reserves.

Furthermore, SDRs in a period of systemic crisis they can give confidence to the

market that the Member can access to foreign exchange funding without liquidating

assets in financial markets that may be impaired.

Give a greater role for emerging market currencies in the international monetary

system through their inclusion. Nonetheless expanding the basket too much could

increase the complexity of the SDRs, potentially reducing its attractiveness as a

reserve asset.

However, we may be cautious in considering SDRs potential benefits. An incredible reform

of SDRs and the international monetary system will be required. The current SDR holdings

are viewed as an imperfect reserve asset as long as they cannot be used directly for liquidity

provision or market intervention. There are political and legal constraints to expanding the

use of the SDRs, inter alia, the need for amendment of the Fund Articles to change the way

SDRs are allocated or the need for an 85 per 100 majority of voting power to agree with the

allocation. These obstacles may not be seen as impossible to achieve, but significant

political will and consensus across the Members would be necessary to address them.

As it is noted by Motomichi Ikawa (2009: 671–2) from Nihon University, China and its

proposal need to play a central role which implies some technically and politically

complicated matters that would require four gigantic steps:

1. Dispose of massive US dollar holding by China which in practice means to replace

existing reserve currencies with SDRs.

2. Reduce the current account imbalances between China and US to a manageable and

sustainable proportion.

3. Eliminate market perception of undervalued currency of rmb.

43

4. Step forward to a full scale reform of the international monetary system centred on

the SDR at one point of time.

In particular, the internationalization of the rmb and the reduction of the role of the US

dollar will be a complicated issue. Zhou Xiochuan proposal lacks a description of the role

to be played by the rmb or the internationalization of the rmb and it may seem odd to talk

about a future reserve currency system with a greater role of the SDRs without rmb

internationalization. Again, Ikawa (2009: 675–8) points out some similarities to the

Japanese experience of the internationalization of the yen. The author suggest the need of

strong leadership to deal with the liberalization of rmb transactions both on asset and

liability sides among non-residents, and this in turn necessitated the deregulation of cross-

border capital transactions. The Japanese experiences of the internationalization of the yen

can be summarized as follows:

It took more than 5 years, after the international role of the yen was first sparked in

discussion before foreign exchange controls were liberalized in principal (1979).

It took another 5 years before the internationalization of the yen was formally

pursued (1985).

It took around 10–15 years before the financial and capital markets were fully

liberalized with the “Foreign Exchange Control Law” (1998–9).

“If China were considered to be more or less following the experience of Japan, with a

different sequencing, it would be a matter of time, past the taboo period, before the country

more formally embarks upon internationalization” (Ikawa, 2009:676).

Meanwhile China and the rmb get their central role in the international monetary system,

there is also other technical issues that must be carried out inside of the IMF in order to

improve the current official SDRs. An IMF paper (2011: 8 – 10) outlines some of those

fundamental improvements. For instance to use safeguards in order to reduce the risk of

misuse by requiring a discussion of any planned use of SDRs allocation in Funds Article IV

consultations, taking into account the debt sustainability analysis. The creation of advisory

44

group of experts that could provide an independent opinion regarding the SDRs allocations.

To create contingent allocations with the purpose of use part of the SDRs allocations in

escrow for use only in case of systemic stress or shocks under the approval of the Executive

Board. To create a mechanism of annual allocations equivalent of 200 billion US dollars,

under the approval of the governors representing 85 per 100 of the voting power, with the

goal to raise SDRs as a proportion of reserves around of 13 per 100 in the early 2020s...

Among all those reforms there is one of the most important for guarantee the successfulness

of SDRs and it is the private use of SDRs.

The obstacle of private use of SDRs is also highlighted in the book of Eichengreen (2011:

244 – 251). The author explains that the usefulness of the current official SDRs is limited

as far as SDRs can be used to settle debts to governments and the IMF itself, but no for

other purposes. Making the SDR attractive would require building deep and liquid markets

on which SDR claims can be bought and sold. As a solution, building private markets in

SDRs-denominated securities will require sustained investments by the relevant

stakeholders, more precisely, governments. Eichengreen clearly specifies that “The first

governments issuing SDR bonds will pay a price, since investors will demand an interest-

rate premium to hold them. Bondholders will demand additional compensation for the

novelty of the instrument and its lack of liquidity. But nothing is free. That price will be an

investment in a more stable international system. Time will tell whether countries like

China are willing to pay it” (2011: 248). SDRs will not replace national currencies in

central bank reserves because it will not replace national currencies in other functions.

Indeed, for Eichengreen, the actual solution to the exorbitant privilege and the global

imbalances it just not (or not only) rely on the enhancement of SDRs. The SDRs as

international key currency may play a codeterminant role together in a new international

monetary system where other relevant currencies, e.g. the rmb and the euro, compete with

the US dollar monopoly in the world trade economy under the transactions of SDRs.

A similar conclusion comes out in a paper of Pietro Alessandrini and Michele Fraitianni of

Università Politecnica delle Marche where they also identify the “inherent weakness of the

current IMS is that it relies on an international money that is also a national money: This

45

dual role cannot be easily reconciled because the Fed faces a conflict between pursuing

domestic objectives of employment and inflation and maintaining the international public

good of a stable money” (2009: 22). The authors assess the SDRs scheme as weak as a

result of its marginal usefulness, instead of weak SDRs their proposal to enhance the

international monetary system rest on Supranational Bank Monies (SBMs), set by

supranational central banks, e.g. EMU, where “the mechanics of the SBM would be similar

to the SDR with a very critical difference: SBMs, unlike SDRs, would be a liability of a

supranational institution. Unlike SDRs, SBM would become supranational money for

central banks” (2009: 23).

To sum up, in order to give more stability to the international monetary system it is

necessary to step forward to a reform in the international monetary system through political

consensus and the amendments of the Funds Articles. The proposal of China of establishing

an international currency by enhancing the SDRs may be a good option but only if the

SDRs increase substantially their global allocation and they turn useful in the private

market. On the other hand, if the China proposal wants to make sense, the

internationalization of the rmb and its inclusion to the SDRs currencies basket may be seen

as another determinant need. A new rebuild international monetary system coexisting SDRs

with other dynamics of regionalism monetary unions will address the Triffin paradox and

the global imbalances.

46

CONCLUSIONS

“I do not know which makes a man more conservative - to know nothing but the present, or nothing

but the past.”

John Maynard Keynes30

From the early 1970s with the end of the Bretton Woods System, there has been a lack of

international monetary system to actually deal with the concerns of the international

financial and trade relations. The “exorbitant privilege” of United States and its currency,

i.e. the US dollar, of being the central reserve of liquidity to the world economy has

allowed the US to run large current account deficits pursuing domestic goals and

deteriorating global financial system by allowing global imbalances between the main

economies. Moreover, due to the negative consequences of the recent financial crisis, the

global exchange rate misalignments and China exchange rate policy have been under the

concerns of the global community. In spite of the fact that the Chinese exchange rate policy

is completely in accordance with the Funds Articles, many retractors of the China exchange

rate policy are willing to address the exchange rate concerns inside the dispute settlement

system of the WTO although exchange rates are not, stricto sensu, a subject matter of the

WTO.

30

From its essay “The End of Laissez-faire” (1926)

47

This research paper have tried to review the current debate on the reform of the

international monetary system which must address these and more other issues of

international political economy. We can summarize it with two completely different ways

to deal with the exchange rate misalignments and the global economic governance. One

called “the back door” and the other “the front door”.

On one hand, the “back door” way is that which tries to address the exchange rate

misalignments of the international monetary system through an international institution

which differs on its subject matter, the World Trade Organization. In spite of the fact that

the provisions found in the GATT and other texts of the WTO law which refers to exchange

rates policies are set in order to reflect the link and cooperation between the WTO and the

IMF as international institutions, some of those provisions never have been carried into a

claim in the dispute settlement system of the WTO. More precisely, those authors want to

deal with the exchange rate misalignments by linking some undervalued exchange rates

under the provision of GATT XV:2 of being a “frustrators” of trade objectives. Some other

authors are trying to link exchange rate misalignments to the SCM Agreement. Even

though that those ways to deal with the exchange rate misalignments does not look to have

a successful under the current normative of the WTO law, they are not exempted to be

tested in the WTO dispute settlement system in order to seek more clarification about the

scope and obligations of those provisions.

On the other hand, the “front door” way tries to adjust the exchange rate misalignments by

reforming the IMF, the institution which historically have dealt with exchange rates, and

enhancing the SDRs in order to solve the Triffin Paradox of the exorbitant privilege granted

by US. With the new role of international key currencies like SDRs in a context where

different currencies, e.g. US dollar, euro or rmb, are competing with each other, the use of

SDRs as a unit of account could mitigate the impact of exchange rate volatility through the

denomination of assets in SDRs and pricing international transactions and trade. One of the

main strong points of SDRs as a new reserve asset is its characteristic basket of currencies

from the economies with the largest value of exports revisable every 5 years as a hedge

against exchange rate volatility. Furthermore, SDRs balances can be used in exchange

48

among Fund Members and the supervision of the IMF to meet balance of payments deficits

with other countries in order to reduce the global imbalances. However, if the international

community wants to ensure the potential benefits of SDRs, it will be necessary to revise

some IMF Articles and a wide consensus between Fund Members in order to cooperate and

accord all the steps needed for the enhance of SDRs as attractive reserve asset. This implies

not only the political will to reform the international institutions, it also implies some

symbolic gestures by countries like China by internationalize its currency, the rmb. Another

difficult task it will be to step forward the future SDRs in the private market.

With this in mind, the exchange rate misalignments will require to be addressed by the

global economic governance. Whether if the reform is done by the “back door” or the

“front door”. Or maybe by both ways31

. But, in my opinion, in the 21st century the world

economy is growing more multipolar and, eventually, sooner or later a scenario of

multipolar international currencies will appear. As noted by Eichengreen “the shift away

from a dollar-dominated international system toward this more multipolar successor was

accelerated, no doubt, by the 2008 crisis, which highlighted the financial fragility of the

United States while underscoring the strength of emerging markets” (2011: 266). Truly,

since the end of Bretton Woods system, a reform of the international monetary system is

needed. Neither to remain in the current US dollar monopoly, to know nothing but the

present, nor to go back in the gold standard, or nothing but the past, are credible solutions

to face the ongoing requirements of the globalization. And must remind ourselves that

“trade cannot become the scapegoat for the pitfalls and drawbacks of the international

monetary system, or current non-system” (Lamy, 2012).

31

Another possibility, but politically hard to achieve, may be to address exchange rate misalignments with both institutions, WTO and IMF.

49

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