It has long been recognized that the Bretton Woods system no longer serves the contemporary international trade order. As Frieder Roessler concluded in his piece "The Relationship Between the World Trade Order and the International Monetary System" (see Chapter 7 of his book, "Essay on the International Structure, Functions and Limits of the World Trade Order" (Cameron May 2000)):
The primary aim of the architects of the International Monetary Fund was to achieve currency convertibility and stability. They decided to introduce fixed exchanged rates so as to ensure that the competitive devaluations of the 1930's would not recur. They were ready to sacrifice to some extent trade liberalization for this purpose. The General Agreement was therefore carefully drafted to ensure that the Fund retained full control over exchange controls and that trade restrictions could be imposed, if necessary, to maintain exchange rate stability.Today, all major currencies are convertible into each other. Exchange rates are no longer fixed. The fear of competitive devaluations that had haunted the creators of the Fund has given way to frustrations over insufficient devaluations. The rules governing the relationship between the world trade order and the international monetary system are thus no longer needed for the purposes for which they were originally drafted.
Roessler's piece was written before the WTO was established. Since then the status of law in this area hasn't changed despite the formal agreements between the WTO and the Fund to strengthen their coordination. The China currency controversy in recent years only highlights the lack of proper rules in regulating the relationship between exchange rates and trade.
It will be a daunting task to replace the Bretton Woods system with a new legal framework for the contemporary world in which both floating and fixed exchange rates are practiced. The task cannot be undertaken by the WTO alone, since it lacks expertise in making monetary and financial policies. Although the IMF presumably has such expertise, it may not be up to the task either - the Fund is increasingly losing its relevance in a world that is flush with cash and liquidity.
The problem is one of macroeconomics. In a globalized economy, what is the net effect of exchange rates on a national economy? Do we have any workable benchmark in judging what the proper exchange rate should be for a currency? In fact, do we even know what the principles are or should be? For example, is stability still a primary goal for the international monetary system? (If the answer is yes, then China's maintenance of a stable exchange rate for the last 13 years, including the period of turmoil during the Asia Financial Crisis, should be commended.) If stability is no longer a primary goal, then why should fixed exchange rates or pegging be allowed to exist at all? Or should we distinguish pegging maintained by a currency board (as practiced in Hong Kong) from that maintained through government intervention in the currency market (as in China) because the latter requires government action on a daily basis? If the criterion is whether government action is involved in setting the exchange rate, then what about central bank's adjustment of interest rates which directly affects the exchange rate of a currency? In this regard, also consider the effect of the strong (or weak) dollar policy pursued by the US government.
If the United States enacts domestic law to allow CVD to be used against "currency subsidies," then such law needs to be consistent with the SCM Agreement. If China were to challenge the US measure at the WTO, then the panel and the AB would be required to interpret the SCM in the context of exchange rate policies. Since the SCM was not designed to deal with such issue, the WTO judiciary could be compelled to either fill a huge gap clearly outside its competence, or declare non liquet. Either way, the result probably would not be good for the WTO system.
On the other hand, a "crisis" triggered by the US measure could prompt the world community finally to focus on this void in international economic law. Remember the effect of US Section 301 on the development of the WTO legal framework?
