From a recent Congressional Research Service (CRS) report by Jonathan Sanford on Currency Manipulation: The IMF and WTO, here is some brief analysis of WTO legal issues.
SCM Agreement Articles 1-3:
Whether currency disputes fall under the WTO’s jurisdiction is a debatable issue. The WTO rules specify that countries may not provide subsidies to help promote their national exports. Most analysts agree that an undervalued currency lowers a firm’s cost of production relative to world prices and therefore helps to encourage exports. It is questionable, however, where currency undervaluation is an export subsidy under the WTO’s current definition of the term.4
The term “subsidy” has a precise definition in the WTO. It requires that there must be a financial contribution by a government to the exporter or some other form of income or price support. Government financial support can take a variety of forms, such as direct payments to the exporter, the waiver of tax payments or special government purchases or the provision of low-cost goods or services (other than general infrastructure) that lowers the cost of production. Currency manipulation would not appear to qualify under the WTO definitions.
In addition, an export subsidy is a subsidy that is “contingent on export performance.” In the case of an undervalued currency, everyone who exchanges money will be affected by the current exchange rate no matter whether they are buying or selling and no matter whether or not they are involved in international trade. While subsidies must be “specific to an industry” to be actionable in the WTO, a prohibited subsidy, such as an export subsidy, is considered to be specific per se.
GATT Article XV:
As it is used in GATT Article XV, the term “exchange arrangement” refers to issues that are the sole province of the IMF. Thus, one could argue that the meaning of the term in the GATT should reflect its current meaning at the IMF and not the meaning prevalent in 1947. An undervalued currency encourages exports by reducing their cost and it discourages imports by making them more expensive than they might be otherwise. Consequently, one might argue that countries with this type of exchange arrangement are engaging in “exchange action” that may have the effect of frustrating “the provisions of the [GATT] agreement.”
There has never been a definitive ruling by the GATT or WTO on the meaning of Article XV,
including how provisions of the GATT agreement might be frustrated by exchange action. Some might argue that currency undervaluation raises the price of imports in a way that unilaterally rescinds tariff concessions approved during multilateral trade talks.Accordingly, a case could be made that the WTO should use the broader meaning of the term “exchange arrangements” and take currency valuation arrangements into account in its dispute settlement process. There has also been increased interest, in recent years, in the issue of currency manipulation and its impact on world trade and financial relationships. It could be argued, therefore, that this might be an appropriate and perhaps auspicious moment for issues relating to the trade impact of currency manipulation to be raised in the WTO dispute adjudication process.
