A law of many meanings: Exchange Actions under the GATT and IMF
Earlier this week, Simon Lester posted about the EU’s concerns with the undervaluation of the Chinese currency. He situated the recent demands for trade restrictions against a longstanding debate about the function of GATT Article XV:4, which states:
Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.
The asterisk leads us to a note clarifying the term “frustrate”:
The word “frustrate” is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a contracting party which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a contracting party which specifies on an import licence the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.
The point of this post is to encourage thinking about how we read current trade restrictions in the context of rules written in the 1940s, given a different system of fixed exchange rates, in which a balance-of-payments deficit meant something else.
The architects of the ITO/GATT discussed the need for close institutional coordination, as quotas and exchange controls both restricted trade. Therefore, there was a desire to prevent circumvention of the prohibition on the use of quotas by employing exchange controls. The drafters foresaw a cooperative relationship between the ITO and the IMF, which is why the provision addresses the frustration of the intent of the rules governing quantitative restrictions and the intent of the IMF’s Articles of Agreement (entered into force December 27, 1945). Imagining a close partnership between the agencies, the ITO would consult the Fund on financial matters, and ITO Members could seek permission from the Fund to impose exchange controls (as set out in Article XV:9). A concern about the United States voting power in the IMF, owing to the Fund’s weighted voting system, did not go by unnoticed.
The Interim Commission for the ITO outlined a future institutional relationship in a draft 1948 agreement concerning the relations between the ITO and the IMF. The institutions would coordinate on ‘rules governing the conversion by Members of currencies of countries which maintain multiple rates of exchange’, consistent with the IMF’s articles or a special exchange agreement.
Per the 1948 interim arrangement, the IMF would coordinate reports required under Article XIV of the Articles of Agreement, which governed the ‘transitional period’ following the war. In this context, where governments had to ‘adapt to changing circumstances’ members would need to impose restrictions on payments and transfers. In the interest of returning to ‘commercial and financial arrangements with other Fund members’ and the ‘maintenance of exchange stability’ with them, governments were to withdraw exchange restrictions ‘as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund’ (article XIV(2)). As Roessler explained, the function of Article XIV, lacking a definition for ‘transitional’, empowered Fund members to ‘determine [for] themselves when their economic conditions permit currency convertibility.’
Sub-paragraph (4) of Article XIV of the IMF Articles of Agreement (AoA) confirms the IMF’s role concerning exchange restrictions. Though governments could determine for themselves the necessity of restrictions in transitional periods, the IMF could ‘if it deems such action necessary in exceptional circumstances, make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions, inconsistent with the provisions of any other article of this Agreement.’ Fund members would have time to reply and the Fund could then determine whether a member’s decision to maintain restrictions are then ‘inconsistent with the purposes of the Fund.’ If so, the Member would be subject to AoA Article XV(2)(a) – which empowered the Fund to ‘declare the member ineligible to use the resources of the Fund’ on the basis it has failed to fulfil its IMF obligations. If this failure to meet IMF obligations persisted, the IMF member would be ‘required to withdraw from membership in the Fund by a decision of the Board of Governors carried by a majority.’
The IMF thus had oversight over governments’ exchange actions. With a formal agreement between the ITO and the IMF, stronger coordination could have been built into the GATT’s architecture. Instead, the GATT lacked a formalised process for linking up on exchange matters affecting trade. Roessler described the original relationship as asymmetrical, with GATT consultation procedures set out in informal arrangements, made through exchanges of letters between the Chairman of the GATT Contracting Parties and the Fund’s Managing Director. For Roessler, the inability to formalise the necessary coordination meant that neither body could govern exchange actions ‘speedily, discreetly, and authoritatively’ (645). The GATT would have to depend on IMF coordination, for it operated under a different compliance structure.
One relevant example of that coordination occurred in 1971, concerning the United States’ temporary import surcharges announced by President Nixon. Before the GATT Council, the United States argued that its balance-of-payments (BoP) deficits had created, over a decade, ‘severe’ and ‘persistent’ distortions, combined with ‘eroded’ reserves and a trade deficit, had ‘jolted’ the United States into action. The 10 per cent import tariff rate increase was applied on an MFN basis and would be a temporary measure within a broader programme. The United States took the position that it was ‘entitled under Article XII to apply quantitative restrictions’ but had chosen instead to apply higher tariff rates, ‘which were less damaging to world trade.’
Upon review, the IMF found that ‘in the absence of other appropriate action, and in the present circumstances, the import surcharge can be regarded as being within the bounds of what is necessary.’ When asked, the IMF representative could not offer any alternative measures to improve the United States’ BoP.
By contrast, the GATT Working Party concluded the trade restrictions were ‘inappropriate given the nature of the United States balance-of-payments situation’ and the ‘undue burden’ placed on other Contracting Parties. Members of the Working Party urged consideration of the ‘full findings’ of the IMF, noting that movements of capital funds of multinational corporations ‘played an important role’ in the United States BoP situation – and the fact that foreign direct investment came with the substitution of US exports with manufacturing facilities abroad. Seeing ‘massive outflow of short term capital’ as ‘the most important and immediate cause’ of the US BoP deficit, import restrictions were just the wrong medicine for the US’s ills. These Working Party Members found that import restrictions were ‘counterproductive in relation to the objective of fostering price stability and increasing export and industrial competitiveness, apart from being damaging to the interest of other contracting parties and undermining the world trading system.’ The Working Party ‘urged’ the United States to continuously review its circumstances and remove the import surcharge ‘within a short time.’
With this brief history in mind, how might it colour a contemporary interpretation of GATT Article XV? In practice, the GATT Council would validate surcharges that complied with IMF recommendations, even if they were also found to be GATT-inconsistent. The IMF held competence and enforcement powers over exchange actions, and therefore, the GATT deferred to its recommendations.
A few years later, in a separate issue, Spanish representatives engaged in consultations concerning its BoP situation, finding that the GATT BoP Committee had followed the IMF determinations ‘too strictly’ and raised concerns about Spain’s economic development. Some Contracting Parties were sympathetic to Spain’s arguments and ongoing efforts to progressively liberalise. The consultation revealed slightly competing interpretations of Article XV:2, with some representatives understanding the consultations as one element of GATT assessment. However, the United States representative declared that Article XV:2 ‘obliged’ the Contracting Parties ‘to accept the determination of the IMF.’
We might read GATT Article XV:4 and the Note in a different light, imagining the GATT Council as understanding its coordination with, and deference to, IMF authority in these exchange matters. Yet the United States case, albeit briefly introduced, illustrates the tensions that can arise, leaving trade governance the loser (so to speak). Roessler criticised the ‘division of labour between the GATT and the Fund,’ finding that GATT ‘Article XV therefore provides no protection against frustrating exchange action approved by the Fund.’
Another issue is whether it matters that the preferred techniques for adjusting exchange rates today were foreseen by the GATT drafters. Do Members today require added rules and criteria respecting each potential technique? Is it enough that there was a commitment to consult and coordinate with the IMF on all monetary matters, regardless of what the drafters knew? How important is it that the exchange system looked wildly different?
In recent discussions with a colleague, I was reminded of the difference between legal history and legal interpretation. I always find it helpful to better understand how the architects of the ITO/GATT legal regime understood the meaning and function of norms and rules, particularly because they foresaw that consultation with the official drafting documents would be useful in early diplomatic consultations. But today, an international lawyer might say such history is contextual and offered only as a subsidiary source in narrow circumstances.
Paul Kahn, thinking of Robert Cover’s work, wrote that the law has many meanings, which explains why the law is what it is. Kahn wrote that ‘a community that understands a unique, normative past will understand itself as carrying that set of meanings into the future.’ If legal interpretation empowers a community to choose meaning, giving in to the idea that norms are ‘essentially contested,’ then there may be no reason to find them outdated, lost in the dusty box marked for the charity shop. On the other hand, we might think more practically and argue that not every term can live on – some are tethered by roots which hold firm, until state practice proves otherwise. The point was not to highlight past wrongdoing through temporary surcharges imposed by the United States (that may have been a happy accident). But beyond interpretation, we might consider the conceptual structure at play and what the group of WTO Members, as a community, finds integral. It may not be then we need to point to the IMF and demand action, or abandon hope of a conversation about China at the WTO. Instead, history suggests the only way for a community to figure out whether the interpretation reflects the community is to get on with the business of talking about it. Article XV:4 provides one opportunity for doing so, but there may be others as well.