As per the principles of Law of Contract, trade or business is a process of enrichment for the business participants. A good business environment, which includes a good currency culture, ensures not only prosperity within the economy but also ensures peace and stability in the society. Hence, it is not a surprise that the preamble part of the World Trade Organization stresses upon the trade and economic endeavors, which infuses stability and sustainable development. The Preamble part of the WTO rules (i.e. Marrakesh Agreement Establishing the World Trade Organization) provides the following –

“Recognizing that their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment and a large and steadily growing volume of real income and effective demand, and expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment and to enhance the means for doing so in a manner consistent with their respective needs and concerns at different levels of economic development.”[1]  

In the area of international trade, currency and exchange rate play a pivotal role, but generally it has been mostly neglected by the researcher and lawmakers. Even while entering into any international treaty the lawmakers seldom discuss any potential threat of currency manipulation by any party to the treaty. There is a close nexus between currency manipulations and international trade. A currency manipulation occurs when a government buys or sells a foreign currency to push the exchange rate of its own currency away from its equilibrium value or to prevent the exchange rate from moving toward its equilibrium value. Besides government’s act, the acts of private players also have an impact upon the value of the domestic currency, e.g. the preferences made by the private parties for their investments and balance of the current account etc. A private player is further induced to sell foreign currencies whereas the domestic currency being sold off at a declined rate. If there is a legal barrier to hold the domestic currencies then the depreciation in the domestic currency will be steeper.  A case of currency manipulation challenges the very subsistence of the international currency regime and trade regime. Recently the business world has seen numerous cases of currency manipulations including the well-known case of (alleged) Chinese currency devaluation. According to an estimate, currency manipulations affect the flow of currencies worth $1.5 trillion per year. The major currency manipulation issue, which has been experienced by the world, recently are USA – China currency conflict, currency manipulation allegation on against Russia by USA and recent pullout by the Trump administration, USA from Trans-Pacific Partnership Agreement (“TPP”).[2]

It has been alleged by the United States that the policy of keeping the currency artificially devalued by China has the potential to make Chinese products cheaper and more competitive in the United States and simultaneously it makes the US products costlier in the domestic market of china. This price differential harmed the business of United States as the demand of the products manufactured by the United States declined and its manufacturing sector suffered very heavy losses. This loss has translated into millions of job losses in manufacturing sector of the United States which has worsened the sufferings of the United States post 2008. The United States criticism of Chinese policy reached to its culmination when the US lawmakers called China a “currency manipulator” (without formally designating China as a currency manipulator). The evolution of Chinese currency policy of devaluation against US dollar has invoked so many discussions among jurists, economists and policy makers. Being the largest trading partner of China, United States is particularly concerned about the Chinese currency devaluation as its market is flooded with cheaper Chinese goods and its trade deficit with China has been growing faster than ever. This trade deficit is an obvious burden on the US economy which is already struggling to come out of the recessionary trends. The USA noted the following in the relevant part of its report pertaining to currency manipulations –

Despite the effects of the global financial crisis, China’s economy has continued to grow rapidly in 2010, surpassing Japan as the world’s second largest economy this year. As a result, China has grown more assertive in pressing its interests in economic fora such as the International Monetary Fund (IMF) and the Group of Twenty nations (G–20). China maintains an export-driven economy through policies such as undervaluation of its currency, the Renminbi (RMB), and support for domestic companies to the detriment of foreign competitors. The Chinese government has been reluctant to revalue its currency due to its expressed concerns that it may damage its exporting industries, thus threatening social stability and continued economic growth. In order to support its export-promoting economic policies and suppress the value of the RMB, the Chinese government has continued channeling its foreign exchange earnings into U.S. government debt, becoming the single largest foreign purchaser of U.S. Treasuries. Although the size of China’s holdings has raised concerns about the degree of influence China has on the U.S. economy, the lack of alternatives and the potential detrimental impacts on China’s economy make it unlikely that China would stop buying U.S. debt or liquidate its holdings altogether.[3]

Currency Manipulations and Articles of Agreement (IMF)

The Article IV of the Articles of Agreement, International Monetary Fund deals with the issue of currency manipulations. It provides the general as well as four specific obligations for the parties. The general obligations of the parties as provided under Article IV is –

“Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.”[4]

The Article IV of the IMF can be conveniently divided into three parts – Preamble, General Obligations and Specific Obligations[5]. The Preamble part (or even the Section 1 of the Article) is not obligatory in nature. It merely provides the essential guidelines which are to be observed by the member nations while doing the trade with each other.

The general obligation of the member is to collaborate with the fund and other members so that a goal of stable and orderly exchange rate in the world could be achieved. At the same time, the International Monetary Fund provides the following four specific obligations[6] –

• Endeavour to direct its economic and financial policies towards the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
• Seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
• 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
• Follow exchange rate policies compatible with the undertakings under this Section.

The phrase “In particular, each member shall:” in Article IV links the general obligations of the members with the particular obligations. The phrase also indicates that the list of four specific obligations is not exhaustive and the general obligations are broader than the specific obligations.

Legal Remedies for Currency Manipulations

Currency manipulation has a very wide impact upon the international trade. The IMF regime provides the checks and balances over the exchange rate of any currency for the purpose of regulating the instances of currency manipulations.

Section 2 of the IMF mandates the member nation to notify any changes in its exchange arrangements.

Section 2. General exchange arrangements

(a) Each member shall notify the Fund, within thirty days after the date of the second amendment of this Agreement, of the exchange arrangements it intends to apply in fulfillment of its obligations under Section 1 of this Article, and shall notify the Fund promptly of any changes in its exchange arrangements.

Article IV, Section 1(iii) mandates that each 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

Bretton Woods – History and Negotiation –

IMF is the outcome of Bretton Woods agreement which took place immediately after the World War – II. It took birth after a hard negotiation, which had continued for many years. The Bretton Woods negotiation was also known as the Keynes and White plans. After the World War – II, USA emerged as the savior of the world. It was USA only among the major economies that could bail out the other nations for restoring the infrastructure. All the European nations, including United Kingdom, were badly ravaged due to the years long war. The post war economic situation had helped USD to get established as a world currency. However, it will also be wrong to say that the whole benefit of the USD ‘regime’ has been reaped by the USA only. United States strived to establish a multilateral and free trade regime; and such regime established by the USA has been largely benevolent which helped even the other European and  Asian nations to get benefitted by the free trade and economic liberalization.[7]

Distinctions between the White and Keynes Plans for a Monetary System White was in favor of a rule based monetary and exchange regulation system. However, simultaneously he was also in favor of keeping such rules flexible enough so that it could occasionally be controlled by the Central Banks. Hence, he preferred an exchange regime, which was to be “fixed but adjustable.” He was also the supporter of gold scale and supported the notion of pegging value of dollar with gold, like most of the economists of that time. However, Keynes differed with White; he had proposed that the levels of interference should be fixed if Central Bank has to intervene for regulating the currency exchange. During the Bretton Woods negotiation, both Keynes and White developed independent plans. Both of them worked hard to promote the political and economic interest of their respective countries. Both of the plans contained the value as well as flaws.

The Bretton Woods did not accept their plans as it was drafted by them. Rather the Articles of Agreement, that was the outcome of their plans, was the amended version of their plans. There were the fundamental differences between the Keynes and White plans. White wanted to protect the American interests and it was always in his back of mind that only a multilateral regime supported by the seamless trade could promote the interest of America. Contrarily, Keynes plan was more concerned about maintaining colonial preferences despite of the opposition by USA for such a system. Along with the multilateralism, the US authorities were also more concerned about establishing Dollar as an international currency. In response to the demand by the US governments, White came up with the Idea of World Bank and an ISF (i.e. International Stabilization Fund). On the other hand, Keynes was preparing a plan to create an ICU (International Clearing Union) which was to be prepared to challenge any possible dominance of Germany in the post war financial set up. The Keynes plan had several important technical advantages over the White plan, and these were frequently cited by the British delegation in the debates. First, under the Keynes plan, members could finance their deficits through the ICU; under the White plan, members acquired from the ISF the currencies of individual member countries to settle their bilateral deficits with those countries, but they could not use those currencies to settle deficits with third countries. This was so because ISF members were not required to make their currencies convertible into third currencies. A member might have an overall balance-of payments surplus and yet need to borrow a particular currency, but the White plan lacked a multilateral clearing mechanism by which to do so.[8]

FUND SURVEILLANCE

To prevent the cases of currency manipulation, the IMF undertakes Fund surveillance. The Fund surveillance is also known as Article IV consultation. Under Article IV of the IMF, Section 3 (a), the Fund is duty bound to ensure compliance from the member nation and the member nations are also bound to abide by the rules provided by the IMF under Articles IV of the Articles of Agreement. For the purpose of ensuring compliance under Section 3, of Article IV, the IMF has the right to institute a process of surveillance. In the process of surveillance the IMF supervises and even advises the member nations over its exchange rate policies [under Section 3 (b) of IMF]. The Section 3 (b) of Article IV, Articles of Agreement, International Monetary Fund provides –

Section 3. Surveillance over exchange arrangements –

• (b) In order to fulfill its functions under (a) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members. The surveillance is undertaken by the IMF may be bilateral or multilateral (or integrated surveillance). Under the bilateral surveillance the staffs of IMF visit the concerned member nation and collect information about the macroeconomic policy of the country such as fiscal policy, exchange rate, soundness of economy etc. A report is prepared by the IMF mission and its summary is referred to the executive board for its discussions. If the member nation is agreed with the report the findings and observation in such report is adopted and its summary is published. While preparing the report the socio-economic-political
situations are also taken into account.

China Exchange Rate Policy and International Law 

Since the time of Jean Bodin (16th Century) power over money has been recognized as the core element of statehood and sovereignty. Emergence of currency exclusive to a particular territory is closely seen as the formation of the modern nation state. In various cases the Permanent Court of justice has also   held that generally accepted principle of public international law recognizes that a country has a right to regulate its own currency.

The public international law confers a sovereign right to a country to determine its exchange rate policy and the value of its currency. Since long China has maintained that it is its sovereign right to decide the value of its currency and which is entirely an internal matter and exclusion to the any external scrutiny. Noted economist Mussa calls this argument as nonsense and absurd. Mussa suggests that the value of the currency of one country is measured in terms of the value of the currency of the other hence it falls within the ambit of logical absurdity.  Hence a country alone could not decide its value of its currency its own without affecting the rights of others.

Many academicians, though, think differently. Many argue that a party is not simply deprived of his rights simply because it conflicts with the right of another party. Same is applicable in case of rights of the nation also and an inference can be drawn that if there is the impossibility to arrive at a logical compromises the accused to be allowed to maintain its status quo.

Currency Manipulations and IMF – WTO

The argument that a country is entitled to exercise complete sovereignty over its exchange rate is neither palatable nor desirable for the development of a healthy business environment. The positions as adopted by various international treaties, including IMF and WTO, are the idea of governing the currency may not be purely a domestic affair.

An analysis of Article IV of revised Articles of Agreement of the International Monetary Fund gives an idea that it contains the Preamble of the obligations of the members, general obligations and four specific obligations. The preamble provides the essential purpose and principle objective of the international monetary system. The essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth whereas a principal objective is the continuing development of the orderly underlying conditions that is necessary for financial and economic stability.  Hence, the preamble assumes that the underlying motive of the general obligations as it is set forth in Article IV, Section 1, to enhance the effectiveness and functioning of the international monetary system to contribute to the realization of the broader economic benefits as identified in the Section. Even though the Preamble does not impose an obligation on the member nations, it provides important guidelines to interpret the various clauses of Art IV.

WTO has rules against subsidies though it is not sure if it encompasses the area of currency manipulations because the export subsidy rules of WTO are applicable on the basis of the specific sector of trade. Nowadays it is greatly debatable whether currency issues fall under the ambit of WTO. 

Conclusion –

WTO has rules against subsidies though it is not sure if it encompasses the area of currency manipulations and there are reasons for it.  There is the difference of impact of a currency manipulation and export subsidy on the economy. The export subsidy is just specific to a particular sector or industry, whereas a case of currency manipulation affects all the sector of the industry.

After having discussed the IMF provisions, it can be said that the existing IMF regime is not sufficient to deal with the currency manipulations cases. The present IMF regime does not provide conclusive remedies or dispute settlement mechanism for currency manipulations. It is also not a surprise that IMF has not declared any of its member as the currency manipulator despite of the several instances of selfish exchange rate policies. This attitude of IMF makes its legal regime as a weak law. The reason is, the IMF provisions seem vague in nature with regard to the currency manipulations, which reduces it merely to a soft law. The IMF does not specifically defines properly some terms like “manipulations”, “unfair trade advantage” etc. on which the law relating to currency manipulation have been laid upon. Even though IMF provides some mandatory provisions regarding compliance but it has no dispute settlement mechanism. The WTO has its own dispute settlement system but there is a lack of clarity whether WTO has any role to play at all in the cases of currency manipulations, and the policy makers are badly divided on this issue in the world over which gives rise to gap in the law relating to currency manipulations.

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[1] Preamble, Marrakesh Agreement Establishing the World Trade Organization.

[2] US President Mr. Donald Trump on 16th April 2018, 8:31 PM – “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” See https://www.businessinsider.in/Trump-launches-peculiar-attack-on-China-and-Russia-for-playing-the-CurrencyDevaluation-game/articleshow/63787190.cms (accessed on 17.11.2018).

[3]2010 Report to Congress of the U.S.–China Economic and Security Review Commission One Hundred Eleventh Congress Second Session, 1, November 2010.

[4] Section 1 of Article IV, Articles of Agreements, IMF

[5] IMF, Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework, p.7, Legal Department, In consultation with the Policy Development and Review Department (2006).

[6] Section 1 of Article IV, Articles of Agreements, IMF

[7] Dr. Ajit Kaushal at 41, Corporate & Commercial Law Review, MNLU,Vol 1, Issue 1, 2018

[8] Id at 44.