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Is China's Manipulation of Its Currency an Actionable Violation of the IMF And/Or the WTO Agreements? Elizabeth L

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Is China's Manipulation of Its Currency an Actionable Violation of the IMF And/Or the WTO Agreements? Elizabeth L Journal of International Business and Law Volume 10 | Issue 2 Article 4 2011 Is China's Manipulation of Its Currency an Actionable Violation of the IMF and/or the WTO Agreements? Elizabeth L. Pettis Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/jibl Recommended Citation Pettis, Elizabeth L. (2011) "Is China's Manipulation of Its Currency an Actionable Violation of the IMF and/or the WTO Agreements?," Journal of International Business and Law: Vol. 10: Iss. 2, Article 4. Available at: http://scholarlycommons.law.hofstra.edu/jibl/vol10/iss2/4 This Legal Article is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Journal of International Business and Law by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Pettis: Is China's Manipulation of Its Currency an Actionable Violation o IS CHINA'S MANIPULATION OF ITS CURRENCY AN ACTIONABLE VIOLATION OF THE IMF AND/OR THE WTO AGREEMENTS? By Elizabeth L. Pettis* For decades a controversy has been raging in Washington regarding the undervalua- tion of China's currency. Many economists, politicians and business leaders argue that China has, and continues to, manipulate the value of its currency in order to promote the growth of its exports while protecting its domestic industries from international competition. The basic argument is that this undervaluation keeps the price of Chinese goods low and the prices of goods produced in other countries out of reach of the average Chinese consumer. This under- valuation, it is thus argued, gives Chinese exporters an artificial trading advantage that is unfair, damaging both the US economy and the global trading system. With the deepening of the Great Recession, the rhetoric of American labor unions, economists and politicians regarding this issue is getting more intense. In March 2010, the Economic Policy Institute (EPI) released a report that found that "China's artificially low currency is a major reason for the lopsided US-China trade balance and that gap eliminated or displaced an estimated 2.4 million US jobs between 2001 and 2008."' On September 20, 2010, EPI released another report that predicted the undervaluation of Chinese currency "will cost one-half million US jobs in 2010.",2 Most recently, on October 10, 2010, economist Dr. C. Fred Bergsten, of the Peterson Institute for International Economics, stated that China's currency actions "have unleashed worldwide currency conflicts that threaten to replicate the spiral of competitive devaluations that deepened the Great Depression in the 1930s." 3 These experts and politicians are now calling for the Obama Administration to act. Among other things, it has been recommended that the Treasury Secretary label China as a currency manipulator under the Omnibus Trade Act of 1988, the Treasury file a complaint with the Executive Board of the International Monetary Fund ("IMF") alleging that China is unfairly manipulating exchange rates in violation of the IMF Agreement, and the Office of the United States Trade Representative ("USTR") file a complaint with the World Trade Organi- zation ("WTO") alleging that China's manipulation of the value of its currency violates the General Agreement on Tariffs and Trade and/or the Agreement on Subsidies and Counter- vailing Measures. Both houses of Congress have also taken their own independent steps to address the controversy. On March 17, 2010, Senators Charles Schumer (D - N.Y.) and Lindsey Graham * Elizabeth Pettis, is an associate attorney at R.L. Hicks & Associates in Harrisburg, PA practicing corporate law. She would like to thank Dean Billie Joe Kaufman of the American University Washington College of Law for her assistance as faculty advisor on this article. She would also like to thank Dr. Aluisio Lima Compos and Professor Marisa Ferreira for their superior instruction and guidance in international trade law and their encouragement and support on this article. I Robert E. Scott, Unfair China Trade Costs Local Jobs, EcON. POLICY INsT. (2010), available at http://epi. 3cdn.net/9lb2eeeffce66clal0_v5m6beqhi.pdf [hereinafter "Unfair China Trade Costs Local Jobs"]. 2 ROBERT E. Scorr, Rising China Trade Deficit Will Cost One-Half Million U.S. Jobs in 2010, 1 EcoN. POLICY INST. (2010), available at http://www.epi.org/page/-/pdf/ib283.pdf 3 Dr. C. Fred Bergsten, Editorial, Topic A, WASH. PosT, Oct. 10, 2010, at A17. 281 Published by Scholarly Commons at Hofstra Law, 2011 1 Journal of International Business and Law, Vol. 10, Iss. 2 [2011], Art. 4 THE JOURNAL OF INTERNATIONAL BusiNEss & LAW (R - S.C.), introduced a bill that would, according to Senator Schumer, "make it easier for the Department of the Treasury to cite the Chinese by finding currency misalignment rather than manipulation." 4 Similarly, on October 1, 2010, the House of Representatives passed the Cur- rency Reform for Fair Trade Act (H.R. 2378) which would "direct the Commerce Department to treat Chinese currency undervaluation as a prohibited subsidy" under current US trade law.5 On the other side of the debate, some experts argue that the US cannot or should not do anything about China's manipulation of its currency. These experts assert, among other things, that China's currency policy is not in fact prohibited by the IMF or WTO Agreements, does not warrant action because it will not significantly impact the global trading system in the long term, or that unilateral US action will be deemed prohibited by a WTO dispute resolution panel and will divert the world's focus from China's actions and refocus it on the US' habit of taking unilateral action rather than developing international solutions. This paper will examine US options for challenging China's currency manipulation under the IMF Agreement, Article XV(4) of the GATT or the Subsidies and the Counter- vailing Measures Agreement ("SCM Agreement"). It will assess the relative strengths and weakness of each option and will conclude by recommending a course of action that may not quickly resolve the problem but will clarify the law on this issue or will clearly identify the form of currency manipulation utilize by China as an issue that must be resolved by agree- ment among the G-20 and/or the member states of the WTO. I. BACKGROUND Experts say that between 1994 and mid-2005, the Chinese government pegged the value of the renminibi ("RMB") at a rate of 8.28 RMB to a US dollar.6 Between 2005 and 2008, due to pressure from its trading partners and the IMF, China allowed the value of the RMB to appreciate between 20 to 25 percent as compared with the value of the US dollar.7 This increase in value was facilitated through China's shift to a policy in which it loosely pegged the value of the RMB to a "basket of major currencies" that included the US Dollar, the Euro and the Japanese Yen.8 Since the beginning of the economic crisis in 2008, however, China has reverted back to its previous policy of pegging the value of the RMB to the value of the US dollar. Currently, the peg is at an exchange rate of approximately 6.83 RMB to a dollar.' China would likely argue that the whole world has benefited from the economic and monetary ac- tions it took in the wake of the collapse of the American housing and financial markets. More precisely, it would argue that the swift recovery of the Chinese economy, due to its exports 4 Aaron Lorenzo & Amy Tsui, Schumer Says Report on Cost of Weak Yuan Justifies Bill to Fight Currency Manipulation,27 ITrr'L TRADE REP. 424 (2010). Amy Tsui, Reps. Ryan, Murphy Circulate Draft Letter Asking for Vote on China Currency Measure, 27 Ir'L TRADE REP. 1296 (2010). 6 Robert W. Staiger & Alan 0. Sykes, Currency "Manipulation" And World Trade: A Caution, Vox, (Jan. 30, 2009), http://www.voxeu.org/index.php?q=node/2934 [hereinafter "Staiger & Sykes"]. Correcting the Chinese Exchange Rate: Hearing on China's Exchange Rate Policy Before the H. Comm. On Ways & Means, IIIth Cong. 1 (2010) (testimony of Dr. C. Fred Bergsten, Director, Peterson Inst. For Int'l Econ.). 8 Staiger & Sykes, supra note 6, at 109. 9 Id. at [1. 282 http://scholarlycommons.law.hofstra.edu/jibl/vol10/iss2/4 2 Pettis: Is China's Manipulation of Its Currency an Actionable Violation o CHINESE CURRENCY MANIPULATION and other economic recovery measures, has helped other nations' recover as well. Most econ- omists agree with this assessment. For example, Mark Zandi, Chief economist at Moody's Economy.com, suggested that "Chinese authorities reasonably halted further appreciation of the RMB" when the global panic hit.1 o But the global economy and the Chinese economy have been stabilized and are now growing again. In fact, the Chinese economic growth has been so impressive that China announces figure earlier this year that show that it is now the world's second largest economy. The Organization for Economic Co-operation and Development ("OECD"), in its 2010 Economic Survey of China, recommended that the Chinese release the RMB's peg and allow it to continue appreciating.II Additionally, on July 27, 2010, the IMF said that the RMB is "undervalued" and is "substantially below the level that is consistent with the level of medium-term fundamentals." 1 2 Prior to Toronto summit of the G-20 in June 2010, the Chinese government seemed to be responding to increased international concern about the undervaluation of its currency. China publically announced that it was removing the RMB's peg to the dollar and would widen the band around which its currency could fluctuate.
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