MILE 14

ENVIRONMENT

TAMIOTTI, STEINFATT

STUDENT ID: 14010

Assessment:

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Page 2 of 11

THE SHOE DOESNT FIT: THE SUBSIDIES AGREEMENT AND CURRENCY

MISALIGNMENT

Monetary policy and trade policy are intrinsically different: the first considers trade (and
capital account) balances, and the latter, the level of trade flows.1 Exchange rate
misalignments are expected to self-correct automatically, over relatively short periods of time,
especially with floating exchange rates.2 However, in a world where, worldwide, government
intervention through monetary policy is quantitatively larger and sustained over longer time, 3
than before, the value of money will inevitably impact trade relations generally in the form
of immediate price signals,4 and volatility, but also indirectly, through trade finance, inflation,
purchasing power, etc, which restructure the economy over time.5
Real undervaluation effectively levies a tax on consumption goods, as consumers must defray
the additional (real) cost of imports.6 Exporters, of course, benefit. But countries can be
reluctant to reduce trade barriers, fearing subsequent appreciation and capital market
volatilities.7 A situation

of overvaluation,

normally reduces

a countrys export

competitiveness, until the currency realigned itself. In the case of the US Dollar, import
transactions being denominated in Dollars, the short-run effect of nominal depreciation
would be a worsening of terms of trade, even if its current account balance would improve as
a result.8 While the economic fundamentals of the Dollar may be weak, 9 it appears capable of

pp.100-101, C Fred Bergsten & John Williamson, Exchange Rates and Trade Policy in William R. Cline, ed.,
Exchange rates and trade policy (Washington DC: IIE, 1983).
2

Ibid, at p.110.

Positive-sum
currency
wars
(2013)
The
Economist,
http://www.economist.com/blogs/freeexchange/2013/02/what-qe-means-world (5 June).
4
Ibid.

online:

p.2, WTO, The Relationship between Exchange Rates and International Trade: A Review of Economic
Literature, Note by the Secretariat WT/WGTDF/W/57 (WTO, 2011).
6
Ibid at p.11.
7
8

See note 1 at p.103 and 110.

p.12, Gian Maria Milesi-Ferretti, Fundamentals at Odds? The Dollar and The US Current Account Deficit
(2008) Prepared for the Siena Conference on the Impact of Global Financial Imbalances, Siena, Italy, September,
online: http://www.cirje.e.u-tokyo.ac.jp/research/workshops/macro/macropaper08/macro1016.pdf (5 June).
9
C Fred Bergsten, Rescuing the Doha Round (2005) Institute for International Economics, online:
http://sxpekzi.iie.com/publications/papers/bergsten1205.pdf (5 June). See also, International Monetary Fund,
Global Economic Prospects and Policy Challenges, Meetings of G-20 Finance Ministers and Central Bank
Governors, Paris, February 1819, 2011, online: http://www.imf.org/external/np/g20/pdf/021811.pdf (5 June).

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sustaining a larger current account deficit, given its use as a reserve currency, and as a safe
haven. The Dollar also has more contagion effects than most currencies.10
The Dollar partially reflects the larger complexity of a world economy with lower barriers to
international investment and trade, which increases contagion and confuses monetary policymaking. Foreign individuals are no longer merely importers and exporters, but are also
investors and exporters who use imported inputs and their interest in appreciation or
depreciation of their domestic country, their wealth and their countrys wealth, changes
accordingly. For all these countries, currency wars may actually be a positive-sum game. 11
To justify countervailing duties, the existence of a subsidy, despite these ambiguous effects,
needs to be proved.
Currency Misalignment and trade
Economic theory suggests that only unsterilized intervention 12 must be actionable as a trade
concern.13 While overvalued currencies may combine monetary intervention with
protectionism,14 undervalued currencies face criticism as effectively subsidizing their imports
as a mercantilist strategy.15
It seems that using the word subsidy, differentiates these claims from those that could be
otherwise made under Article XV of the General Agreement on Tariffs and Trade (GATT),
1994. As Article XV refers to currency action that frustrates trade commitments, 16 which
corresponds with the IMF notion of currency manipulation, a complainant would have to
struggle to prove a concept which has no accepted economic or legal definition.17
Is an active intervention like Quantitative Easing (QE), currency manipulation? Some argue
that QE involves no demand-switching from foreign products to domestic products, and it is a
10

Arvind Subramanian, International Impacts of the Federal Reserves Quantitative Easing Program, Prepared
testimony submitted to the House Committee on Financial Services Subcommittee on Monetary Policy and
Trade,
Washington
DC,
9
January
2014,
online:
http://www.iie.com/publications/testimony/subramanian20140109.pdf (5 June).
11
See note 3.
12

See note 3.

13

See also, note 1 at p.102, and note 9.

14

See note 9.

15

See note 10

16

p.20, Vera Thorstensen, Emerson Maral & Lucas Ferraz, Trade Rules And Exchange Rate Misalignments: in
search
for
a
WTO
solution
(2013),
online:
http://www.zoww.iie.com/publications/papers/thorstensen20130402.pdf (5 June).
17
p.2, C Lim, The Law Works Itself Pure: The Fragmented Disciplines of Global Trade and Monetary
Cooperation, and the Chinese Currency Problem (2013) Available at SSRN 2254739, online:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2254739 (5 June).

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domestic, rather than a foreign, policy.18 Because of this, it is often treated as an implicit
export stimulus.19 Others treat both as protectionist measures.20
Even undervaluation cannot unequivocally be termed manipulation. The value of the
currency is an expression of the budgetary position deficit or surplus and countries are
sovereign in these matters. Article IV of the IMF Articles of Agreement was intended to
preserve some level of independence in these matters. 21 Demonstrating that an intentional22
intervention on the part of a foreign government, acting perhaps to tackle domestic deficit or
other fundamentals, frustrates the intent of GATT, is obviously difficult.23 Moreover, a
dramatic appreciation of currencies like the Remnimbi will affect the American economy,
maybe upsetting the precarious balance-of-payments position, as demand for its exports and
inflows of foreign investment, both, constrict. Undervaluation is the focus of this paper.
The notion of a subsidy becomes useful, because it invokes notions of self-defence, or
playing fair, to justify unilateral action in difficult situations. 24 Measures such as H.R.1276,
the Currency Reform for Fair Trade Bill 2013, consider that trade remedies under WTO
already permit unilateral action against fundamentally undervalued currency enjoying
protracted large-scale intervention by its government.25

Currency intervention as a Subsidy

18

See note 10 at p.12.

19

See note 16.

20

p.207, Gottfried Haberler, Comments, Chapters 1-6 in William R. Cline, ed., Exchange rates and trade
policy (Washington DC: IIE, 1983).
21
See note 17 at p.6.
22
23

See Ad Note to Article XV:4, GATT.

Dukgeun Ahn, Is the contemporary Chinese exchange-rate regime WTO-legal?, (16 April 2010), online:
VoxEU.org http://www.voxeu.org/article/chinese-exchange-rate-regime-wto-legal (5 June).
24
See note 17 at p.3. See also, on the role of Article XV:4, GATT read with corresponding Ad Note, as an
additional condition to prove GATT violation, Simon Lester, More on GATT Article XV:4, (21 March 2010),
online: International Economic Law and Policy Blog http://worldtradelaw.typepad.com/ielpblog/2010/03/moreon-gatt-article-xv4.html (5 June).
25
Currency Reform for Fair Trade Act of 2013, Sander M Levin, 19 March 2013 [H.R.1276], online:
http://democrats.waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/LEVIN_001_xml
%20as%20introduced.pdf (5 June). See also Sander M Levin, H.R.1276: Currency Reform for Fair Trade Act of
2013, online: Ways and Means Committee Democrats http://democrats.waysandmeans.house.gov/bill/hr1276currency-reform-fair-trade-act-2013 (5 June).

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Article 1, Agreement on Subsidies and Countervailing Measures (SCM), has an exhaustive

definition of subsidy. 26 Where undervaluation occurs without intervention, there is no
government action under Article 1. Assuming that some monetary policy is identifiable, the
scope of SCM is restricted to government measures which (i) make or cause financial
contribution, (ii) conferring a benefit and (iii) covered by the finite list of measures
specified.27 Some subsidies are prohibited,28 and other subsidies must be specific to be
actionable.29 Each requirement is analysed below, and pros and cons of using SCM to fight
currency wars is summarized thereafter.
FINANCIAL CONTRIBUTION & TYPE OF MEASURE : A form of transfer of economic resources
occurs to domestic exporters, in the form of facing implicitly lower tariffs, 30 and receiving
payment at a higher nominal price.31 Exporters receive foreign exchange from the central bank
as a direct transfer,32 a government-given insurance against exchange risks,33 and the
government forgoes tariff revenue from lowered imports.34 But this is not a contribution of the
government from its own pockets, or even at its direction. A tariff, for example, cannot be a
subsidy, and undervaluation is comparable to tariffs. 35 Economy-wide measures are not
considered subsidies, such as export restraints, even if they implicitly re-order the structure of
the domestic economy to the detriment of foreign goods.36
BENEFIT: Domestic exporters benefit from undervalued currency, but not always. 37 Actual
benefit depends on (i) country being price maker; (ii) exporters business structure not
requiring irreplaceable imported inputs; (iii) exporter not also being a foreign investor; (iv)
26

Panel Report, United States Measures Treating Exports Restraints as Subsidies, WT/DS194/R and Corr.2,
adopted 23 August 2001, paragraph 8.73.
27
Ibid.
28

Article 2.3, SCM read with Article 3, SCM.

29

Article 1.2, SCM read with Article 2, SCM.

30

See note 16.

31

p.11, Marcus Sohlberg, The China Currency Issue: Why the World Trade Organization Would Fail to Provide
the United States with an Effective Remedy (2011), online: http://scholarship.law.cornell.edu/lps_clacp/43/?
utm_source=scholarship.law.cornell.edu%2Flps_clacp
%2F43&utm_medium=PDF&utm_campaign=PDFCoverPages (5 June).
32
Robert W Staiger & Alan O Sykes, Currency manipulation and world trade (2010) 9:4 World Trade Review,
p.583
33
See note 31 at p.13.
34

See note 31 at p.12.

35

See note 32, at p.597, that undervaluation has import tax and export subsidy effects, but these send opposite
price signals and ought to cancel out.
36
See note 26.
37

See note 32 at p.585.

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exporter pricing transactions in domestic currency; (v) the elasticity of demand and supply,
etc. Benefit must be transaction-specific.38 Money has long-run neutrality, so policies have
no real effect.39 Even in cases were benefit is conferred, in a globalized world, governments
probably could not have predicted and intended the benefit conferred. Further, there may be
no commercial conduct by the government.40 Some authors suggest that the value of
hedging against risks in the market is the benefit conferred.41
SPECIFICITY: If a subsidy exists, it must be prohibited, or specific. Undervaluation has a
beneficial impact on exports, and encourages the use of cheaper domestic goods. Prima facie,
it appears to satisfy the requirements of an export subsidy, i.e., contingency on export
performance42 or the use of domestic over imported goods as inputs.43 Monetary policy finds
no mention in the Illustrative List, arguably an intentional omission. 44 Moreover, in the
absence of concerted, manipulative efforts, a measure that merely happens to benefit export
enterprises may not be export-contingent.45
PROOF: Estimates of the real exchange rate can, at best, be made as bands of likely or
expected values. Further, exchange rates are relative, and undervaluation could, for example,
be a result of a relatively overvalued currency of a trading partner (or vice versa). In those
cases, there is no government measure to treat as a subsidy. Proof of a subsidy is, in practice,
probably no simpler than proving currency manipulation or frustration itself.

38

Panel Report, Korea Measures Affecting Trade in Commercial Vessels, WT/DS273/R, adopted 11 April
2005, paragraph 7.46,.
39
40

See note 32 at p.597.

Ibid. at para 7.28.

41

See note 31 at p.13.

42

Article 3.1, SCM

43

Article 3.2, SCM

44

See note 17.

45

See second sentence, footnote 4, SCM.

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Conclusion
ISSUE
Claiming under

PROS OF SCM

Not

CONS OF SCM

require

proof

of

Be

difficult

to

SCM and not

manipulation, frustration of

Especially

GATT may

benefits.

action, without cooperation

and

await

to

policy

Nevertheless

trigger

challenge before the dispute

currency

settlement body.

monetary independence.

Specifically

exclude

overvalued currencies, and

target

only

undervalued

ones.

Contribute
incoherence.

Empower countries to act

unilaterally,

unilateral

of other government.

Not require consultation and

cooperation with IMF.

in

prove.

Can

Not

wars,

tackle

manipulative

actions.

currency

manipulation holistically.
Act

against

misalignments
deter

infringe

short-term
with

long-

term consequences.

Extend
beyond

WTO
their

agreements
ordinary

meaning.

Government

measure

Sustained

imbalance

Cause

of

imbalance

unlikely without government

unpredictable and complex,

intervention.

including actions of other

Central

banks

trading partners.

and

government control outflows

of foreign currency.

Domestic

measure,

so

repercussions on exchange
rate may be incidental.

Pegging,

and

legitimate

action, may be covered.

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Contribution

Page 8 of 11

Economic
implicitly

resources
transferred

to

Exchange risk is removed

from,

or

parties by, government.

for exporters.

Benefit

transfer

direction given to private

domestic exporters.

No

Economy-wide actions are

not contributions.

Foregone import tariffs.

No express mention in list.

Transfer from Central Bank.

Implicit tariff on imports.

Unpredictable.

Implicit benefit to exports.

Occurs only if currency is

Receipts

from

price-maker.

individual

export transactions increase.

Depends on demand, supply

elasticity, terms of trade.

Cannot be quantified easily

and accurately.

Partly harms exporter also.

May

not

be

commercial

conduct.

Prohibited

Contingent on exports.

subsidy

Encourages shift to domestic

inputs.

Not covered by Illustrative

List.

May not have additional

reasons

for

misalignment

other than happenstance.

Specificity

Access to its benefits are

availed only by sellers of

Benefits are automatic on

export, availed by all.

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foreign currency.

Predominantly

used

by

Adverse effects difficult to

prove.

exporters.

Proof

(as above)

Establishing currency misalignments as subsidies

(as above)

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LIST OF REFERENCES
Arvind Subramanian, International Impacts of the Federal Reserves Quantitative Easing
Program, Prepared testimony submitted to the House Committee on Financial Services
Subcommittee on Monetary Policy and Trade, Washington DC, 9 January 2014, online:
http://www.iie.com/publications/testimony/subramanian20140109.pdf (5 June).
C Lim, The Law Works Itself Pure: The Fragmented Disciplines of Global Trade and
Monetary Cooperation, and the Chinese Currency Problem (2013) Available at SSRN
2254739, online: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2254739 (5 June).
Bergsten, C Fred. Rescuing the Doha Round (2005) Institute for International Economics,
online: <http://sxpekzi.iie.com/publications/papers/bergsten1205.pdf>.
Bergsten, C Fred & John Williamson. Exchange Rates and Trade Policy in Exchange rates
and trade policy (Washington DC: IIE, 1983).
Gottfried Haberler, Comments, Chapters 1-6 in William R. Cline, ed., Exchange rates and
trade policy (Washington DC: IIE, 1983).
Milesi-Ferretti, Gian Maria. Fundamentals at Odds? The Dollar and The US Current Account
Deficit (2008) Prepared for the Siena Conference on the Impact of Global Financial
Imbalances,

Siena,

Italy,

September,

online:

<http://www.cirje.e.u-

tokyo.ac.jp/research/workshops/macro/macropaper08/macro1016.pdf>.
Panel Report, United States Measures Treating Exports Restraints as Subsidies,
WT/DS194/R and Corr.2, adopted 23 August 2001.
Panel Report, Korea Measures Affecting Trade in Commercial Vessels, WT/DS273/R,
adopted 11 April 2005.
Sohlberg, Marcus. The China Currency Issue: Why the World Trade Organization Would Fail
to

Provide

the

United

States

with

an

Effective

Remedy

(2011),

online:

<http://scholarship.law.cornell.edu/lps_clacp/43/?utm_source=scholarship.law.cornell.edu
%2Flps_clacp%2F43&utm_medium=PDF&utm_campaign=PDFCoverPages>.
Staiger, Robert W & Alan O Sykes. Currency manipulation and world trade (2010) 9:4
World Trade Review 583.

Student ID 14010

Page 11 of 11

Thorstensen, Vera, Emerson Maral & Lucas Ferraz. TRADE RULES AND EXCHANGE
RATE

MISALIGNMENTS:

in

search

for

WTO

solution

(2013),

online:

<http://www.zoww.iie.com/publications/papers/thorstensen20130402.pdf>.
Thorstensen, Vera, Daniel Ramos & Carolina Muller. The Missing LinkBetween the WTO
and the IMF (2013) 16:2 Journal of International Economic Law 353.
Positive-sum

currency

wars

(2013)

The

Economist,

online:

<http://www.economist.com/blogs/freeexchange/2013/02/what-qe-means-world>.
Ahn, Dukgeun. Is the contemporary Chinese exchange-rate regime WTO-legal?, (16 April
2010), online: VoxEU.org <http://www.voxeu.org/article/chinese-exchange-rate-regime-wtolegal>.
Sander M Levin. H.R.1276: Currency Reform for Fair Trade Act of 2013,, online: Ways and
Means

Committee

Democrats

<http://democrats.waysandmeans.house.gov/bill/hr1276-

currency-reform-fair-trade-act-2013>.
Simon Lester. More on GATT Article XV:4, (21 March 2010), online: International
Economic Law and Policy Blog <http://worldtradelaw.typepad.com/ielpblog/2010/03/moreon-gatt-article-xv4.html>.
WTO. The Relationship between Exchange Rates and International Trade: A Review of
Economic Literature, Note by the Secretariat WT/WGTDF/W/57 (WTO, 2011).