Document Type

Conference Proceeding

Comments

Presented at the 7th Cornell Inter-University Graduate Student Conference, April 2011.

Abstract

A critical issue in the global trading system that came to the forefront in 2010 concerns exchange rates. Having suffered to various degrees through the worst economic and financial downturn since the Great Depression, many large trading nations have sought to achieve economic recovery through export-led growth. In order to boost international competitiveness, many have engaged in competitive devaluations, i.e. interventions in currency markets to devalue domestic currency. According to Brazilian Finance Minister Guido Mantega this situation has escalated into a “global currency war”.

This paper focuses on China’s practice of maintaining an artificially undervalued currency, and addresses the question of whether the United States could challenge this practice in the dispute settlement system of the World Trade Organization (WTO). The answer is one of interpretation, but there is at least a tenuous legal basis pursuant to which the United States could bring a formal complaint. The rationale for WTO involvement is that an artificially undervalued exchange rate is a protectionist trade policy because it is a combination of an import tariff and an export subsidy in the country where it is maintained.

However, even if there is a legal foundation by which the United States could lodge a formal complaint, it is the contention of this paper that WTO litigation would be unsuitable. Drawing from the experience of past WTO case law, there is reason to believe that the WTO Dispute Settlement Body would fail to provide the United States with an effective remedy, seeing that the China currency issue is not a mere trade disagreement. Rather, it involves the exercise of a sovereign prerogative that delves into complex issues of social and economic structures in China. Therefore an adverse ruling compelling China to refrain from its current practice is unlikely to be complied with. Moreover, a case like this could also set a dangerous precedent for expansive interpretation of vague WTO provisions, and considerably broaden the trade organization’s authority into peripheral trade-related areas.

Date of Authorship for this Version

4-2011

Keywords

Currency exchange rates, China, World Trade Organization