Currency Manipulation and Exchange Rate Policies: Why the WTO needs to strengthen its monetary policies

Trade has been an inseparable part of the global economy since the dawn of time with the history of trade between civilizations stretching back thousands of years. In the modern age, trade has continued to be an important factor within the global economy. According to the United Nations Conference on Trade and Development (UNCTAD), global trade has risen by 25% in 2022 to around $32 Trillion, a significant growth from $28.5 Trillion in 2021. This development highlights the importance of global trade within the rapidly growing global economy. Any form of disruption to the flow of goods and services could easily hamper the development of multiple countries around the world, especially developing economies. This has led to the necessity for a global organization in facilitating international trade agreements between nations. Since its inception in 1995, the World Trade Organization (WTO) has been the main international organization that deals with issues related to foreign trade between countries. As the world continues to develop at a fast rate, necessary guidelines for maintaining international trade need to be formulated to maintain a free and fair trade competition between countries. Over the past several years, the world of international trade has seen multiple new challenges and threats emerging such as the policy of protectionism, subsidy, digitalization of trade, and others that could threaten or change the global trading system to favor one side over the other. One of the key problems that has not been properly addressed within the realm of international trade by WTO is the potential manipulation of currency and exchange rate policies by countries in order to boost their export.

To understand the harmful effect of such practices, there needs to be a clear understanding of what practice or conduct constitutes a currency manipulation practice. Currency manipulation can be classified as when a country intentionally weakens the value of its currency or sustains a weak currency in order to have a trade advantage over other countries. The devaluation of a country’s currency would enable its companies and industries operating within the country to offer its products and services at lower prices in foreign currencies. This practice grants the practicing states a significant unfair trade advantage over other states. Currency manipulation has been a heated debate within recent US politics, especially under the Trump Administration under which the US has accused China of conducting a currency manipulation policy in order to boost their trade values against the US. The subject of currency manipulation is not something that has only emerged in the modern day as examples can be found in recent history. Prior to the advent of the Great Depression, countries around the world engaged in an intentional undervaluation of their currencies in order to gain trade advantage over one another.  It was hoped that by devaluing their currencies, countries would be able to have the cheapest export, this coupled with a protectionist policy would eventually be a contributing factor to the Great Depression. Countries around the world would eventually realize the harmful effect of such endeavors and by the end of the second world war, had agreed upon the creation of the International Monetary Fund (IMF) to ensure the stability of the global exchange rate system. Between 1946 and 1971, the IMF implemented a strict parity exchange rate system which dictated that the value of all currencies was to be defined in US Dollars, in which the US dollar was further defined in terms of a set quantity of gold. The IMF and governments across the world have also put a heavy emphasis on preventing the practice of currency manipulation such as Article IV of the IMF Articles of Agreement which calls for all member states to avoid manipulation of their exchange rates to gain unfair advantage over their neighbors. This however came to an abrupt end in the 1970s as a series of devaluations by the United States towards the US dollar without first consulting the IMF in 1971, ended the IMF controls over the global exchange rate. This event prompted the IMF to adopt an amendment in 1978 which allows countries to use whatever exchange rate they wish in accordance with certain guidelines and does not use gold as a basis. The 1978 IMF amendment has left room for exploitation of the exchange rate policies by countries in order to boost their export commodities. The IMF is further weakened in its efforts by the lack of effective dispute settlement and enforcement mechanisms within the organization.

The lack of power by the IMF means that countries around the world could potentially exploit the practice of currency manipulation in order to boost their own trade, this signals the need for a more effective enforcement to preventing the practice of currency manipulation. The WTO has been seen as a potential regulatory and enforcement institution on regulating currency manipulation because of its effective dispute settlement and enforcement mechanisms. A recent study by the United Nations Conference on Trade and Development has found that exchange rate manipulation misalignment has a substantial impact on international trade. This finding could easily lead to the practice of currency manipulation being seen as a problem not just for the IMF but also the WTO as its impact on world trade cannot be underestimated, especially given the history involved with the practice. There is however, the dilemma of whether currency manipulation constituted a breach of international trade agreements. Some experts have argued that the practice of currency manipulation constitutes an unfair distortion of trade, equivalent to implementing a subsidy, or tariff on imports that violates the rules within the WTO. This argument is based on the assumption that an undervalued currency has the same practical effect as an export subsidy. Some have also put forward the notion that the practice of currency manipulation constitutes a breach of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) as well as Article 15 of the General Agreement on Tariffs and Trade (GATT). Several studies however, have concluded that the practice of currency devaluation and manipulation as a whole does not constitute a breach of the WTO ruling above. This puts into question whether the WTO has effective monetary mechanisms to prevent such manipulation of exchange rates. Many have argued that the WTO should not be involved in handling monetary policies of nations as it is within the realms of the IMF. This however is problematic as given the IMF lack of dispute settlement and enforcement mechanisms, it is unlikely that the IMF will be a viable solution to the problem. Whether or not the practice of currency manipulation constitutes a breach of international trade agreements continues to be debated, there is however clear historical evidence of the danger posed by such practices left unchecked. This of course continues to make the potential practice of currency manipulation a serious risk to the global economy.

Given the risk involved to international trade with the practice of currency manipulation, it is imperative that the WTO introduce a mechanism to prevent such practice. A deeper cooperation between the WTO and IMF in the realms of the dispute settlement and enforcement mechanisms has been floated around as a potential solution. Such proposals are not uncommon in the realms of international trade as in 1996 the WTO and IMF had agreed on a cooperation agreement to consult each other to achieve greater coherence within global economic policies. This agreement has granted the WTO the ability to work with the IMF on matters involving the international monetary system, this agreement however, has excluded the WTO dispute settlement mechanisms which made it insufficient in handling jurisdictional barriers for the WTO to handle issues of currency manipulation. A closer and more integrated cooperation between the WTO and the IMF would be the ideal method of combating the issue of currency manipulation, this however would require a drastic change and improvement in the relationship between the two organizations. New reforms and policies would need to be implemented within the WTO to call for greater operational integration and cooperation between itself and the IMF. Such reforms would also need to grant the WTO jurisdiction over disputes relating to trade and monetary problems within the IMF. A closer WTO-IMF cooperation in the realms of international monetary policies would enable both organizations to seek a better dispute settlement mechanism and maintain a stable international monetary system.

There is however a significant barrier to implementing the necessary reform to allow for a WTO jurisdiction over matters relating to monetary policies. For countries around the world, monetary sovereignty to undervalued their respective currencies is vital for a country’s economy and development. Monetary Sovereignty grants states the ability to protect their domestic industry, attract foreign investment, as well as influence the market prices for exported goods and services. Examples of such practices have been alleged to take place within the Chinese economy, in which the US has accused China of undervaluing its currency to gain a trade advantage. The US has also accused several other countries such as Vietnam and India of implementing currency manipulation to gain trade advantage over others. Whether any of these countries truly are practicing a currency manipulation strategy to boost its trade continues to be debated. It is unlikely that a state would choose to voluntarily give up its monetary sovereignty, especially when such practices can potentially boost their own economy moving forward. This is a major problem as the WTO and IMF would require the support of states around the world to implement any form of reform. Such a major barrier would need to be addressed in order to introduce reforms towards the IMF-WTO cooperation relationship.

The practice of currency manipulation continues to be a heated debate within the current international monetary system. The lack of mechanism within the IMF to manage any potential dispute between countries effectively, has cast serious doubts on whether the organization can independently solve such potential practices. The WTO with its clear dispute settlement and enforcement mechanism has the potential to assist the IMF in handling monetary disputes between countries, especially those related to international trade. Significant barriers to such cooperation continue to exist however, and serious reformation and restructuring of the cooperative relationship between the WTO and the IMF would be necessary in order to improve both organizations cooperation on the monetary front.