An Evaluation of WTO Remedies for Currency Undervaluation

During the past decade of mounting global imbalances, many academics and policymakers have argued that the exchange rate of China's Renminbi – perceived by many as intentionally undervalued relative to the U.S. dollar – has contributed to China's substantial trade (and consequent current account) surpluses and the corresponding U.S. current account deficit. This paper provides an assessment of the legality of GATT/WTO trade remedies in counteracting persistent trade deficits induced by undervaluation. While motivated by the present flashpoint over Renminbi undervaluation, this paper considers the economics of undervaluation and trade generally, highlighting the risk that other countries might strategically adopt undervaluation in the future. If there are prospects for dynamic gains from undervaluation, countries may pursue self-interested undervaluation at the expense of long-run global financial stability absent an effective enforcement mechanism through the IMF and WTO to counteract such imbalances. This paper argues that the current GATT and IMF Articles of Agreement are adequate to fill the enforcement gap. These provide legal scope for the IMF to appropriately act to make an impartial first-stage assessment of whether intentional undervaluation was sustaining current account imbalances. Such a finding would then open an avenue for a second-stage complaint and remedy through the WTO dispute settlement process.