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Don Yuan: China’s “Selfish” Exchange Rate Policy and International Economic Law

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European Yearbook of International Economic Law 2010

Part of the book series: European Yearbook of International Economic Law ((EUROYEAR,volume 1))

Abstract

If there is any single character in the history of literature that stands for egoism and selfishness, it is certainly the one of Don Juan, the restless and insatiable lover and seducer of women. If there is any trading nation that is perceived — at least in the United States — to be similarly selfish and insatiable in its conduct of foreign economic relations, it is certainly China, whose currency unit is the yuan, also called renminbi (The People’s Money).1 Given the permanent accusations that are being raised against China for its exchange rate regime for the yuan, one feels inclined to speak of China as the Don Yuan of our times. However, we should be careful with excessively quick answers to a matter that is far more complicated in reality.

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Notes

  1. 1.

    The name of the currency as a whole is Renminbi, the greatest currency unit is the yuan, divided into 10 jiao or 100 fen. The international abbreviation is CNY, the Chinese one is RMB.

  2. 2.

    Cf. Kirshner, Currency and Coercion – The Political Economy of International Monetary Power, 1995, pp. 3 et seq. on the concept of “monetary power”.

  3. 3.

    As of December 2008.

  4. 4.

    Henning, The Exchange Rate Weapon, Macroeconomic Conflict and Shifting Structure of the Global Economy, EUI RSCAS Working Paper No. 2005/11.

  5. 5.

    Posen, Avoiding a Currency War, The International Economy (Summer 2004), p. 10.

  6. 6.

    See, for example, Evans-Pritchard, China threatens “nuclear option” of dollar sales, http://www.telegraph.co.uk, 10 August 2007.

  7. 7.

    Steingart, Weltkrieg um Wohlstand, 2007.

  8. 8.

    Hirn, Angriff aus Asien: Wie uns die neuen Wirtschaftsmächte überholen, 2008.

  9. 9.

    Susbielle, Chine–USA: La guerre programmée, 2006.

  10. 10.

    For a more detailed account of China’s exchange-rate policy, see Goldstein, Renminbi Controversies, Cato Journal (2006) 2, p. 251; Goldstein/Lardy (eds.), Debating China’s Exchange Rate Policy, 2008; Griswold, Who’s Manipulating Whom? China’s Currency and the U.S. Economy, Cato Institute Trade Briefing Paper No. 23, 11 July 2006; Hale/Hale, Reconsidering Revaluation — The Wrong Approach to the US–Chinese Trade Imbalance, Foreign Affairs (2008) 1, p. 57; Herr, Das chinesische Wechselkurssystem, ApuZ 7/2008, p. 27; Hilpert, Transpazifische Währungskonflikte, SWP-Aktuell 41 (October 2003); Keidel, China’s Currency: Not the Problem, Carnegie Endowment for International Peace Policy Brief 39 (June 2005); Lardy, Exchange Rate and Monetary Policy in China, Cato Journal (2005) 1, p. 41; Ogawa, The Chinese Yuan after the Chinese Exchange Rate System Reform, RIETI Discussion Paper Series; 06-E-019 U.S. Department of the Treasury Office of International Affairs, Report to Congress on International Economic and Exchange Rate Policies, December 2008, pp. 16 et seq.; Hartquist/Beckington/Collis, China’s Policy of Substantially Undervaluing the Renminbi: A Challenge for the International Monetary and Trading System, Research Paper Prepared by the Trade Law Advisory Group, 15 September 2008, p. 43 et seq.

  11. 11.

    COM(2006) 631 final, p. 6.

  12. 12.

    European Commission, Directorate General External Trade, Global Europe. EU–China Trade and Investment — Competition and Partnership, p. 8, available at http://trade.ec.europa.eu.

  13. 13.

    IMF Country Report No. 06/394, p. 17, para. 24.

  14. 14.

    Statement by IMF Managing Director Dominique Strauss-Kahn at the Conclusion of his Visit to China, IMF Press Release No. 08/26, 15 February 2008.

  15. 15.

    The Exchange Rates and International Economic Policy Coordination Act of 1988 was passed as Title III, Subtitle A of the Omnibus Trade and Competitiveness Act of 1988.

  16. 16.

    On this topic, see Henning, Accountability and Oversight of US Exchange Rate Policy, 2008, pp. 17 et seq.

  17. 17.

    See Calmes, Geithner hints at harder line on China, International Herald Tribune 23 (January 2009).

  18. 18.

    See United States Senate Committee on Finance, Hearing on Confirmation of Mr. Ronald Kirk to be United States Trade Representative, 9 March 2009, pp. 45, 61, 62, and 109, available at http://finance.senate.gov/hearings/testimony/2009test/031109QFRs%20for%20SubmissionRK.pdf.

  19. 19.

    For an overview of the policy options see Morrison/Labonte, China’s Currency: Economic Issues and Options for U.S. Trade Policy, CRS Report for Congress RL 32165, updated 9 January 2008.

  20. 20.

    For a description and account of Section 301, see Jackson/Davey/Sykes, International Economic Relations, (4th Ed.) 2002, pp. 332 et seq.

  21. 21.

    Available at http://waysandmeans.house.gov/media/pdf/110/currencypetition.pdf.

  22. 22.

    See USTR, Trade Policy Agenda and 2007 Annual Report, p. 206 et seq., available at http://www.ustr.gov/Document_Library/Reports_Publications/2008/2008_Trade_Policy_Agenda/Section_Index.html, last accessed on 3 March 2009); see also Federal Register, Vol. 72, No. 161, p. 46688.

  23. 23.

    S. 1586 [108th], A Bill to authorize appropriate action if the negotiations with the People’s Republic of China regarding China’s undervalued currency and currency manipulation are not successful.

  24. 24.

    Denters, Manipulation of Exchange Rates in International Law: The Chinese Yuan, ASIL Insight 118 (November 2003).

  25. 25.

    For a full summary of all initiatives, see Morrison/Labonte, China’s Currency: Economic Issues and Options for U.S. Trade Policy, CRS Report for Congress RL 32165, Updated 9 January 2008, pp. 45 et seq.

  26. 26.

    See in particular the Currency Reform and Financial Markets Access Act of 2007 (S. 1677 [110th]).

  27. 27.

    For a discussion of the proposal, see Bacchus/Shapiro, Re: The Consistency with the WTO Obligations of the United States of H.R. 1498, the Hunter–Ryan bill, Letter to the Chairman of the International Economic Affairs Policy Group, National Association of Manufacturers, 12 September 2006.

  28. 28.

    Bodin, Les six livres de la République, 1583, Chap. X, p. 211 (223).

  29. 29.

    Helleiner, The Making of National Money: Territorial Currencies in Historical Perspective, 2003.

  30. 30.

    Simmel, Philosophie des Geldes, (5th ed.) 1930, p. 173.

  31. 31.

    Mill, Principles of Political Economy, 1848/1909, p. 615.

  32. 32.

    See Gianviti, Use of a Foreign Currency Under the IMF’s Articles of Agreement, in: IMF (ed.), Current Developments in Monetary and Financial Law, Vol. 3, 2005, pp. 817 et seq.

  33. 33.

    PCIJ, Case concerning the Payment of Various Loans Issued in France, Judgment of 12 July 1929, Series A, No. 20/1, p. 44.

  34. 34.

    Cf. Proctor, Mann on the Legal Aspect of Money, (6th Ed.) 2005, pp. 331 et seq. and pp. 499 et seq.

  35. 35.

    On these elements, see Gianviti, Current Legal Aspects of Monetary Sovereignty, in: IMF (ed.), Current Developments in Monetary and Financial Law, Vol. 4, 2005, p. 1; Lastra, Legal Foundations of International Monetary Stability, 2006, pp. 22 et seq.; Proctor, Mann on the Legal Aspect of Money, 2005, pp. 500 et seq.

  36. 36.

    On the law of the IMF in general, see Lastra, Legal Foundations of International Monetary Stability, 2006, pp. 371 et seq.; Lowenfeld, International Economic Law, 2002, pp. 529 et seq.; Proctor, Mann on the Legal Aspect of Money, (6th Ed.) 2005, pp. 557 et seq.

  37. 37.

    A list of the members can be consulted at http://www.imf.org/external/np/sec/memdir/members.htm.

  38. 38.

    On the fixed exchange regime between 1945 and 1971 and on the transition to the new system, see Lowenfeld, International Economic Law, 2002, pp. 524 et seq.

  39. 39.

    Proctor, Mann on the Legal Aspect of Money, 6th Ed., 2005, p. 564.

  40. 40.

    See International Monetary Fund, Annual Report on Exchange Arrangements and Exchange Restrictions 2007, pp. XXV et seq. On the legal differences between the several types of arrangements, see Proctor, Mann on the Legal Aspect of Money, (6th Ed.), 2005, pp. 566 et seq.

  41. 41.

    See Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Norton/Andenas (eds.), International Monetary and Financial Law upon Entering the New Millennium, 2002, p. 29 (pp. 38 et seq.); Gold, Exchange Rates in International Law and Organization, 1988, pp. 108 et seq.; IMF Legal Department, Article IV of the Fund’s Articles of Agreement: An Overview of the Legal Framework, 28 June 2006; Lowenfeld, International Economic Law, 2002, pp. 534 et seq.

  42. 42.

    Cf. Gold, Exchange Rates in International Law and Organization, 1988, p. 109.

  43. 43.

    For the practical aspects of surveillance cf. Lastra, Legal Foundations of International Monetary Stability, 2006, pp. 399 et seq.; Lowenfeld, International Economic Law, 2002, pp. 541 et seq.

  44. 44.

    Executive Board Decision No. 5392-(77/63).

  45. 45.

    Goldstein, Currency Manipulation and Enforcing the Rules of the International Monetary System, in: Truman (ed.), Reforming the IMF for the 21st Century, 2006, p. 141 (150).

  46. 46.

    Hufbauer/Wong/Sheth, US–China Trade Disputes: Rising Tide, Rising Stakes, 2006, p. 26.

  47. 47.

    For an assessment of the surveillance practice, see Independent Evaluation Office of the IMF, IMF Exchange Rate Policy Advice, Evaluation Report, 2007.

  48. 48.

    Gianviti, Evolving Role and Challenges for the International Monetary Fund, in: Norton/Andenas (eds.), International Monetary and Financial Law upon Entering the New Millennium, 2002, p. 29 (47).

  49. 49.

    The following IMF documents contain large parts of the discussions: Review of the 1977 Decision on Surveillance Over Exchange Rate Policies — Preliminary Considerations, 28 June 2006; — Background Information, 30 June 2006; — Summing Up of the Executive Board Meeting, 19 July 2006; — Further Considerations, 11 January 2007; — Summing Up of the Executive Board Meeting, 14 February 2007; — Companion Paper, 22 May 2007; — Proposal for a New Decision Supplement, 13 June 2007; 1 year after the adoption of the 2007 Decision, a further document, entitled Guidance on Operational Aspects of the 2007 Surveillance Decision, 4 August 2008, was published; all documents are available at http://www.imf.org.

  50. 50.

    See IMF Public Information Notice (PIN) No. 07/69, 21 June 2007.

  51. 51.

    IMF, Public Information Notice (PIN) No. 07/69, p. 2.

  52. 52.

    The last development (vii) is of not of interest in the case of exchange rate manipulation as discussed in this contribution, but is rather designed for cases such as the Asian crisis of 1997/1998.

  53. 53.

    Hartquist/Beckington/Collis, China’s Policy of Substantially Undervaluing the Renminbi: A Challenge for the International Monetary and Trading System, Research Paper Prepared by the Trade Law Advisory Group, 15 September 2008, p. 23, speculate that such ad hoc consultations might actually be considered at present.

  54. 54.

    For an in-depth analysis of the IMF sanctions regime, see Gold, Legal and Institutional Aspects of the International Monetary System: Selected Essays, 1979, pp. 148 et seq.

  55. 55.

    Staiger/Sykes, “Currency Manipulation” and World Trade, NBER Working Paper 14600, p. 28.

  56. 56.

    On these different “scenarios” of WTO involvement, see Ciobănaşu/Denters, Manipulation of the Chinese Yuan — May WTO Members Respond? SSRN Working Paper, p. 10, available at http://sssrn.com/abstract=1315290.

  57. 57.

    For details, see WTO, Note by the Secretariat, WTO Provisions Relevant to the Relationship Between Trade and Finance and Trade and Debt, WT/WGTDF/W/3.

  58. 58.

    See WTO, Note by the Secretariat, WTO Provisions Relevant to the Relationship Between Trade and Finance and Trade and Debt, WT/WGTDF/W/3, para. 4.

  59. 59.

    See GATT CONTRACTING PARTIES, Decision L 57/61, November 30, 1984, 31S/15.

  60. 60.

    Cf. WTO, Note by the Secretariat, WTO Provisions Relevant to the Relationship Between Trade and Finance and Trade and Debt, WT/WGTDF/W/3, pp. 13 et seq.; Jackson, World Trade and the Law of GATT, 1969, pp. 479 et seq.

  61. 61.

    Denters, Manipulation of Exchange Rates in International Law: The Chinese Yuan, ASIL Insight 118 (November 2003).

  62. 62.

    There is no legal basis for including other WTO agreements in the circle of provisions which must not be frustrated, as suggested by Staiger/Sykes, “Currency Manipulation” and World Trade, NBER Working Paper 14600, p. 30.

  63. 63.

    For a discussion of this point, see Hufbauer/Wong/Sheth, US–China Trade Disputes: Rising Tide, Rising Stakes, 2006, pp. 17 et seq.

  64. 64.

    Staiger/Sykes, “Currency Manipulation” and World Trade, NBER Working Paper 14600, p. 30.

  65. 65.

    See WTO Document WT/L/195 of 18 November 1996. On this topic, see Ahn, Linkages between International Financial and Trade Institutions, JWT 2000, p. 1; Roessler, The Relationship between the World Trade Order and the International Monetary System, in: Petersmann/Hilf (eds.), The New GATT Round of Multilateral Trade Negotiations: Legal and Economic Problems, (2nd ed.) 1991, p. 363; Siegel, Legal Aspects of the IMF/WTO Relationship: The Fund’s Articles of Agreement and the WTO Agreements, AJIL (2002), p. 561.

  66. 66.

    Cf. Bacchus/Shapiro, Re: The Consistency with the WTO Obligations of the United States of H.R. 1498, the Hunter–Ryan bill, Letter to the Chairman of the International Economic Affairs Policy Group, National Association of Manufacturers, 12 September 2006; Hufbauer/Wong/Sheth, US–China Trade Disputes: Rising Tide, Rising Stakes, 2006, pp. 20 et seq.; Staiger/Sykes, “Currency Manipulation” and World Trade, NBER Working Paper 14600, pp. 31 et seq.

  67. 67.

    See Benitah, China’s Fixed Exchange Rate for the Yuan: Could the United States Challenge It in the WTO as a Subsidy, ASIL Insight 117, October 2003; Ciobănaşu/Denters, Manipulation of the Chinese Yuan — May WTO Beiträge zum Transnationalen Wirtschaftsrecht, Issue 77, Halle, August 2008, pp. 26 et seq.; Members Respond?, SSRN Working Paper, available at http://sssrn.com/abstract=1315290; Franke, Chinas Währungspolitik in der Kritik des US-amerikanischen und des internationalen Wirtschaftsrechts, Hufbauer/Wong/Sheth (eds.), US–China Trade Disputes: Rising Tide, Rising Stakes, 2006, pp. 20 et seq.; Staiger/Sykes, “Currency Manipulation” and World Trade, NBER Working Paper 14600, pp. 31 et seq.; Zimmermann, Fundamental Exchange Rate Misalignment and International Law, SSRN Working Paper, available at http://ssrn.com/abract=1300542; For an overview of the different positions expressed on the matter, see A Survey of Views Regarding Whether Exchange-Rate Misalignment Is a Countervailable, Prohibited Export Subsidy Under the Agreements of the World Trade Organization (WTO), April 2007, available at http://www.chinacurrencycoalition.org.

  68. 68.

    Bacchus/Shapiro, Re: The Consistency with the WTO Obligations of the United States of H.R. 1498, the Hunter–Ryan bill, Letter to the Chairman of the International Economic Affairs Policy Group, National Association of Manufacturers, 12 September 2006.

  69. 69.

    To use just the most obvious example: The exchange rate between the euro and the US dollar fluctuated between approximately 85 ct = 1 euro and 1,60 US dollar = 1 euro during the last ten years. This amounts to a devaluation of the dollar of almost 50%, which does certainly not completely reflect differences in inflation rates, etc.

  70. 70.

    Mattoo/Subramanian, Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization, Peterson Institute for International Economics, Working Paper WP 08-2, January 2008.

  71. 71.

    It is worth recalling at this point that China objected to the adoption of the 2007 Decision. However, the weighted voting applied in the IMF did work against China, which — contrary to the US — has no veto power in the institution.

  72. 72.

    See Reuters India, Leave Currency Surveillance to IMF — WTO head, 23 October 2007, available at http://in.reuters.com.

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  1. Lehrstuhl für Staats- und Verwaltungsrecht, Europarecht, Europäisches und Internationales Wirtschaftsrecht, Universität Passau, 94030, Passau, Germany

    Christoph Herrmann

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Editors and Affiliations

  1. Chair for Constitutional and Administrative Law European Law, European and International Economic Law, Passau University, D-94030, Passau, Germany

    Christoph Herrmann LL.M

  2. Department of European Law, Hamburg University, Schlüterstraβe 28, 20146, Hamburg, Germany

    Jörg Philipp Terhechte (Assistant Professor of Law, Faculty of Law) (Assistant Professor of Law, Faculty of Law)

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Herrmann, C. (2010). Don Yuan: China’s “Selfish” Exchange Rate Policy and International Economic Law. In: Herrmann, C., Terhechte, J.P. (eds) European Yearbook of International Economic Law 2010. European Yearbook of International Economic Law, vol 1. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-78883-6_2

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