VoxEU Column Exchange Rates

Yuan to fight about it? The WTO legality of China’s exchange regime

Does the US have a legal case against China’s exchange-rate regime? This column, which first appeared in Vox's latest eBook, argues that any claim against China at the WTO would face substantial hurdles, and would be unlikely to add pressure on China any time soon. If a claim does go ahead, it is more likely than not to fail.

China joined the WTO on 11 December 2001, taking on all of the legal obligations of a WTO member. Today, the US continues its political attacks on China’s exchange-rate regime, raising the question of whether a legal case at the WTO might be successful in adding to the pressure on China. I argue that a legal claim against China at the WTO would face substantial hurdles and be unlikely to add to pressure on China any time soon.

Litigation at the WTO generally takes at least two years to conclude. If China were to win – as the following analysis suggests is more likely than not – it would strengthen China’s negotiating position. But even if China were to lose a case at the WTO, it would ordinarily have 15 more months to bring its measures into conformity with legal requirements before retaliation could be authorised. So, it would take more than three years before the US would have any authorisation to retaliate against China within WTO law. Indeed, if the US wished to retaliate against China in the near term, it would be better off arguing that China’s measures are not covered by WTO law, in order to avoid the restrictions on unilateral retaliation provided in the WTO Dispute Settlement Understanding.

Furthermore, this is the type of “big case” for which WTO dispute settlement may not be productive. Article 3.7 of the WTO Dispute Settlement Understanding requires that “Before bringing a case, a Member shall exercise its judgement as to whether action under these procedures would be fruitful.”

Characterising China’s exchange rate regime for WTO law purposes

The US argues that China has intervened in money markets in order to suppress the value of the renminbi artificially. Under the present system, the People’s Bank of China (PBC) buys and sells Chinese currency in order to maintain the value of the renminbi against a basket of foreign currencies that includes principally the dollar, the Japanese yen, and the euro. This type of regime is known as a “peg.” In order to avoid appreciation of the renminbi, the PBC has actively sold renminbiin exchange for dollars and other foreign currencies, increasing its reserves of these currencies.
However, the fact that China’s exchange rate regime has resulted in systematic undervaluation of the renminbiagainst the dollar does not simply translate into a particular barrier to imports or subsidisation of exports, as commonly assumed. Staiger and Sykes (2008 and in this ebook) conclude that the extent of any currency misalignment is difficult to measure, and its effects on trade are difficult to ascertain. This point will result in difficult evidentiary problems in connection with any claim against China under WTO law.

Applicable WTO law

While there may be grounds for criticising China’s exchange-rate regime under IMF law or under other international law, here I focus on WTO law (which in turn may refer to certain determinations under IMF law). There are three types of claims under WTO law worth discussing.

  • First, the US might claim that the Chinese exchange-rate regime is an exchange action that frustrates the intent of the General Agreement on Tariffs and Trade (GATT), pursuant to Article XV of GATT.
  • Second, it might claim that the regime constitutes a prohibited export subsidy or import substitution subsidy under Article 3 of the SCM Agreement, or a subsidy that causes adverse effects under Article 5 of the SCM Agreement.1
  • Third, it might claim that, even if the Chinese currency regime is not a violation of WTO law, it “nullifies or impairs” a benefit accruing to another party to the WTO treaty. In addition, it might be possible for an importing state unilaterally to characterise Chinese goods as being subsidised for purposes of imposing countervailing duties. While this last claim would not argue that the Chinese regime is illegal, if the claim were justified under WTO law it would result in authorisation for importing states to impose countervailing duties in response to Chinese imports.

I review these claims (in slightly different order) below.

Article XV of GATT

Article XV(4) of GATT provides in relevant part that: “Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement . . . .”2

In order for this provision to apply to China, there must be a Chinese measure that constitutes an “exchange action” within its meaning.3 In order for a violation to be found, the Chinese measure must “frustrate the intent” of other provisions of the GATT. There have not been any WTO dispute settlement decisions under this provision, and so there are no precedents to guide us in interpreting its key terms.

Exchange action

As noted above, China’s exchange-rate regime uses a currency peg to maintain the approximate value of the renminbiagainst a basket of currencies. Given the division in Article XV between “trade actions” (presumably such as quotas or embargos) and “exchange actions”, it seems natural to categorise China’s regime as an exchange action.4

Frustrating the intent of the provisions of the GATT

In order for China’s currency regime to “frustrate the intent” of the provisions of GATT, we would ordinarily expect it to have trade effects, either as a barrier to imports or as a subsidy to exports, or both. While a number of economists and other commentators have decried China’s currency regime as having substantial protectionist and subsidising effects, as noted above (for example Mattoo and Subramanian 2008), meanwhile Staiger and Sykes (2008) argue that it is not correct simply to assume that an undervalued currency has tariff- and export-subsidy-type effects. Rather, a number of particular aspects would be required to be examined. This column cannot engage in this analysis, and so, for purposes of discussion, we will assume some resulting trade effects either inhibiting imports or subsidising exports, or both.

But Article XV(4) is a confusing provision when read, as it must be, in conjunction with its “ad note.”5 The example of frustration provided by the ad note suggests that Article XV(4) might not be intended to provide an independent basis for claims against national exchange action, but instead is intended to reduce the coverage of other substantive provisions. Infringements of the letter of another substantive provision are only to be considered violations if they frustrate the intent of that substantive provision. If this were all that Article XV(4) covered, then it would definitely not expand prohibitions beyond the existing substantive provisions. And it is by no means clear that China’s currency regime violates the explicit prohibition of any substantive provision of GATT. However, this part of the ad note is framed as an example. So it is possible that there might be other unstated examples, such as a circumstance where the letter of a substantive provision is not violated, but its intent is violated. We simply do not know. If this broadening interpretation is available, however, then we might understand Article XV(4) as having a purpose similar to the concept of “non-violation nullification or impairment” in WTO law: making the nullification or impairment of the intent of another provision, through an exchange action, an independent violation of GATT. Indeed, this seems to be the natural meaning of the language of Article XV(4), absent the ad note.

This concept of frustration of the intent, like non-violation nullification or impairment, is difficult to apply in practice. For example, it may be difficult to discern the intent of a provision separate from its language. But in practical terms, can we say that China, by its exchange action, has evaded the intended liberalisation of its tariff bindings? Borrowing a concept from the WTO doctrine providing remedies for “non-violation nullification or impairment,” we would ask whether the US had “legitimate expectations” that China would not use exchange actions in a way that evades the intended liberalisation of its tariff bindings. One determinant of the US legitimate expectations would be the actual state of the exchange rate at China’s accession in 2001. We would also need to find whether China’s exchange action indeed had the effect of a tariff above its bindings. On this latter point, economists may well disagree.

As to the former point, the Chinese government maintained a peg of 8.27 yuan per dollar from 1997 to 2005. The current exchange rate is approximately 6.825 yuan per dollar, representing a significant appreciation since China’s WTO accession. Given this peg at a lower value at the time of accession, it may be difficult for the US to argue that it had legitimate expectations of greater appreciation of the renminbi, as opposed to expectations of non-depreciation. That is, we would ordinarily express a “legitimate expectation” as expecting a frustrating event not to occur, as opposed to a requirement that current conditions be improved.

Non-violation nullification or impairment

For the same reasons just mentioned, an independent claim that China’s exchange action has “nullified or impaired” US rights under the WTO treaty would be unlikely to succeed. Furthermore, the very existence of Article XV of GATT – addressing the issue and setting the expectations – makes an independent non-violation claim unlikely to succeed.

Articles 3 and 5 of the WTO Agreement on Subsidies and Countervailing Measures

Article 3 of the Subsidies and Countervailing Measures Agreement prohibits export subsidies and import substitution subsidies. But the definition of “subsidy” contained in Article 1 of the agreement demands that there be a financial contribution by a government. It is difficult to view the Chinese exchange action through the PBC as a financial contribution by a government to an exporter in this sense. If a creative reading of this provision were to result in a finding that the Chinese exchange action is indeed a subsidy, it is difficult to see it as a prohibited export subsidy or import substitution subsidy. This is because the availability of the alleged subsidy does not seem to be contingent on exportation or on the substitution of domestic products for imported goods.

In order for a subsidy to be actionable under Article 5 of the agreement, it must be “specific” within the meaning of Article 2 of the agreement. However, it is difficult to argue that the benefits of China’s exchange action are limited to an enterprise or industry or group of enterprises or industries, as required by Article 2. Any benefits would be felt throughout the economy. So the requirement of specificity, along with the definition of “subsidy”, would make it difficult to make a case under Article 5 of the Subsidies and Countervailing Measures Agreement.

Countervailing duties

For the reasons mentioned above, it is unlikely that China’s exchange action could be considered either “specific” or a “subsidy” eligible to be countervailed by national action. If it were considered a subsidy, there would still be difficulties in measuring the amount of the subsidy, as well as in determining whether this subsidy had caused the requisite “material injury” to a US industry.


Benitah, Marc (2003), “China's Fixed Exchange Rate for the Yuan: Could the United States Challenge It in the WTO as a Subsidy”, ASIL Insights, October.

Bhala, Raj (2008), “Virtues, the Chinese Yuan, and the American Trade Empire”, Hong Kong Law Journal, 38:183.

Mattoo, Aaditya and Arvind Subramanian (2008), “Currency Undervaluation and Sovereign Wealth Funds: A New Role for the World Trade Organization”, Petersen Institute Working Paper 08-2.

Mercurio, Bryan and Celine Sze Ning Leung (2009), “Is China a ‘Currency Manipulator’?: The Legitimacy of China’s Exchange Regime under the current International Legal Framework”, The International Lawyer, 43:1257.

Staiger, Robert W and Alan O Sykes (2008), “Currency Manipulation' and World Trade”, Stanford Law School, Olin Working Paper No. 363.

1 I do not examine whether China’s regime might violate China’s obligations with respect to subsidies under the Agreement on Agriculture.

2 The ad note indicated by the asterisk, which is part of the binding treaty text, provides in relevant part as follows:

The word "frustrate" is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article.

3 While a “trade action” could, by frustrating the intent of the provision of the IMF Articles of Agreement, also violate Article XV of GATT, I do not consider this prong of Article XV. It is unlikely that this prong would apply. See Mercurio & Sze Ning Leung (2009).

4 Mercurio & Sze Ning Leung (2009). For an opposing argument, see Bhala (2008).

5 See note 2, supra.


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