Conflicts in global currency regulations: The case of Chinese currency devaluation policy

Abstract

In the area of international trade, currency and exchange rate play a pivotal role but generally it has been mostly neglected by the researcher and lawmakers. Even while entering into any international treaty the lawmakers seldom discuss any potential threat of currency manipulation by any party of the treaty. The evolution of Chinese currency policy of devaluation against US dollar has invoked so many discussions among jurists, economists and policy makers. Being the largest trading partner of China, United States is particularly concerned about the Chinese currency devaluation as its market is flooded with cheaper Chinese goods and its trade deficit with China has been growing faster than ever. This trade deficit is an obvious burden on the US economy which is already struggling to come out of the recessionary trends. There is a close nexus between currency manipulations and international trade. A case of currency manipulation challenges the very subsistence of the international currency regime and trade regime. Recently business world has seen numerous cases of currency manipulations including the well-known case of (alleged) Chinese currency devaluation. According to an estimate currency manipulations affect the flow of currencies worth $1.5 trillion per year. As it has been alleged by the United States that the policy of keeping the currency artificially devalued by China has the potential to make Chinese products cheaper and more competitive in the United States, simultaneously it makes the US products costlier in the domestic market of china. This price differential harmed the business of United States as the demand of the products manufactured by the United States declined and its manufacturing sector suffered very heavy losses. This loss has translated into millions of job losses in manufacturing sector of the United States which has worsened the sufferings of the United States. The United States criticism of Chinese policy reached to its culmination when the US lawmakers called China a “currency manipulator” (without formally designating China as a currency manipulator).A currency manipulation occurs when a government buys or sells a foreign currency to push the exchange rate of its own currency away from its equilibrium value or to prevent the exchange rate from moving toward its equilibrium value. The major part of the dispute covered the Chinese currency policy between the periods of 2002 -2005 when China allowed a de facto peg of its currency (Yuan, also known as RMB) against the US dollar at the rate of 8.28 Yuan/Dollar. For the purpose of keeping the exchange rate at the fixed level China regularly intervened in the market. The Chinese policy of (protracted intervention) in the market was termed as an act of currency manipulation under the Art. IV (1) (iii) of Article of Agreement of International Monetary Fund read with IMF 1977 decisions. A set of policy tools that influences the exchange rate is capital control measures such as taxes or regulatory restrictions on private capital inflows and outflows. Regulatory restrictions, in the form of taxes etc., on capital inflows tends to depreciate a currency, whereas a tax or restriction on capital outflows tends to appreciate a currency. The primary motivation for such controls is domestic financial stability (Ostry et al. 2011). Besides government’s act, the acts of private players also have an impact upon the value of the domestic currency, e.g. the preferences made by the private parties for their investments and balance of the current account etc. A private player is further induced to sell foreign currencies whereas the domestic currency being sold off at a declined rate. If there is a legal barrier to hold the domestic currencies then the depreciation in the domestic currency will be steeper. Although currency manipulation is a violation of various international agreements including IMF but IMF does not intend to provide sanction against any currency manipulation. WTO provides some sigh of relief to the regulators which works in consultations with IMF. The WTO rules authorize to impose tariffs on imports.