UNIVERSITY OF BARCELONA Master of Laws in International Economic Law and Policy 2013/2014 FINAL RESEARCH PAPER Reform and regulation of the international monetary system: From the back door or the front door? Author: Ramsés Llobet Bentarif Supervisor: Prof. Ramon Torrent Macau
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Reform and regulation of the international monetary system: From the back door or the front door? Author: Ramsés Llobet
The present final research paper investigates, after providing a brief overview of the history of the international monetary system and the global economic governance, the recent discussion about the two ways solve the exchange rate misalignments: (i) under the WTO law in spite of the fact that exchange rates are not its subject matter; or (ii) by reforming the IMF and introducing as official exchange rate the international currency standard of SDRs in order to correct the “exorbitant privilege” of the US and hence the global imbalances.
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UNIVERSITY OF BARCELONA
Master of Laws in International Economic
Law and Policy 2013/2014 FINAL RESEARCH PAPER
Reform and regulation of the international monetary system:
From the back door or the front door?
Author: Ramsés Llobet Bentarif
Supervisor: Prof. Ramon Torrent Macau
2
Abstract
The present final research paper investigates, after providing a brief overview of the history
of the international monetary system and the global economic governance, the recent
discussion about the two ways solve the exchange rate misalignments: (i) under the WTO
law in spite of the fact that exchange rates are not its subject matter; or (ii) by reforming the
IMF and introducing as official exchange rate the international currency standard of SDRs
in order to correct the “exorbitant privilege” of the US and hence the global imbalances.
Bibliography and Notes ............................................................................................... 49
4
INTRODUCTION
Since its creation in 1944, the global economic governance was managed by the well-
known Bretton Woods system compound with its two main institutions, the International
Monetary Fund and the World Bank, plus the GATT1947/WTO. Although these three
institutions got the same purpose to assist and manage the international economy, each one
had its own subject matter. While, on one hand, the issue of exchange rates and finance has
been historically considered as a subject matter of the IMF, on the other hand, the subject
matter of the GATT1947/WTO has been the gradual trade liberalisation among countries in
order to avoid the protectionist war. Nonetheless, it is important to stress on the fact that if
we want to achieve the well-management of the global economic governance it is going to
be necessary the correct cooperation and collaboration between these institutions and their
Members state.
As a consequence, in words of Robert Triffin, of the “exorbitant privilege” of the US
economy to have its own currency as the international reserve currency giving it the ability
to running a huge balance of payments deficit (through exporting US dollars) without enter
in a balance of payments crisis because the US purchase imports in its own currency.
Consequently, large imbalances (US registered a huge deficit while Germany and Japan
were registering huge surpluses) were established between the three main capitalist
economies. By approaching the 1970, the international monetary system was completely
unstable as a result of the large imbalances in the international economy and the question
then, as it is now, is who is going to adjust? And the answer was nobody. In 1971, Nixon
administration, which had the possibility to be reelected in the next elections, rather to
deflate their economy they decided to take unilateral actions in order to force the other
economies to revalue their currencies. In this context, the US imposed its domestic
objectives in front of the international objectives and suspended the convertibility into gold
and open a new paradigm were floating exchange rates were allowed meaning the end of
the par value system and thus the collapse of Bretton Woods system.
5
As a result, a new role was given to the IMF in the second amendment of its agreement in
order to give more policy space and autonomy to the world economies regarding the
monetary issues and the exchange rates and according to the political will of the period.
The post-Bretton Woods era was performed by ad hoc meetings among the main world
economies and the G-20 for the purpose to negotiated monetary accords. In the 2008 crisis,
the concerns about the global imbalances raised again with the new economic actor of
China. The developed countries, mainly the US and EU, accused China and its exchange
regime of maintaining an undervalued exchange rate which it is allegedly manipulated. For
instance, the Nobel prize Paul Krugman have suggested that China is subsidizing its
exports via its exchange rate policy by maintained a massive foreign exchange intervention
over years resulting in a combination of an export subsidy and import tariff (Krugman,
2010).
In spite of the fact of the developed countries accusations, the exchange rate policy of
China is in accordance with the IMF Article IV (the chapeau) which assess if IMF member
is intending to manipulate its exchange rate in order to obtain unfair competitive advantage
and thus consistent the its IMF obligations. The same US which in the early 1970 forced
the collapse of the Bretton Woods system and the second amendment of the IMF and,
among others, its Article IV, in the present it is blaming on other countries on their excess
of exchange rate policy maneuver. It not should be surprising that the same retractors of
China exchange regime that are not in accordance with the IMF outcomes are trying to
submit their demands by the “back door” of the global economic governance regarding the
exchange rate policies, by the WTO law instead of the IMF framework even though that
exchange rate has been always a subject matter of the IMF.
With this in mind, the complainants are arguing that persistent exchange rate misalignments
do have significant distortion effects on ad valorem applied and bound tariffs negotiated in
the WTO (Thorstensen, Ramos and Müller, 2012: 8). Alternatively to the IMF mechanisms
they claim to address those exchange rate misalignments under the “frustrator” approach
6
provided by the untested GATT1 Article XV: 4 by alleging there has been a frustration of
trade objective under GATT Article II. Moreover, some other authors claim that a currency
that is significantly deviated from its equilibrium value for more than the time needed to
address economic imbalances is equivalent to a subsidy, legally and economically
speaking, and as a consequence some currency competitive devaluations may fall under the
scope of the SCM2 agreement (Lima-Campos and Gil, 2012: 37). On the contrary, by
addressing all the complaints on its currency policy, the Governor of the People’s Bank of
China, Mr Zhou Xiao-chuan, proposed a new reserve currency system centred on
strengthened SDR3 (Zhou, 2009). The idea, quoting the “bancor” reserve proposed by
Keynes in the 1940s, is to create an international reserve currency that is disconnected from
individual nations avoiding then to confer any “exorbitant privilege” to a single country and
thus trying to address the exchange rate misalignments by the “front door” of the global
economic governance, by the IMF framework. With a new reform in the IMF and its new
agenda, its proposal calls for a general increase in SDR allocation, as well as broadening of
the scope of using SDR, in order to replace current dollar standard and creating a new
international monetary system which will address the currency distortions to the
Multilateral Trading System.
Having in mind all the above mentioned, this research paper is going to be divided in three
different parts. Part A is going to provide a brief overview of the international political
economy of the past century regarding the evolution of the international monetary system
and the global economic governance. Part B will set main mechanism of international
economic law, both the IMF and WTO law, regarding the exchange rate misalignments
exploring the relationship of both international organizations and their nature. Part C will
deal on the economic consequences of the “exorbitant privilege” and the proposal of SDRs
as a new reserve currency in order to address the systemic global imbalances. Finally, some
conclusions will close this paper by questioning which of both “doors” will be used.
1 General Agreement on Tariffs and Trade.
2 Agreement on Subsides and Countervailing Measures.
3 Special Drawing Rights.
7
PART A. THE EVOLUTION OF THE INTERNATIONAL
MONETARY SYSTEM AND THE ISSUE OF EXCHANGE RATES
So much of barbarism, however, still remains in the transactions of the most civilized nations, that
almost all independent countries choose to assert their nationality by having, to their own
inconvenience and that of their neighbours, a peculiar currency of their own.
John Stuart Mill4
1. From the Bretton Woods system to the Silent Revolution
In some way, there is much truth in the assertion which says that “money makes the world
go round”. In spite of the fact that the actual wealth of nations, in words of Adam Smith, is
indeed the production of goods and services, money is the main mean used by people
across nations which allows to purchase and sell these goods and services5, that is the
activity known as international trade. Since the creation of Nations States in modern times,
the emergence of national currencies has been seen not only as a tool to articulate the
international trade rather it is also a tool of the notion of sovereignty which is exclusive to
the territory of the State. In this sense, the price of a currency in terms of another it is
known as the exchange rate (Krugman, Obstfeld and Melitz, 201: 329). As a matter of fact,
the international monetary system has been one of the core elements in the creation of the
global economic governance of the past century and its central issue is to correct the
mismanagements of those exchange rates resulted of sovereignty exercises.
4 Mill, John Stuart. 1985. Principles of Political Economy. New York: D. Appleton And Company. pp. 479
5 Cf. Smith, Adam. 1776. An inquiry into the Nature and Causes of the Wealth of Nations.
8
Almost seventy years have passed from the creation of the main pillars that compose the
global economic governance which was the result from the agreements in the 1944
conference of Bretton Woods and in the 1947 at the Geneva round. The creation of this new
institutional architecture was essentially based in order to answer specific problems that
arose in that context. Its main objective was to avoid again the appearance of the causes
that resulted what in the inter-war period was known as the conflict of “capitalist blocs”
and the trade wars. (Torrent, 2010: 6).
In a polarized world, marked by an abusive treaty of Versailles6, the German hyperinflation
and the 30s Great Depression, the countries were competing with each other and imposing
what in the economic field is known as “beggar-thy-neighbour” policies, i.e. traditional
instruments of protectionism and monetary measures with direct influence to the trade
flows (e.g. competitive currency devaluations). The protectionist war was undoubtedly one
of the main causes what the led emergence of a bloody II World War.
Hence, at being the international trade with the finance and monetary stability the main
economic issues of relevance in the Brettoon Woods conference, the necessity of create a
new international institutional system able to coordinate and regulate the use of different
trade and economic policy tools in order to avoid the resurgence of the trade wars was an
evidence. The institutions that born ex post of the conference, popularly called as the
Bretton Woods system, were what currently are known as the World Bank7 (WB) and the
International Monetary Fund (IMF). By adding the creation of General Agreement on
Tariffs and Trade8 (GATT) in 1947, which later in 1995 became part of the institutional
body of the World Trade Organization (WTO), the foundations of the global economic
governance were established.
6 Cf. Keynes, John Maynard. 1919. The Economic Consequences of Peace.
7 Indeed, the WB is composed by two institutions: the International Bank for reconstruction and Development
(IBRD) and the International Development Association (IDA). 8 The main essence of GATT was discussed in the Bretton Woods conference, but it does not materialized in
the Bretton Woods agreement because consensus was not achieved due to the position of the United States.
Later on 1947 the GATT was agreed in the first Geneva Round, and its institutional body, the WTO, was
created in 1995.
9
Even though that, as a whole, these international institutions were designed lato sensu in
order to set the rules of the international economic relations through the multilateral system,
stricto sensu each one of them pursues its own subject matter. Being these the economic
development under the WB9, finances and monetary issues under the IMF, and the trade
flows with a gradual liberalization of them under the GATT/WTO. Due to the capital flows
liberalization were not one of the main problems that led the II World War during the inter-
war period, this issue was left behind from the scope of the new regulatory international
framework (O’Hara, 1999: 44).
The rationale of the Bretton Woods international monetary system relies under the adjust
mechanism, through surveillance and financing, the imbalances in the balance of payments
among countries. This constitutes the main core of the politics of international monetary
arrangements (Walter and Sen, 2009: 96). In this sense, the IMF is the main international
finance institution facilitating temporary liquidity in the short run to those countries that are
facing payments problems.
The creation of the IMF also chased the objective of prevent restrictive monetary practices,
mainly the quantitative restrictions and the competitive currency devaluations. IMF Article
IV: 1 sets that all the national currencies must be subjected to either US dollar or gold while
maintaining their exchange rate within a range of 1 per 100 US dollar value established by
the IMF. Nonetheless, IMF Article VI: 3 sets the permission of using capital controls due to
the prioritization of domestic monetary policy. Therefore, one of the main mechanisms
installed in the IMF was the system of “fixed but adjustable10
” exchange rate or also known
as the par value system. This system was intended to prevent competitive currency
devaluations and to stabilize the characteristic volatility of floating exchange rates allowing
some flexibility of adjustment under international surveillance. While the US dollar
9 I want to stress on the fact that by talking on the international monetary system and the trade relations in this
paper, in hereafter each time I will mention the Bretton Woods system I am going to elude the WB because
his purpose do not suit on the subject matter of this paper.
10
In theory the adjustment required consultation through the multilateral system of the IMF in order to
prevent competitive devaluations.
10
maintained the fix price of 35 US dollars in exchange of 1 gold ounce, the rest of countries
were free to maintain their reserves in either gold or US dollars. They would be able to
exchange their reserves of gold or US dollars by the fix price using either the “gold
window” of the US Treasury or in the gold private markets.
Having reached the 1960s, as a consequence of the incredible growth in the international
private markets and following the increasing demands of liquidity in order to satisfy the
globalisation process, the gold-US dollar standard began to weaken. The Belgian economist
Robert Triffin argued that the gold-US dollar standard was intrinsically unstable due to his
low capacity to satisfy the growing demands of an international trade which was
progressively dependent of the liquidity US payments deficit and the dollar glut (Triffin,
1978: 21). Hence to the “exorbitant privilege11
” , repeatedly blamed by the French
government, of the US and its currency thanks to its central position as a provider of
liquidity to the rest of the world, the US were able, and currently still, to run larger trade
and current account deficits without worsening its external position commensurately
(Gourinchas, Rey and Govillotm, 2010: 1). Triffin raised the idea of using the “bancor”, the
Keynes proposition in the 1940s of using a supranational currency used in international
trade as a unit of account, as a new international currency created and managed by the IMF
in order to replace the gold-US dollar standard.
With this in mind, in the 1970s the governments tried to give a solution to the liquidity
problem by the creation of a new reserve asset which substituted the US dollar, the Special
Drawing Rights (SDRs). These SDRs are assets which their sole purpose is to serve as a
source of liquidity for the governments in order to negotiate their debts coming from the
balance of payments deficits. Although there was a first distribution of SDRs in the early
1970s, they were left aside and its usefulness was marginal. The only solution for avoid the
collapse of the Bretton Woods system was to restore the trust of a weak US dollar as a
consequence of a huge deficit in the US balance of payments. In front of this situation only
were able three different solutions: (i) to devalue the US dollar in relationship to gold, (ii)
11
Term coined by the French Minister of Finance Giscard d’Estaing in the 1960s.
11
deflate the US economy to correct its deficit, or (iii) that the other countries began to
expand more their economic activity, especially the major capitalist economies. We should
remember that in the context of 1970s the main major capitalist economies, also known as
the finance G3, were the US, Germany and Japan. The problem was that none of the three
solutions was really achievable, the one due to technical problems and the other two due to
political problems. On the first hand, the American policymakers did not found any sense to
devalue the US dollar in relationship to gold because, as a reaction, Germany and Japan
would devalue their currencies in response (Oatley, 2012: 219). On the other hand, neither
the USA nor Germany were in the political situation to change their economic policies. The
USA because was in the middle of the Cold War and was unwilling to reduce his budget
expenses. While Germany was also unwilling o expand their economic activity and revalue
its currency because its aversion to the inflation which came from the past experience of
Germany in the inter-war period and the depressing hyperinflation.
When Richard Nixon achieved the presidency in the 1969, he showed to be contrary to take
reduction deficit policies. Moreover, he blamed on the other governments and pointed out
that the facing international monetary problems were caused of the surpluses of both
Germany and Japan (Dam, 1982: 186). In spite of the fact that the systematic problem was
not solve, US continued exporting US dollars. In 1971 there were many speculative attacks
against the US dollar and Washington faced a serious balance of payments crisis. In a
situation where nobody wanted to adjust, the US decided to take unilateral economic
measures and Nixon vowed “we’ll fix those bastards” (Paterson et al, 2010: 386). In the
august of the same year, the Nixon administration decided to close the gold window,
suspending the convertibility to US dollars in gold, and to impose an import tax in order to
increase the cost of imports. These unilateral decisions meant the collapse of the Bretton
Woods system, the end of the gold standard and the supremacy of the US dollar as a key
currency. In December, during a meeting with the representatives of the ten leading trade
economies, the US Treasury Secretary George Shultz stressed: “Santa Claus is dead”. By
announcing the death of “Santa Claus” the former US Treasury Secretary suggested that the
12
US would not act as a global monetary savior if that meant altering the chances of President
Nixon to be reelected (Keegan, 2004).
Furthermore, the decision to abandon the gold standard in 1971 implied the end of the par
value system, so a process of modification mutatis mutandis of the practices of the IMF
was required, this process is known as the “silent revolution” (Boughton, 2001: 1 – 50).
The range of these modifications had a direct impact on the rules of the IMF. One of the
most important changes was the reformulation of the IMF Article IV which transformation
implied the shift from the par value system to the flexible surveillance system by limiting
the role of the IMF only to financing purposes in order to aid the balance of payments in
danger of the countries in a new world of floating exchange rates.
The reason of the crisis of the Bretton Woods system was mainly because a large creation
of international liquidity by the hand of the USA. On this issue we have emphasize a point:
this problem is not solve at all. This is not only due to the lack of a “lender of last resort”
but on the fact that some national currencies, in particularly the US dollar, still being the
key currencies, more even with the absence of the original disciplines and legal rules
(Torrent, 2010: 8)
2. Cooperation in post-Bretton Woods system and the financial crisis
The rupture of the multilateral monetary system, the fall of the gold standard and the
reconversion of the IMF through the “silent revolution” were consequence of the growing
desires of pursue domestic economic policies with more autonomy where the national
sovereign do not see limitations in front of an administrative institution at supranational
level. The shift from “fix bud adjustable” exchange rate to a floating exchange rate system
gave the chance to the governments to use different macroeconomic policies in order to
pursue different goals at the same time that governments were not enforced to eliminate
their payments imbalances.
13
With the end of the Bretton Woods system, the global economic governance was found
itself inside a new paradigm where the resolution of the most international monetary
problems had to be carried by ad hoc intergovernmental accords and meetings between the
major capitalist economies rather than the basis of permanent institutions such as IMF. In
this new paradigm the 1970s were marked with a period of relatively low current accounts
imbalances. This period of relatively stability was followed by a 1980s of current account
imbalances. In 1984 the USA reached the major current account deficit not registered in the
world while Japan and Germany were running large current account surpluses. These
current account imbalances were product of divergent macroeconomic policies among the
three major capitalist countries (Oatley, 2012: 226).
A weak US dollar from the 1970s found the way to acquire strength in the 1980s due to the
ability of the US to attract capital flows from the surplus countries through interest rates
relatively high. In this context, a large current account deficits and ongoing appreciation of
the US dollar started to push some domestic demands on using trade policy protectionist
tools, in particular to Japanese products (Suzuki, 2000: 140). In order to appease the
growing domestic protectionist demands, in the 1985 the president Ronald Reagan, through
an exercise of diplomacy, tried to find out a solution to those international currency
misalignments and the current account imbalances by setting a meeting with the finance G5
at the Plaza Hotel in New York. This meeting had as an outcome the Plaza Accord where
the 5 governments agreed to reduce the value of the US dollar in front of the Japan and
Germany currencies.
Hence, in the subsequent years was devalued in big proportion and with the intention to
avoid a major devaluation, in the 1987, the finance G5 set a new meeting at the Louvre in
Paris. In the same way, a new agreement, called the Louvre Accord, was the outcome of
this meeting which it agreed by the parties the end of the US dollar devaluation period and
the exchange rate realignment. As a matter of fact, in the Louvre meeting was raised the
proposal of do a step forward to some institutionalization of the cooperation on exchange
14
rate issues through the creation of a “target zone12
” but the proposal was left behind due to
the lack of supports. Approaching the XXI century, marked by the creation of a European
monetary union and the ongoing economic growth of the BRICS, a twist was given with
the apparition of a new finance G3 composed by US, China and the European Union (EU).
This new G3, in comparison with its predecessor, is characterised for being less
institutionalised and with more political asymmetries that turns it in a weaker actor of the
global economic governance.
In the middle of the 2000s, the world was in the midst of a boom period that seemed
endless, the economic growth was increasing while the investments and the international
trade were expanding. Nevertheless, in the middle of this expansive period a big number of
countries were running simultaneously current account deficits, including the USA. At the
same time, China was registering a huge surplus in its current account. Even though these
global imbalances were not the main cause of the 2008 financial crisis13
, they have been a
relevant co-determinant which has empowered the acceleration of those economic policies
that cause the crisis. Especially due the US ability to finance their macroeconomic
asymmetries through the foreign borrowing (Obstfed and Rogoff, 2009: 3).
Consequently, there is the growing opinion of some researchers that the monetary policy
chosen in the 2005 by China of fixing their exchange rate pegging it at the US dollar is
resulting to an increasingly depreciation of the remminbi (rmb), the Chinese currency.
Those who are arguing the devaluation of the rmb as a fact are pointing out three different
indicators that confirm they thesis: (i) from 2005 China obtained an increased sharp surplus
in their current account; (ii) the fact of an incredible and sustained accumulation of foreign
exchange reserves, usually linked by the famous concept of the “global savings glut14
”
connected by Ben Bernanke; and (iii) the growing intensity of investment capital in China
(Walter, 2010: 4 and 9).
12
A target zone tries to restrict the movement of an exchange rate, avoiding the pitfalls of both a pegged
exchange rate and a floating exchange rate. 13
Today is widely known that the main causes of the financial crisis were the leverage and housing bubbles. 14
Ben Bernanke, the former chairman of the FED, used this expression for describe his concerning about the
significant increase in the global supply of savings and its implications in the US monetary policy.
15
In addition, the interdependence between Asiatic countries – mainly China – with the
western countries – mainly USA –, where the first ones with a huge save are lending money
and exporting commodities to the second group, by adding the Chinese monetary policy of
fix exchange rate pegged at the US dollar and the current account deficit of USA has
created a de facto revived Bretton Woods system widely known as Bretton Woods II
(Dooley, Flokerts-Landau and Garber, 2007: 21).
In the 2010, when the crisis was still hitting hard, the president Barack Obama contacted
with the leaders of the main world economies that were suffering the bad consequences of
the crisis in order to formally request them to impulse action against the crisis through
expansive monetary and fiscal policies that allow incentive the growth of their economies.
The response of Germany was that by now the main interest is to consolidate the economy
and avoid an increase of the inflation. It is curious to see how more the things are changing,
the more the things remain the same. The political conflicts that cause the collapse of
Bretton Woods system with the purpose to avoid them are persisting today. This shows that
there is still much work to do in terms of global economic governance and the need to lay a
foundation to reform the international monetary system. In this direction, some authors
point out that the creation of what they consider the new pillar of the global economic
governance, the Financial Stability Board (FSB), it is a sign that governments want to
prioritize the shift of permanent institutional economic governance “Bretton Woods-type”,
such as WTO and IMF, to a more informal intergovernmental economic governance, such
as the FSB and the G20 (Wouters and Odermatt, 2013: 21). Nonetheless, the current
situation of exchange rate misalignments will require the revision and the reform of some
mechanism of the international economic institutions in order to correct these global
imbalances and give a response to the political concerns.
In our current days, China has been in the middle of the discussion regarding the
mismanagement of currency misalignments. This discussion has been on the agenda of the
global economic governance during the past years. The view that the rmb is clearly
undervalued is shared almost globally. Not only the US, but also the IMF, the EU and
Brazil have repeatedly demanded a quicker appreciation of the Chinese currency. The
16
sceptics of the Chinese monetary policy argue not only if that its exchange rate is in breach
with some IMF mechanisms, they also claim that some WTO disciplines are being distorted
by exchange rate misalignments. Therefore they claim that exchange rate misalignments
must be subjected to WTO mechanisms. We are going to these and other issues in the next
part.
17
PART B – EXCHANGE RATE MISALIGNMENTS AND THE WTO
LAW: FROM THE BACK DOOR
“Exchange rates are, and have always been, a highly sensitive subject in the WTO.”
Pascal Lamy15
1. Nature of obligations and the legal relationship between WTO and the IMF
The long-standing relationship between the IMF and the WTO comes since creation of the
IMF and the contracting parties of the GATT in the 1944-7. Their linkage is obvious in the
sense that their institutional framework was designed to avoid “beggar-by-neighbor”
policies. Taking into account the close relationship between the money and finances with
the trade some mechanisms were needed to ensure this link but, of course, having in mind
their own subject matter and trying to avoid the overlap of obligations and functions.
First of all, in order to achieve a complete understanding of the nature and end of these
institutions, we need to mention some elemental differences about their scope and
functions. Regarding the goal of the IMF and WTO, even though we can ensure that both
institutions work for the same purpose of avoiding bad practices in international economic
relations, we must point out that their subject matter and purposes are strictly different. In
particular, the WTO tries to safeguard the international trade by a gradual liberalization and
15
From the WTO Seminar on Exchange Rates and Trade on 27 March 2012
18
avoiding the discrimination16
among its members while the IMF seeks preventing
competency currency devaluations and ensure the adjustment of balance of payments. On
the other hand, it is important to stress the difference of the nature of their obligations and,
as consequence, their different modes of operation. In the WTO the multilateral system
plays a central role, its trade obligations are characterized by the reciprocal nature where
parties undertake obligations to other parties. The WTO as an organization provides the
framework of implementation and administration of the different agreements and a forum
of discussion where the member’s substantives rights and obligations flow from one
member to another through a mechanism for formal dispute resolution regarding supposed
violations of the rules set by the WTO Agreements. The WTO performs a limited range of
activities such as trade policy reviews and the fulfillment of administrative liabilities, as an
institution the WTO do not have power to impose sanctions to any member that fails to
comply with its obligations from the WTO Agreements.
On the contrary, in the case of the IMF the members’ obligations are owed to the institution
rather than to other members. In this sense, we can see in the IMF a double role. On one
hand, multilateral system as far as the institution must oversee the effective operation of the
international monetary system and, on the other hand, the bilateral system established by
the vertical organization where members seek fulfill their commitments individually in
front of the eyes of the IMF as an organization. The IMF Articles requires the obligation to
their members to withdraw constraints affecting other members disregarding if any member
has submitted a complaint requesting such withdraws. In the case of persistent violations,
the IMF as organization has the authority to impose a different range of sanctions, e.g.
suspensions of voting right or withdrawal of eligibility to use the IMF financial resources.
To sum the above mentioned, the approach and means that are used by both organizations
in order to reach their goals are not symmetrical. In spite of the fact that the WTO is an
international organization, it does not operate from the same “institutional” perspective as
the IMF (Siegel, 2002: 564).
16
MFN and NT clauses.
19
From a legal point of view, the jurisdictional aspect of both institutions can be seen in two
different categories that should be mentioned. On the first hand, (i) by those provisions in
the WTO Agreements that address cooperation with the IMF in order to avoid the conflict
of rights and obligations between the both institutions; and, on the other hand, (ii) by the
recent resolution of the WTO dispute settlement mechanism that have arose the question
whether the WTO panels should consult the IMF and, if so, what should be the legal effects
of the consultation. We will focus on the first category because it concerns the issue of
exchange rates misalignments while the second category addresses others policy tools such
as balance of payments derogations17
due to the fact that no case on exchange rate
misalignments has been revised for the WTO dispute settlement mechanism yet.
Although there is no explicit Article in the IMF which links its relations with the WTO, the
IMF Article X authorizes communications and relationships with other international
organizations having responsibilities in related fields. However, in the case of the WTO,
there are some provisions in the GATT and the GATS, e.g. GATT Article XV: 1, which
explicitly addresses cooperation with the IMF. This shows that the legal relationship
between both international organizations is “one-sided” where the WTO is required to
consult the IMF under specific circumstances and not vice versa.
Under GATT 1994, the Article XV on “Exchange Arrangements” explicitly sets seek
cooperation with the IMF in order to coordinate policy with regard of exchange questions
and quantitative restrictions. In Article XV: 2 may be found an obligation to consult with
the IMF on specified situations. In spite of the fact that this same obligation does not
require the WTO to accept the IMF view on the issue consulted, nevertheless the WTO is
required to accept some factual findings under the competitions of the IMF, e.g. statistical
findings. Article XV: 9 (a) states that nothing in this Agreement (GATT) shall preclude the
use of exchange controls or exchange restrictions that are consistent with the IMF Articles.
In case of overlapping jurisdiction of overlapping jurisdiction, GATT Article XV: 2 and 9
work together in order to avoid conflicting rights and obligations between WTO and IMF.
17
Cf. India Balance of Payments case: India – Quantitative Restrictions on imports of agricultural, textile and industrial products. (WT/DS90/AB/R)
20
As a result, it may create an exception to GATT obligations for a measure that the IMF
determines is an exchange measure and if it is consistent with the IMF Articles (Siegel,
2002: 607). A further analysis of the Article XV will be given below in the third section of
this Part B.
In the case of the GATS, Article XI: 2 states that nothing in GATS shall affect rights and
obligations of the IMF Articles. Article XII of GATS contains an analogous statement to
the GATT about the effects of consultations with the IMF.
Finally, in 1996 the IMF and the WTO signed a formal cooperation agreement 18
which
includes several provisions on reciprocal attendance on meetings, document exchange and
bureaucratic matters in order to facilitate cooperation between both organizations.
2. The IMF Article IV:1 and the 2007 reform of bilateral surveillance
As was pointed out in the previous part, exchange rates are the subject matter of the IMF.
Even during the period of post-Bretton Woods system and the second amendment of the
IMF Agreement, what we called as the “silent revolution”, IMF had been playing a central
role on the issues of exchange rate misalignments. In this sense, the IMF Article IV: 1 is
known as the chapeau which establishes general obligations for the IMF members in order
to conduct their respective exchange arrangements. This provision also includes a non-
exhaustive list of four specific obligations which reads as follow:
“In particular, each member shall:
(i) endeavour to direct its economic and financial policies toward the objective of fostering
orderly economic growth with reasonable price stability, with due regard to its
circumstances;
(ii) seek to promote stability by fostering orderly underlying economic and financial
conditions and a monetary system that does not tend to produce erratic disruptions;
18
Agreement between the IMF and the WTO (1996), may be found in the IMF webpage: