Exchange Rate Manipulation – is sunlight the best disinfectant?

On 30 September 2018, the United States published the draft text of the recent United States-Mexico-Canada trade agreement (“USMCA”). One of USMCA’s innovations is the inclusion of a new chapter, entitled “Macroeconomic Policies and Exchange Rate Matters”, which addresses, among other things, the issue of exchange rate manipulation. This is about countries undervaluing their currencies to gain a competitive advantage, and it is a sensitive topic for the United States which has complained about China’s currency practices for some time.

International Monetary Fund (“IMF”) Articles of Agreement (the “IMF Articles”)

The IMF Articles address exchange rate manipulation directly, providing that member countries of the IMF shall “avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members”.  The IMF has clarified that “manipulation of the exchange rate is only carried out through policies that are targeted at—and actually affect—the level of an exchange rate” and that the phrase to gain an unfair competitive advantage” only applies where “the member is engaged in these policies for the purpose of securing fundamental exchange rate misalignment in the form of an undervalued exchange rate and the purpose of securing such misalignment is to increase net exports3. Two elements must therefore be shown: there must be both an intention to manipulate exchange rates to increase exports and a causal link between the relevant policies and the level of the exchange rate.

The IMF enforces this obligation by means of surveillance of member countries’ compliance (“Article IV consultations”), which results in a report prepared by the IMF staff to the IMF’s Executive Board. If a member violates this obligation, the IMF can declare it ineligible to borrow and (in the case of a persistent breach), suspend its voting rights (this takes a 70% majority) or expel it (an 85% majority). The enforcement of this obligation is therefore problematic as it requires IMF members to vote for the suspension or expulsion of a peer (although it is not without precedent, as Zimbabwe had, for example, its voting rights suspended in 2003 and then restored in 2010).

WTO agreements

WTO agreements address exchange rate manipulation more obliquely. The General Agreement on Tariffs and Trade 1994 (the “GATT”) prohibits WTO members from “[frustrating] by exchange action the intent of [GATT] provisions” provided that such exchange action is an “appreciable departure” from the intent of those provisions.8

This will be hard to show, and there has never yet been a dispute on the issue.9 In addition, it has been suggested that exchange rate manipulation could be characterised either as a subsidy under the Agreement on Subsidies and Countervailing Measures 1994 or as a nullification or impairment of benefits under the GATT.10 But detailed analysis suggests that these arguments are difficult to sustain.11 This analysis might be borne out by the absence of any action to date, even by the United States.


The USMCA approach starts by confirming that each party is bound by Article IV of the IMF Articles in relation to exchange rate manipulation, replicating its language.12  In addition, USMCA adds soft language, stating that parties should: “achieve and maintain a market-determined exchange rate regime; (b) refrain from competitive devaluation, including through intervention in the foreign exchange market; and (c) strengthen underlying economic fundamentals, which reinforces the conditions for macroeconomic and exchange rate stability”.

A simple reiteration of previous commitments and a soft law elaboration does not add a great deal. However, USMCA also adds hard law transparency and reporting obligations in relation to exchange rate policy, including requiring the consent of each party to public disclosure by the IMF of its surveillance reports.13 If this enables greater scrutiny of the exchange rate policy of a party, it may make it easier for the other parties – and indeed for all of its trading partners around the world – to place political pressure on it to cease any unfair practices.

Institutionally, USMCA also establishes a “Macroeconomic Committee” to monitor the implementation of the USMCA exchange rate obligations 14  and provides for enforcement of the transparency and reporting obligations through senior representative consultations and, in the end, the USMCA dispute settlement mechanism.15 Interestingly, this final option comes with certain additions reflecting the special nature of the subject matter. The consulting parties may request the IMF undertake further surveillance or initiate formal consultations as part of its mandate,16 and panellists must have “served as a senior official of an exchange rate or fiscal or monetary authority of a Party or the [IMF]”.17


Ultimately, in relation to exchange rate manipulation requirements, USMCA builds on the existing framework of the IMFA, coupling it with increased transparency and reporting obligations which are subject to dispute settlement. It is therefore an example of the recent trend of “regulation by transparency” in line with the theory that parties may be indirectly driven to better behaviour by having to disclose relevant information. Given the innovative nature of the USMCA provisions, it will be interesting to see in the future to what extent such provisions remain solely a feature of agreements negotiated with the United States or whether they will be taken up more broadly by countries when negotiating free trade agreements, and whether the United States decides to pursue its claims in relation to currency practices more broadly, whether at the WTO or in other fora.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.
2.IMF Articles, Article IV:1.
4.IMF Articles, Article IV:2.
5.IMF Articles, Article XXVI:2.
6.IMF Articles, Article XXVI:2.
7.GATT Article XV:4.
8.GATT Note Ad Article XV.
9.W. Staiger and A. O. Sykes, ‘“Currency Manipulation” and World Trade’ (2010) 9(4) World Trade Review 583.
10.GATT Article XXIII:1(b).
11.Staiger and Sykes, (n 9).
12.USMCA, Article 33.4:1.
13.USMCA, Article 33.5:2.
14.USMCA, Article 33.6.
15.USMCA, Article 33.7.
16.USMCA, Article 33.7:4.
17.USMCA, Article 33.8:2.