THE MISSING LINK BETWEEN THE WTO AND THE IMF Vera Thorstensen, Daniel a!

os, "arolina M#ller1 (January 2013) Draft not to be quoted Abstract This article is part of a broader study on the impacts of exchange rate on trade. It searches for an explanation on why there is no effective rule in the WTO to neutralize the negative impacts of currency misalignments on trade instruments. In other words, it searches for the missing link between the WTO and the I ! concerning the relationship between exchange rates and trade. It also seeks to demonstrate that, in the creation of the "retton Woods #ystem this link was clearly defined but was forgotten after the end of the par value. $espite all the historical and theoretical developments these two organizations have been through, their only legal link remains the same% &'TT 'rticle (). The article analyzes the differences between the I ! 'rticle I) approach based on the concept of manipulation of exchange rates and the &'TT 'rticle () approach that looks for the frustration of the trade ob*ectives. !inally, it argues for the rescue of &'TT 'rticle () to solve the serious problem of trade rules circumvention through currency misalignments. Intro$#%tion I am gratified to announce that the +onference at "retton Woods has completed successfully the task before it. It was, as we knew when we began, a difficult task, involving complicated technical problems. We came here to work out methods which would do away with the economic evils , the competitive currency devaluation and destructive impediments to trade , which preceded the present war. We have succeeded in that effort. -enry orgenthau, .r., /nited #tates #ecretary of the Treasury 0resident of the "retton Woods +onference.

When the articles of the General Agree ent on !rade and !ariffs (GA!!) "ere negotiated in 1#$%& during the 'nited (ations ('() )onference on !rade and * +loy ent& the contracting +arties "ere concerned about the da aging effects of e,change rate ani+ulation on trade +olicy instru ents- !he chaotic consequences to trade of the +ractice of co +etiti.e currency de.aluation in the years before the World War // "ere still .ery +resent in the inds of the negotiators!he issue "as see ingly settled& though& by the fi,ed e,change rate syste established in 0retton Woods- With e,change rates controlled under /nternational 1onetary 2und (/12) aus+ices& the sub3ect "as not ade +resent ore than a fe" ti es in the GA!!Article 45 of GA!!& in its 6aragra+h $& established that 7contracting +arties shall not& by e,change actions& frustrate the intent of the +ro.isions of this Agree ent& nor by trade action& the intent of the +ro.isions of the Articles of Agree ent of the /1281 5era !horstensen is a 6rofessor at the 9:o 6aulo 9chool of *cono ics (**96) of the 2G5 and )oordinator of the )enter on Global !rade ()G!/); Daniel <a os and )arolina 1uller are researchers at the )G!/-

Article /5 of the /12 Articles of Agree ent& by its turn& established a fir control o.er e,change rates& deter ining that e,change rates "ould not .ary ore than 1= fro the +ar .alue established and that e bers "ould underta>e 7to collaborate "ith the 2und to +ro ote e,change stability& to aintain orderly e,change arrange ents "ith other e bers& and to a.oid co +etiti.e e,change alterations8Article 45 of the GA!! and Article /5 of the /12 "ould thus for the +ri ary bond bet"een the t"o regulatory syste s& guaranteeing that e,change rates "ould not be of concern to international trade as long as the fi,ed e,change rate syste "as in +lace!he ultilateral trading syste could then de.elo+ "ith relati.e indifference to e,change rate issuesAfter ore than ?0 years of historical and theoretical de.elo+ ents& these t"o syste s suffered a3or odifications& both in their structure as in their agendas- !hese odifications ha.e had a great i +act in each regulatory syste & as each had to e.ol.e to deal "ith the ne" challenges +resent in the international arena- @o"e.er& after the end of the fi,ed e,change rate syste in the %0s and the /128s loosened control o.er e,change rates& the Article /5 of the /12 gradually lost its focus on e,change rates& as "ell as its central +lace in the 2und8s ob3ecti.es& brea>ing the lin> bet"een the t"o institutionsDes+ite the efforts of coordination bet"een the /12 and the W!A& andated by Article ///-B of the 1arra>esh Agree ent and the agree ent bet"een the institutions (W!CDC1#B)& the 200E econo ic crisis brought its effects to the forefront of international econo ic tensions- 9ee>ing a "ay out of recession& se.eral countries aintained under.alued currencies (either directly or as an indirect consequence of e,+ansionary onetary +olicies& such as nonFcon.entional instru ents of onetary +olicy) and chose to +ro ote e,+orts in order to sti ulate econo ic gro"th 2- !he i +acts on international trade ha.e surged and any state agents and scholars no" criticiGe the /12 and the W!A for their inca+acity to address the +roble !"o of the ost influential scholars in international econo ics and international la" of the +ast decades su ariGed "ell the dee+ concerns o.er the issue- John Jac>son argues that there is a bitter di.ision bet"een trade and finance e,+erts& stating the e,istence of a 7hatred of the trade +eo+le co +ared to the financial +eo+le8H /t causes real har & because the +roble s of financial ser.ices& "hich are horrendous +roble s today& can really a>e life +retty iserable& and (it) is a>ing life +retty iserable for illions and illions of +eo+le all o.er the "orld-3 2red 0ergsten argues in the sa e line& stating further thatH !he failure to lin> the trade and currency issues is by far the ost i +ortant single issue facing the global trading syste and& indeed& international econo ic coo+eration today- /t re+resents the biggest structural fla" in the 0retton Woods syste that "as created in the end of the 9econd World War-$
2 !he currency ani+ulation can be traced bac> to e.en before the financial crisis of 200E& arguably e.en being one of its underlying reasons& but the crisis has undeniably un.eiled its full consequences- 9ee 0*<G9!*(& 2red& GAG(A(& Jose+h& I)urrency 1ani+ulation& the '9 *cono y& and the Global *cono ic ArderJ& 0olicy "rief 1. 0" 23435& 6eterson /nstitute for /nternational *cono ics& Dece ber 2012 3 W!A& I/nter.ie" "ith 6rofessor John Jac>son on the W!A8s Dis+ute 9ettle ent 9yste J& WTO Online !orum& $th July& 2012& accessible at htt+HCC"""-"to-orgCenglishCforu sKeCdebatesKeCdebate$1Ke-ht $ 0*<G9!*(& 2red& Leynote 9+eech at the 5/// Annual 9y +osiu )ollege of Da"& A erican 'ni.ersity& 1%th Actober&2012 on /nternational !rade& Washington

!his article see>s to identify the origin of this I issing lin>J through the history of /12 and W!A de.elo+ entI & The 'ost(War International E%ono!i% S)ste! After the econo ic tur oil of the 30s and the follo"ing World War //& countries decided that international econo ic relations should be better regulated in order to +reser.e +eace and foster de.elo+ ent- !hree international organiGations "ere concei.ed out of this unique +olitical o ent& construing an institutional structure "hich "ould be res+onsible for global econo ic go.ernance in the follo"ing decadesH the /nternational 0an> for <econstruction and De.elo+ ent F /0<D (the original institution of the fi.e that no" a>e u+ the World 0an> Grou+); the /nternational 1onetary 2und (/12); and the /nternational !rade ArganiGation& "hich has not co e into force& lea.ing only the General Agree ent on !ariffs and !rade (GA!!) as its outco e!he t"o 0retton Woods organiGations& along "ith the sur.i.ing GA!!& "ould be the basis for the econo ic relationshi+ bet"een the nations& guaranteeing that no country "ould resort to the +rotectionist and Ibeggar thy neighborJ easures that had further "orsened the econo ic crises of the 30s- While the /0<D "ould focus on financing reconstruction and +o.erty alle.iation +ro3ects& the /12 "ould guarantee the fi,ed e,change rates syste by assisting countries facing difficulties in their balance of +ay ent- !he GA!!& by its turn& "ould regulate the fair trade bet"een countries& fostering the liberaliGation of ar>ets and the benefits of free trade- /n this sense& 7the +ostF"ar syste "ould encourage trade in goods& full e +loy ent& and stable currencies in a +eaceful "orld8-B According to Douglas /r"inH !he Great De+ression of the 1#30s is a +ri e e,a +leMalbeit rarely so recogniGedMof ho" e,change rate +olicies can create difficulties for trade +olicy- !hat decade sa" a .irulent outbrea> of +rotectionist trade +olicies that contributed to a colla+se of "orld trade- /n fact& higher trade barriers accounted for about half of the 2B +ercent decline in the .olu e of global trade bet"een 1#2# and 1#32 and stunted the gro"th of trade for the re ainder of the decadeNet countries .aried significantly in the e,tent to "hich they increased tariffs and i +osed i +ort quotas- A >ey factor in deter ining a country8s trade +olicy res+onse "as notM+erha+s sur+risinglyMthe degree to "hich it suffered fro falling out+ut and rising une +loy ent& but rather its e,change rate +olicy under the gold standard-? *ach one of these organiGations& ho"e.er& has since suffered dee+ transfor ations both in its echanis s as in its o.erarching goals- !he /0<D has gro"n to enco +ass se.eral other ob3ecti.es& fro +o.erty reduction and de.elo+ ent to +ro oting foreign in.est ent& international trade and facilitating ca+ital in.est ent& as "ell as a gro"ing concern "ith en.iron ental issues- !he /0<D is no" +art of a grou+ of B international organiGations >no"n as the World 0an> Grou+B DAW*(2*DD& Andreas 2-& I!he /nternational 1onetary 9yste H A Doo> 0ac> A.er 9e.en DecadesJ& .ournal of International 6conomic 7aw 13(3)& 2010& +- B%? ? /<W/(& Douglas A-& I9+rit de )urrencyJ& !inance and $evelopment& 5ol- $E& (o-2& /12& June 2011& +30

!he GA!! has de.elo+ed into the World !rade ArganiGation (W!A) and its rules no" regulate not only tariffs but technical barriers to trade& sanitarian and +hytosanitarian regulation& ser.ices& intellectual +ro+erty as+ects of trade and trade related in.est ent easures- /ts dis+ute settle ent syste is a "ellFestablished la"Fgi.ing entity and has hel+ed to sol.e a biguous and conflicting +rinci+les& enhancing free trade- !he W!A has beco e one of the ost i +ortant international fora "here countries negotiate and su+er.ise as+ects of the global econo ic go.ernance fra e"or>2inally& the /12 too has suffered a3or transfor ations- !he /12 is arguably the 0retton Woods organiGation "hose historical and theoretical changes ha.e had the ost i +ortant i +act on its goals and echanis s- 9o e scholars call these changes a I9ilent <e.olutionJ due to the funda ental changes under"ent by the organiGation throughout the last ?0 years-% !hese changes ha.e had an i +act not only on the organiGation& but on the "hole 0retton Woods syste coordination& as the /12 gradually changed its ain stabiliGing function in the international onetary syste a"ay fro strict e,change rate control to a sur.eillance syste focusing in balance of +ay ent stability (or& ore broadly& national stability) through financial su+++ortII & The IMF*s Silent e+ol#tion an$ the ,all o, Arti%le IV !he ain +ur+oses of the /128s creation "ere to a.oid the e,change rate +olicies IanarchyJ of the 30s and a balance of +ay ent crisis after the end of the "ar- /n the inds of Leynes and White the fathers of the organiGation +rotectionist easures through currency ani+ulations "ere one of the ain causes of econo ic do"nfall in the +eriod- !he idea "as that if no country "as allo"ed to de.aluate its currency to gain a co ercial ad.antage o.er its neighbor& the balance of +ay ents of all countries "ould be +rotected and the syste "ould not fall +rey to a Irace to the botto J to the li>es of the great de+ressionE- !he absence of a stabiliGing international authority such as the /12 "ould 7de+ress "orld econo ic gro"th and dri.e the "orld bac> into +rotectionist +olicies& regardless of ho" quic>ly or "ell +roduction and trade could be reconstructed after the "ar8-# *,change stability "as to be guaranteed through a +ar .alue syste based on the con.ertibility of '9 dollars to gold- All countries "ould ha.e the obligation to aintain this +ar .alue& by the inter.ention of their central ban>s if needed be& "ithin 1= of the .alue established by the 2und- !he 2und "ould then hel+ countries ha.ing difficulties in aintaining their +ar .alues through financial assistance- !he +ri ary ob3ecti.e of the syste "as to aintain the e,change rate equilibriu - !he Article /5 of the Articles of Agree ent "as& in this sense& the central legal obligation of the syste Ariginally& Article /5 read as follo"ingH
Article /5- 6ar 5alues of )urrencies

% 9ee 0A'G@!A(& Ja es 1-& #ilent revolution% the International 2001- 1111 +-

onetary !und, 2898,28:8 & /12&

E 9ee @arry De,ter White8s I6reli inary Draft 6ro+osal for a 'nited (ations 9tabiliGation 2und and a 0an> for <econstruction and De.elo+ ent of the 'nited and Associated (ationsJ& fro A+ril 1#$2# 0A'G@!A(& Ja es 1-& The I ! and the !orce of -istory% Ten 6vents and Ten Ideas That -ave #haped the Institution& /12 Wor>ing 6a+er W6C0$C%B& 6olicy De.elo+ ent and <e.ie" De+art ent& /12& 200$& ++- $FB

9ection 1- 6xpression of par values. , (a) !he +ar .alue of the currency of each e ber shall be e,+ressed in ter s of gold as a co on deno inator or in ter s of the 'nited 9tates dollar of the "eight and fineness in effect on July 1& 1#$$- (O) 9ec- 3. !oreign exchange dealings based on parity- !he a,i u and the ini u rates for e,change transactions bet"een the currencies of e bers ta>ing +lace "ithin their territories shall not differ fro +arity (i) /n the case of s+ot e,change transactions& by ore than one +ercent; and (ii) /n the case of other e,change transactions& by a argin "hich e,ceeds the argin for s+ot e,change by ore than the 2und considers reasonable- (O) 9ec- $- Obligations regarding exchange stability. (a) *ach e ber underta>es to collaborate "ith the 2und to +ro ote e,change stability& to aintain orderly e,change arrange ents "ith other e bers& and to a.oid co +etiti.e e,change alterations- (b) *ach e ber underta>es& through a++ro+riate easures consistent "ith this Agree ent& to +er it "ithin its territories e,change transactions bet"een its currency and the currencies of other e bers only "ithin the li its +rescribed under 9ection 3 of this Article- (O)-

/t "ould be +ossible& ho"e.er& to alter this +ar .alue& after /128s acquiescence& in order to 7deal "ith a funda ental disequilibriu 8 bet"een a currency .alue and the econo ic funda entals of its country- !his did occurred in se.eral occasions& the ost notorious one being in 1#?% "hen the 'L announced a de.aluation of 1$&3= of its currency/t is "orth noting that not only the ultilateral trading syste de+ended u+on the "ellF functioning of the +ar .alue syste & but also se.eral echanis s under the original World 0an> Articles of Agree ent related to it 10- !he +ar .alue syste "as& thus& central to the global econo ic go.ernance institutional structure as concei.ed in 0retton Woods- /n the "ords of @enry 1orgenthau& Jr-& 'nited 9tates 9ecretary of the !reasury and 6resident of the 0retton Woods )onferenceH What are the funda ental conditions under "hich the co erce a ong the nations can once ore flourishP 2irst& there ust be a reasonable stable standard of international e,change to "hich all countries can adhere "ithout sacrificing the freedo of action necessary to eet their international econo ic +roble s!his is the alternati.e to the des+erate tactics of the +ast F co +etiti.e currency de+reciation& e,cessi.e tariff barriers& unecono ic barter deals& ulti+le currency +ractices& and unnecessary e,change restrictions by "hich go.ern ents .ainly sought to aintain e +loy ent and u+hold li.ing standards- /n the final analysis& these tactics only succeeded in contributing to "orldF"ide de+ression and e.en "ar- !he /nternational 1onetary 2und agreed u+on at 0retton Woods "ill hel+ re edy this situation-11 2or a quarter of a century the syste "as relati.ely stable and concerns o.er co +etiti.e e,change rate de.aluations "ere softened12- !rade liberaliGation negotiators
10 9ee& e-g-& its article //& section #& dealing "ith I aintenance of .alue of certain currency holdings of the ban>J- Also& it is re.ealing that e bers of the World 0an> or contracting +arties to the GA!! "ere obligated to be e bers of the /12 or& at least& to ha.e s+ecial e,change rate arrange ents "ith each institution& but no si ilar obligation "as inserted into /128s Articles of Agree ent11 1A<G*(!@A'& @enry Jr-& )losing address to the 0retton Woods )onference& July 22& 1#$$ 12 Do"enfeld contrasts the +ercei.ed robustness of the /12 and World 0an> syste s co +ared to the difficulties faced by the GA!! during the B0s and ost of the ?0s& "hile& by the end of the E0s and #0s it "as the other "ay around- 9ee DAW*(2*DD& Andreas 2-& International 6conomic 7aw& A,ford

had not to "orry about it and "ere free to tailor trade rules that "ere silent to the +roble - /n the late ?0s& ho"e.er& the syste started to sho" signs of unsustainability!he fi,ed syste created so e indirect effects such as the o.er.aluation of rich countries8 currencies and the under.aluation of se.eral e erging econo ies- Albeit the +ossibility of change in the +ar .alues& this "as se.erely discouraged by the syste and countries often chose not to do so- !his created situations li>e Ja+anQs that& by the early %0s& after attaining econo ic gro"th in double digits for se.eral years& still aintained its currency at the sa e +ar .alue to the dollar as in 1#$#2urther ore& se.eral authors already +ointed out to the unsustainability of the fi,ed e,change rate syste - /n a se inal +a+er in 1#B3& 1ilton 2ried an already "arned that the fear of e,change rate fle,ibility "as o.errated since infor ed s+eculators "ould al"ays tend to stabiliGe +rices& not the other "ay around-13 0y its turn& <obert !riffin argued that gro"ing de and for dollar reser.es "ould stress the syste either to a crisis of confidence and a rush for gold or "ould +ush the "orld into deflation& in "hat beca e >no"n as the Triffin $ylema-1$ 2inally& Ja es 1eade highlighted the negati.e effects cause by a fi,ed e,change rate regi e to efforts of achie.ing e,ternal ad3ust ent and balance of +ay ent equilibriu & +ushing countries into +rotectionist easures-1B !he GA!!Qs safeguard echanis "as originally concei.ed to +ro.ide the necessary fle,ibility that "ould +er it endangered countries to +rotect their balance of +ay ents in the short ter - !hese te +orary barriers +ro.ed difficult to o.erco e e.en after the floatation of e,change rates-1? 0y 1#%1& the 5ietna War had dra"n hea.ily on A ericaQs treasure and& after ? years of "ar& the 'nited 9tates "ere no longer able to aintain the gold +arity- /n August 1Bth& 1#%1& after a historical +residential s+eech& the 'nited 9tates of A erica declared the end of the con.ertibility of '9 dollars to gold- !he e+isode& >no"n as the I(i,on 9hoc>J& hit hea.ily on the syste 8s core& sending shoc>"a.es at all other fi,ed e,change rate .alues that no" faced increased +ressure to fluctuate- !he fall of its center+iece "ould ean the fall of the fi,ed e,change rate syste )urrencies started to freely flo" and the ada+tation +rocess ended u+ being s oother than it had been e,+ected- !he 2und "as called to face this ne" reality and to ada+t*cono ic theory had already changed fro "hat it "as in 1#$? and the floating e,change rates "ere less .ie"ed as a catastro+he- 2urther ore& as the '9 "ere no longer in a +osition to guarantee the basic echanis of the syste & it "as no longer feasible in its original lines/n 1#%2 the /128s 0oard of Go.ernors created the 7)o ittee on <efor of the /nternational 1onetary 9yste 8 F the )o ittee of 20 "ith the ission of restructuring "hat "as left of the syste and ada+ting it- After t"o years of efforts& the )o ittee of 20 concluded its "or> and agreed on a +rogra to hel+ the onetary
'ni.ersity 6ress& 200E& +-1#- An the other hand& Dastra argues that the syste "as ne.er really stable& sho"ing i +ortant signs of stress during its relati.ely short life s+an- 9ee DA9!<A& <osa 1-& 7egal foundations of international monetary stability& A,ford 'ni.ersity 6ress& 200B& ++ 3B#F3?113 9ee 2</*D1A(& 1ilton& I!he )ase for 2le,ible *,change <atesR& 6ssays in 0ositive 6conomics, 'ni.ersity of )hicago 6ress, 1#B3 1$ !</22/(& <obert& &old and the $ollar +risis& Nale 'ni.ersity 6ress& 1#?0& 1#B +1B 1*AD*& Ja es& The Theory of International 6conomic 0olicy H The "alance of 0ayments& A,ford 'ni.ersity 6ress& 1#B1& $$E +1? 9ee /r"in& abo.e n ?& at 32

syste e.ol.e& focusing ainly in hel+ing countries to o.erco e the oil +rice shoc>s!he /128s *,ecuti.e 0oard later ado+ted the RGuidelines for the 1anage ent of 2loating *,change <atesR as "ell as a ne" ethod of 9D< .aluation based on a bas>et of 1? currencies& in an atte +t to control the floatation +rocess-1% After se.eral atte +ts& the /nteri )o ittee agreed on an Rinteri refor R of the onetary syste & including the a end ent of Article /5- A 9econd A end ent of /128s Articles of Agree ent entered into force t"o years later& finally ac>no"ledging the right of e bers to ado+t e,change rate arrange ents of their choice (Decision (oB3#2F(%%C?3)& ado+ted A+ril 2#& 1#%% F the ;2899 $ecision;)- !he /12 e bers "ould no" be free to choose bet"een a set of e,change rate +olicies (e,ce+t +egging their currency to gold)H allo"ing the currency to float freely& +egging it to another currency or a bas>et of currencies& ado+ting the currency of another country& +artici+ating in a currency bloc& or for ing +art of a onetary union0y the end of the decade& the /12 had irre.ersibly changed its funda ental ob3ecti.e in global econo ic go.ernance- !he end of the 0retton Woods onetary syste eant that its +i.otal role in stabiliGing a fi,ed rate syste had to be o.erco e- !he 2und no" +layed a different role in the international econo ic syste H that of guaranteeing the balance of +ay ent of countries in a free floating e,change rate "orld- /n this ne" role& it "ould not ha.e the +o"er to deter ine +ar .alues for currencies e,change rates- !he ne" echanis s created to su++ort this ne" role "ere based on conditional lending and syste ic sur.eillance- /n <osa Dastra8s "ordsH !he "orld"ide change fro fi,ed floating e,change rates& follo"ing the colla+se of the +ar .alue regi e& also signified a ore +rofound change in the nature of the /12- !here "as a shift in e +hasis fro being +ri arily an international onetary institution focusing on issues such as e,change rate stability and con.ertibility& to beco ing an international financial institution& "ith a broader array of res+onsibilities (O) !he e.olution of the role of the 2und o.er the +ast three decades has affected the +ractice of conditionality and the e,ercise of sur.eillance-1E /n this sense& the 2und no longer e,erted strict control o.er its e bers8 e,change rate arrange ents- !he Article /5 no" +rescribed thatH 9ection 1- General obligations of e bers <ecogniGing that the essential +ur+ose of the international onetary syste is to +ro.ide a fra e"or> that facilitates the e,change of goods& ser.ices& and ca+ital a ong countries& and that sustains sound econo ic gro"th& and that a +rinci+al ob3ecti.e is the continuing de.elo+ ent of the orderly underlying conditions that are necessary for financial and econo ic stability& each e ber underta>es to collaborate "ith the 2und and other e bers to assure orderly e,change arrange ents and to +ro ote a stable syste of e,change rates- /n +articular& each e ber shallH (O) (iii) a.oid ani+ulating e,change rates or the international onetary syste in order to +re.ent effecti.e balance of +ay ents ad3ust ent or to gain an unfair co +etiti.e ad.antage o.er other e bers; (O)
1% /12& &uidelines for the $232F%$C?%& /12& 1#%$ anagement of !loating 6xchange <ates& *,ecuti.e 0oard Decision (o-

1E DA9!<A& <osa 1-& 7egal foundations of international monetary stability& A,ford 'ni.ersity 6ress& 200B& +- ,.i

!he /12 "ould also e,ercise fir sur.eillance o.er the e,change rate +olicies of e bers as deter ined by Article /5 section 3H 9ection 3- 9ur.eillance o.er e,change arrange ents (a) !he 2und shall o.ersee the international onetary syste in order to ensure its effecti.e o+eration& and shall o.ersee the co +liance of each e ber "ith its obligations under 9ection 1 of this Article(b) /n order to fulfill its functions under (a) abo.e& the 2und shall e,ercise fir sur.eillance o.er the e,change rate +olicies of e bers& and shall ado+t s+ecific +rinci+les for the guidance of all e bers "ith res+ect to those +olicies- *ach e ber shall +ro.ide the 2und "ith the infor ation necessary for such sur.eillance& and& "hen requested by the 2und& shall consult "ith it on the e ber8s e,change rate +olicies- !he +rinci+les ado+ted by the 2und shall be consistent "ith coo+erati.e arrange ents by "hich e bers aintain the .alue of their currencies in relation to the .alue of the currency or currencies of other e bers& as "ell as "ith other e,change arrange ents of a e ber8s choice consistent "ith the +ur+oses of the 2und and 9ection 1 of this Article- !hese +rinci+les shall res+ect the do estic social and +olitical +olicies of e bers& and in a++lying these +rinci+les the 2und shall +ay due regard to the circu stances of e bers (O)As the 1#%% Decision established& the sur.eillance echanis "ould be the one to ensure that countries did not re.ert to co +etiti.e e,change rate de.aluation- @o"e.er& in the co ing years& e.en this echanis "ould suffer changes fro its initial role& beco ing a ore integral +art of the /12 syste by adding se.eral acroecono ic considerations to the sur.eillance e,ercise and gradually rela,ing its concern o.er e,change rate ani+ulations- !he sur.eillance echanis e.ol.ed& +arting "ays fro the 7fir sur.eillance o.er e,change rate +olicies8- As the /12 staff recogniGesH !he 1#%% Decision "as crafted shortly after the colla+se of the 0retton Woods syste & in the idst of considerable uncertainty as to ho" the ne" syste "ould "or>- /t focused e,clusi.ely on sur.eillance o.er e,change rate +olicies& and its co.erage "as relati.ely narro" e.en in that area- !he Decision "as e,+ected to be re.ised "ith e,+erience- @o"e.er& it re ained .irtually unchanged e.en as the +ractice of sur.eillance e.ol.ed (including to enco +ass do estic +olicies as a >ey ele ent)& and a disconnection de.elo+ed bet"een the Decision and the best +ractice of sur.eillance-1# 9o farFreaching "ere the changes suffered by the /12 that so e argue for the need of a 7ne" fund agree ent8 since the /12 7no longer described& let alone controlled& the international onetary syste 8-20 /n +ractice& these changes eant not only the radical change of the 2und8s ain role but the fall of its Article /5A clear sign of the funda ental change of Article /5 central +lace and strength can be +ercei.ed by the consequences of its .iolation- 'nder the original .ersion of the /128s Articles of Agree ent& countries that decided to alter their e,change rates "ithout +er ission "ould be +re.ented fro borro"ing fro the 2und- /f the alteration +ersisted after a Ireasonable +eriodJ& Article 45 section 2(b) "ould a++ly (Article /5&
1# /12& I ! 6xecutive "oard 'dopts 1ew $ecision on "ilateral #urveillance Over 6ublic /nfor ation (otice (6/() (o- 0%C?#& June 21& 200% 20 9ee Do"enfeld& abo.e n B& at BE2 embers= 0olicies &

section ?)- !his article established the +ro.isions by "hich a e ber could lose its e bershi+ in the 2und& and letter (b) ade direct reference to the s+ecific case in "hich a e ber "ould .iolate the obligations regarding e,change rate arrange ents in connection to +ar .alues- A e ber in .iolation of Article /5 could& therefore& by 7a decision of the 0oard of Go.ernors carried by a a3ority of the go.ernors re+resenting a a3ority of the total .oting +o"er8& be required 7to "ithdra" fro e bershi+ in the 2und8 (Article 45& section 2(b))/n this sense Article /5 not only contained an ob3ecti.e echanis to assess co +liance (the +ar .alue)& but also carried s+ecific +ro.isions to +unish e bers that failed to res+ect its obligations& leading& ulti ately& to "ithdra"al of e bershi+- An the other hand& under the refor ed "ording no direct reference is +resent in Article /5 as to the consequences of failing to co +ly "ith its obligations- Article 445/ section 2 (the equi.alent of original Article 45 section 2) establishes the consequences of the .iolation by a e ber of its obligations to the 2und- /nstead of the original reference to e,change rate obligations though& there is a direct reference to Article 5 (o+erations and transactions of the fund)Also& the e bershi+ "ithdra"al beca e uch ore co +le,& requiring first that the e ber be sus+ended by a a3ority of %0= of the total .oting +o"er and then& after another reasonable +eriod& a a3ority of EB= of the total .oting +o"er for a e ber to lose its e bershi+With no echanis to deter ine e,change rates& the 2und no" concentrated its efforts in guaranteeing the financial health of a floating e,change rate syste - !he si +le fact that the 2und no" allo"ed countries to choose "hen and to "hich currencies to +eg their currencies says a lot about the +rohibition of currency ani+ulation after the fall of the +ar .alue syste - 9ince the 1#%% decision& the 2und had no substanti.e legal rights "ith res+ect to the choice of e,change arrange ent of its e bers-21 !he e,istence of such an article& disaggregated fro the organiGation8s +ractices& is not to be seen "ith strangeness- !he article 5/ of /128s Articles of Agree ent& had the sa e fate due to the rise in i +ortance of +ri.ate ca+ital flo"s to in.est ents and balance of +ay ent- 'n+redicted by the 2und8s founders& the +rohibition of lending to countries facing significant ca+ital outflo"s and the +ossibility of the 2und to request a country e ber to 7e,ercise controls to +re.ent such use8& contained in this article& "ere ne.er in.o>ed by the 2und& in a silent recognition of its odern ina++licability22/n the last decade& the /12 "as sub3ect to criticis for its lac> of sur.eillance o.er e bers8 e,change rate +olicies23- /t "as argued that the Article /5 sur.eillance re+orts "ere not +aying due attention to funda ental isalign ents of so e e bers currencies-2$ !he tensions rising fro the dis+utes bet"een the '9 and )hina on the issue led to the ado+tion by the /12 *,ecuti.e 0oard of the Decision on 0ilateral
21 9ee Dastra& abo.e n 1E& at $02 22 0oughton& abo.e n #& at 11- Gian.iti argues that /12 Article /5 section 1 has under"ent a de facto transfor ation fro hard la" into soft la"- 9ee G/A(5/!/& I*.ol.ing <ole and )hallenges for the /nternational 1onetary 2undJ& International 7awyer& .ol 3B& 2001& ++- 13%1F1$0$23 9ee the star> criticis by 1orris Goldstein for er De+uty Director of the /12 <esearch De+art ent of the failure by the 2und to declare )hina a currency ani+ulator- 9ee GADD9!*/(& 1orris& W*A!@*<9!A(*& Dennis& I)onfronting Asset 0ubbles& !oo 0ig to 2ail& and 0eggarFthyF(eighbor *,change <ate 6oliciesJ& 0olicy "rief 2>4?& 6eterson /nstitute& 2ebruary& 2010 2$ /12& abo.e n 1#-

9ur.eillance A.er 1e bers8 6olicies& on June 1B& 200%-2B !his decision re.ie"ed and re+laced the 1#%% decision& introducing a rene"ed focus on e ber8s e,change rate +olicies bringing 7greater clarity and s+ecificity to "hat e,change rate +olicies countries should a.oid8-2? At the sa e ti e it for aliGed the Ibest +ractices of sur.eillanceJ& de.elo+ed through the years after the 1#%% decision& e +hasiGing the i +ortance of 7dialogue& +ersuasion& candor& e.enhandedness and due regard to country circu stances8 in in.estigations under Article /5-2% 2inally& the 200% decision offered better definition to the conce+t of 7e,change rate ani+ulation in order to gain unfair co +etiti.e ad.antage o.er other e bers8& relating such beha.ior to the conce+t of funda ental e,change rate isalign ent- An this& the 200% decision established thatH A e ber "ould only be acting inconsistently "ith Article /5& 9ection 1(iii) if the 2und deter ined both thatH (a) the e ber "as ani+ulating its e,change rate or the international onetary syste and (b) such ani+ulation "as being carried out for one of the t"o +ur+oses s+ecifically identified in Article /5& 9ection 1(iii)(a) R1ani+ulationR of the e,change rate is only carried out through +olicies that are targeted atMand actually affectM the le.el of an e,change rate1oreo.er& ani+ulation ay cause the e,change rate to o.e or ay +re.ent such o.e ent(b) A e ber that is ani+ulating its e,change rate "ould only be acting inconsistently "ith Article /5& 9ection 1(iii) if the 2und "ere to deter ine that such ani+ulation "as being underta>en Rin order to +re.ent effecti.e balance of +ay ents ad3ust ent or to gain an unfair co +etiti.e ad.antage o.er other e bers-R /n that regard& a e ber "ill only be considered to be ani+ulating e,change rates in order to gain an unfair co +etiti.e ad.antage o.er other e bers if the 2und deter ines both thatH (A) the e ber is engaged in these +olicies for the +ur+ose of securing funda ental e,change rate isalign ent in the for of an under.alued e,change rate and (0) the +ur+ose of securing such isalign ent is to increase net e,+orts-2E Accordingly& the 200% decision enhanced the sur.eillance o.er e bers8 e,change rate +olicies- Data fro the /12 9taff sho" that less than 2C3 of Article /5 9ur.eillance <e+orts included so e >ind of e,change rate analysis before the 200% decision& "hile ore than #0= did so in 2011-2# !heses analyses usually co e in the for of e,change rate isalign ent esti ates conducted by the )onsultati.e Grou+ on *,change <ates ()G*<)2B 9ee /12& $ecision on "ilateral #urveillance Over June 1B& 200% 2? /12& abo.e n 1#& at 1 2% /bid2E /12& abo.e n 2B& at Anne, /& +ara- 22# 9ee /12& odernizing the 7egal !ramework for #urveillance ,'n Integrated #urveillance $ecision & +re+ared by the 9trategy& 6olicy and <e.ie" De+art ent and Degal De+art ent& A++ro.ed by 9iddharth !i"ari and 9ean @afan& /12& June 2?& 2012& ++- $F? embers= 0olicies & *,ecuti.e 0oard Decision& /12&

!he isalign ent esti ates "ere sub3ect to uch discussion and contro.ersy bet"een e bers of the /12 and so e of the esti ates "ere not allo"ed to be +ublished in their entirety- 1any re+orts only entioned .ague references such as 7substantially under.aluation or oderate under.aluation8& "ithout referring to an e,act quantu Also& this rene"ed attention to e,change rate isalign ents did not +re.ent countries fro te +ering "ith the .alue of their currencies after the 200E crisis in "hat has been referred to as a Icurrency "arJ-30 9o e analysts argued that the focus "as is+laced& "ith too uch e +hasis on the effects of e,change rate isalign ent on do estic stability (national stability) as o++osed to its effects on the stability of other e bers8 econo ies (global stability)Also& the e,change rate analysis suffered criticis fro so e countries that considered the need for better analysis ta>ing into account the integration bet"een e,change rate and other national easures effects on o.erall econo ic health-31 !he 200% decision had already tried to address the effects of national easures& including e,change rate arrange ents& to Ie,ternal stabilityJ (i-e- other e bers8 econo ic stability)32- A ne" decision "as drafted and ado+ted by the *,ecuti.e 0oard of the /12 in July 1E& 2012& addressing the issue the Decision on 0ilateral and 1ultilateral 9ur.eillance& also >no"n as the /ntegrated 9ur.eillance Decision (/9D)- 33 !he /9D co +le ented the 200% one and introduced rules 7as a ste+ to"ard oderniGing the foundations of 2und sur.eillance and +art of a continuous effort to ensure that sur.eillance re ains rele.ant and effecti.e a idst the changing global econo ic landsca+e8-3$ !he /12 9trategy& 6olicy and <e.ie" De+art ent along "ith the /12 Degal De+art ent had +roduced a cou+le of +olicy +a+ers and draft decision +ro+osals called I1oderniGing the Degal 2ra e"or> for 9ur.eillanceJ indicating the need for u+dating the /12 legal fra e"or> in order to address the ne" econo ic issues being raised by its e bers& es+ecially regarding the e,change rate isalign ent issue and its effects on 7global econo ic and financial stability8-3B 9tability is the organiGing +rinci+le of sur.eillance- Article /5 consultations should focus on the a++ro+riate conduct of econo ic and financial +olicies +ursued by e bers to +ro ote +resent and +ros+ecti.e do estic and
30 9ee& e.g-& 0usiness /nsider& )entral 0an>s are Doc>ed in a )urrency War& Actober 22& 2012 F htt+HCC"""-businessinsider-co CcentralFban>sFareFloc>edFinFcurrencyF"arF2012F10 31 9ee /12& abo.e n 2#& at ?F% 32 According to the 6ublic /nfor ation (otice of the /12& the 200% decision brought 7a +rinci+le reco ending that e bers a.oid e,change rate +olicies that result in e,ternal instability& regardless of their +ur+ose& thereby ca+turing e,change rate +olicies that ha.e +ro.en to be a a3or source of instability o.er the +ast decades8- 9ee /12& I ! 6xecutive "oard 'dopts 1ew $ecision on "ilateral #urveillance Over embers= 0olicies& 6ublic /nfor ation (otice (6/() (o- 0%C?#& June 21& 200% 33 /12& "ilateral and ultilateral #urveillance $ecision , Integrated #urveillance $ecision & *,ecuti.e 0oard Decision& /12& July 1E& 2012 3$ /12& 6xecutive "oard 'dopts 1ew $ecision on "ilateral and ultilateral #urveillance & 6ublic /nfor ation (otice (6/() (o12CE#& July 30& 2012& accessible at htt+HCC"""-i f-orgCe,ternalCn+CsecC+nC2012C+n12E#-ht 3B 9ee /12& odernizing the 7egal !ramework for #urveillance , "uilding "locks Toward an Integrated #urveillance $ecision& +re+ared by the 9trategy& 6olicy and <e.ie" De+art ent and Degal De+art ent& A++ro.ed by 9iddharth !i"ari and 9ean @afan& /12& 1arch 1?& 2012- 9ee also /12& abo.e n 2#-

balance of +ay ents stability as "ell as global stability- 2or the latter& Article /5 consultation re+orts should discuss +otential or actual s+illo.ers fro e bers7 econo ic and financial +olicies that ay significantly i +act global stability& including alternati.e +ossible +olicy o+tions that "ould ini iGe the ad.erse i +act of s+illo.ers on global stability@o"e.er& in the conte,t of ultilateral sur.eillance e bers "ill not be required to change their +olicies in the interest of global stability- 3? /n this sense& the /9D sought to address the challenges brought u+ by the financial crisis and by +ercei.ed global i balances through a ne" +ers+ecti.e to be added to /128s sur.eillance e,ercises- 0esides the national stability& the /12 "ill no" focus on the s+illo.ers of e bers8 e,change rate arrange ents and other national easures on global stability& 7bringing a ultilateral +ers+ecti.e to sur.eillance8- 3% Article /5 <e+orts (bilateral sur.eillance) shall indicate +ossible consequences of e bers8 +olicies to global stability and shall include 7alternati.e +ossible +olicy o+tions8 to ini iGe ad.erse i +acts!"o ne" sur.eillance echanis s "ere created to enhance /128s sur.eillance strength)ountries8 obligations under Article /5 of /128s Articles of Agree ent "ould continue to be addressed through regular Article /5 bilateral sur.eillance e,ercises& but a ne" echanis of 7fir sur.eillance8 has been created Ad @oc Article /5 in.estigations!he /12 1anaging Director ay no" call e bers to discuss s+ecific e,change arrange ents and +olicies that ight .iolate their obligations under Article /5& 9ection 1H (a) Whene.er the 1anaging Director considers that i +ortant econo ic or financial de.elo+ ents are li>ely to affect a e ber8s e,change rate +olicies or the beha.ior of the e,change rate of its currency& the 1anaging Director shall& in the conte,t of the 2und8s e,ercise of fir sur.eillance o.er e bers8 e,change rate +olicies& initiate infor ally and confidentially a discussion "ith the e ber- After such discussion& the 1anaging Director ay re+ort to the *,ecuti.e 0oard or infor ally ad.ise the *,ecuti.e Directors and& if the *,ecuti.e 0oard considers it a++ro+riate& an ad hoc Article /5 consultation bet"een the e ber and the 2und shall be conducted in accordance "ith the +rocedure set out in sub+aragra+h (b) belo"(b) A staff re+ort "ill be circulated to the *,ecuti.e Directors under co.er of a note fro the 9ecretary s+ecifying a tentati.e date for *,ecuti.e 0oard discussion "hich "ill be at least 1B days later than the date u+on "hich the re+ort is circulated- !he 9ecretary8s note "ill also set out a draft decision ta>ing note of the staff re+ort and co +leting the ad hoc consultation "ithout discussion or a++ro.al of the .ie"s contained in the re+ort; the decision "ill be ado+ted u+on the e,+iration of the t"oF"ee> +eriod follo"ing the circulation of the staff re+ort to the *,ecuti.e Directors
3? /12& &uidance 1ote for #urveillance under 'rticle I) +onsultations& +re+ared by the 9trategy& 6olicy and <e.ie" De+art ent in consultation "ith other de+art ents& A++ro.ed by 9iddharth !i"ari& /12& Actober 10& 2012& +- % 3% /bid& at E- 6aragra+h 23 of the /9D states thatH
0eyond e bers8 obligations under Article /5 9ection 1& and recogniGing that a e ber8s +olicies ay ha.e a significant i +act on other e bers and on global econo ic and financial stability& e bers are encouraged to i +le ent e,change rate and do estic econo ic and financial +olicies that& in the sel.es or in co bination "ith the +olicies of other e bers& are conduci.e to the effecti.e o+eration of the international onetary syste

unless& "ithin such +eriod& there is a request fro an *,ecuti.e Director or decision of the 1anaging Director to +lace the re+ort on the agenda of the *,ecuti.e 0oard- /f the staff re+ort is +laced on the agenda& the *,ecuti.e 0oard "ill discuss the re+ort and "ill reach conclusions "hich "ill be reflected in a su ing u+-3E !his echanis is in addition to regular Article /5 consultations and "as concei.ed as a eans to enhance sur.eillance o.er e,change rate +olicies that ay be .iolating Article /5 obligations- !he second echanis is the ultilateral consultation initiati.e31- Whene.er the 1anaging Director considers that an issue has arisen in a +olicy area of a e ber country that ay significantly influence the effecti.e o+eration of the international onetary syste & and that requires collaboration a ong e bers that is not already effecti.ely ta>ing +lace in another foru in "hich the 2und is a +arty& the 1anaging Director shall infor ally and confidentially discuss the issue "ith the rele.ant e bersWhen the 1anaging Director for s the .ie" that a ultilateral consultation is necessary& the 1anaging Director ay reco end such a consultation to the *,ecuti.e 0oard& "hich ay decide that a ultilateral consultation "ill be held- (O) 32- A ultilateral consultation "ill consist of discussions bet"een 2und staff and anage ent and officials of rele.ant e ber countries& including& in the case of a currency union& "ith officials of rele.ant unionFle.el institutions- !he 2und "ill facilitate discussions a ong +artici+ating e bers and encourage the to agree on +olicy ad3ust ents that "ill +ro ote the effecti.e o+eration of the international onetary syste - /n these discussions& the 2und "ill +ro.ide analysis and +ro+ose +olicy o+tions that +artici+ating e bers ay ado+t& and ay ad.ise on the effect of different co binations of +olicy ad3ust ents-3# 0oth echanis s de+end u+on the acti.e sur.eillance of the /12 1anaging Director and its staff& significantly enhancing the "eight and i +ortance of their +osition- !he *,ecuti.e 0oard of the /12 "as >een to guarantee the secrecy and souplesse of the echanis s though& constantly reinforcing that they in no "ay eant an e,+ansion of e bers8 obligations-$0 !hrough both refor s& in 200% and in 2012& the /12& in its o"n "ay& tried to address the criticis it recei.ed regarding its lost gri+ o.er e,change rate arrange ents and the issue of co +etiti.e de.aluations- Although a lot has been achie.ed& and uch still de+ends u+on further de.elo+ ents of the ne" echanis s& it is clear that the 2und has undeniably lost the fir control it had before the end of the dollarFgold standard- /n +lace& se.eral sur.eillance echanis s ha.e been created "ith the ob3ecti.e of sti ulating countries to ado+t +olicies that do not .iolate their obligations under article /5 of /128s Articles of Agree entAs an international institution& the /12 had to ada+t e,tre ely fast to face the tre endous challenges i +osed by the dyna ic international econo y so as to fulfill its duties- !he 2und has found an i +ortant +lace in today8s international econo ic go.ernance and anaged to fulfill it accordingly during the last decades- /n this sense&
3E /12& "ilateral and ultilateral #urveillance $ecision , Integrated #urveillance $ecision & *,ecuti.e 0oard Decision& /12& July 1E& 2012& +ara- 2E 3# /bid& +aras- 31F32 $0 /12& abo.e n 3$& at 2

the end of the fi,ed e,change rate syste and the fall of Article /5 ha.e not had as consequence the irrele.ance of the 2und as so e had +redicted at the ti e- !he /12 has been able to ada+t and e.ol.e to these changes& but not "ithout a dee+ o.erhaul of its syste !he ain difficulties faced by the /12 co e fro its decision +rocess& "hich is based in "eighted .otes& o+ened to bloc>ages fro the ost +o"erful e bers- /t lac>s an enforce ent echanis as the Dis+ute 9ettle ent 0ody of the W!A- /n GA!! language& Iit has no teethJ(e.ertheless& ho"e.er "ell the /12 syste ay ha.e ada+ted& it did not find a "ay to +reser.e its lin> "ith the ultilateral trading syste & re+resented by the +ar .alue syste - /n reality& it lost this lin>& and the consequences of the fall of Article /5 original strength& the end of a fi,ed e,change rate syste and the gradual loosened control o.er e,change rate ani+ulations ha.e been felt harder& +resently& at the GA!!CW!A syste III & The -rea.in/ o, the e0%han/e rate lin. -et1een IMF an$ WTO When the GA!! rules on international trade "ere concei.ed& the negotiators intended to constrain e.ery unilateral easure by a country that "ould +ose a threat to fair international trade- <ules "ere tailored to li it +rotectionist national easures to i +ort tariffs- /n this sense& these easures "ould be ore clearly identified and easier to addressDuring negotiations& a series of other national easures "ere analyGed and rules "ere created to deal "ith the - !hat "as the case of the negati.e effects of subsidies and du +ing on international trade flo"s- Additionally& the history of negotiations de onstrates an early concern "ith the i +acts of t"o other >inds of Idu +ingJH the co +etiti.e e,change rate de.aluations Icurrency du +ingJ and the aintenance of lo" labor standards in order to acquire co +arati.e ad.antages Isocial du +ingJ<e edies "ere +ro+osed to counter.ail such easures- $1 (one of these echanis s "ere +resent at the final Agree ent!he Isocial du +ingJ "as thought to be addressed gradually by the "or> of the '( syste together "ith the /nternational Dabor ArganiGation (/DA)- !he currency issue& ho"e.er& see ed accordingly addressed under the 0retton Woods syste - !he fi,ed e,change rate syste +ro.ided a strong safeFnet against co +etiti.e e,change rate de.aluations and their effects on trade- /n this sense& the contracting +arties had no reason to doubt the efficiency of such a syste and established this lin> throughout the GA!!- /n the original GA!! te,t& se.eral +assages can be found relating to the fi,ed e,change rate syste - Articles //H? and 5/H$ are e,a +les of echanis s directly relating to +ar .alues established by the /12@o"e.er& in the inds of the founders of the +ostFWorld War // ultilateral econo ic syste & +olicy coherence and the consistency of rules "as already an ob3ecti.e to be achie.ed& so se.eral articles "ere inserted in the GA!! reflecting in +articular (1) the attach ent of the trading co unity to e,change rate stability (2) and the need for the trading co unity to ensure that the rulesFbased trading syste is not frustrated by the undisci+lined use of ulti+le e,change rate arrange ents or e,change restrictions-$2
$1 9ee '( *)A9A)& *C6)C!C3$ of 1arch Bth& 1#$% $2 A'0A/(& 1arc& !ulfilling the arrakesh andate on +oherence% Ten @ears of +ooperation between the WTO, I ! and World "ank& discussion +a+er (o- 13& W!A& 200%& ++- $FB

Article 45 is the ain e,+onent of the bond bet"een the t"o syste s- /t establishes the coo+eration bet"een the t"o organiGations regarding e,change rate arrange ents atters (Art- 45H1)- /t also states that all contracting +arties should see> e bershi+ at the /12 or& at least& enter in a s+ecial agree ent "ith the )A(!<A)!/(G 6A<!/*9 (Art- 45H?)- 2inally& it deter ines that 7contracting +arties shall not& by e,change action& frustrate the intent of the +ro.isions of this Agree ent& nor& by trade action& the intent of the +ro.isions8 of the /12 (Art- 45H$)- !he relationshi+ "as in this sense tailored "ith the .ie" that no e,change rate atters "ould IfrustrateJ the intents of the GA!!- !his lin> "as essential in order to neutraliGe the atter in GA!!Qs +ers+ecti.e!he sa e logic "as aintained e.en after the end of fi,ed e,change rate syste - /n order to ada+t to the ne" reality of floating e,change rates and the re.a +ed /12 Article /5& se.eral decisions and guidelines "ere ado+ted by the )A(!<A)!/(G 6A<!/*9 to the GA!!- An interesting e,a +le is that of Article //H? "hich establishes the +ossibility of a country to renegotiate its s+ecific bound tariffs after a 20= de.aluation of its currency- !he renegotiation "ould only be +ossible if the de.aluation occurred "ithout .iolating the 2und8s rules and "as based on the +ar .alue establishedAfter the fall of the +ar .alue syste & the echanis had to be ada+ted "ith the contracting +arties issuing the &uidelines for $ecisions under 'rticle II%ABaC of the &eneral 'greement (DC$#3E& 2%9C2EF2#)& in January 2#th 1#E0& reaffir ing the i +ortance of the 2und8s e.aluation of the country8s currency de.aluation- !he Wor>ing Grou+ on *,change <ate ado+ted the Guidelines establishing a +rocess to be follo"ed by +arts facing the +roble of under.alued currencies& allo"ing the to renegotiate their s+ecific tariffs- !his echanis "as in.o>ed only 11 ti es& all of "hich occurred before the 1#E0 decision& and has since been buried in the archi.es of the W!AAll ada+tations follo"ed the sa e +attern and relied u+on the ne"ly established Isur.eillance syste J created by the /12- As it "as sho"n in 6art // of this article& the sur.eillance syste also under"ent se.eral changes& adding other econo ic as+ects that "ould be constantly analyGed by the 2und "hile loosening the control o.er e,change rate o.e ents- /n its a++raisal& the 2und "ould consider e,change rate +olicies 7"ithin the fra e"or> of a co +rehensi.e analysis of the general econo ic situation and econo ic +olicy strategy of the e ber& and shall recogniGe that do estic as "ell as e,ternal +olicies can contribute to ti ely ad3ust ents of the balance of +ay ents8$3!he relati.e a++roach to e,change rate +olicies "as "ell ada+ted to the ne" role +erfor ed by the /12 after the end of the gold standard- /t did not& ho"e.er& offer the sa e le.el of +rotection to the ultilateral trading syste against the effects of e,change rate isalign ents as it did in 1#$$- 1ore than that& the change in the 2und8s a++roach to e,change rate isalign ents eant a brea>ing of the +rotecti.e lin> that 3ustified the absence of s+ecific neutraliGing echanis s in the GA!!CW!A syste An the ability of the /128s ne" sur.eillance echanis to e,ert control o.er e,change rates Do"enfeld argues thatH Article /5 did not acco +lish the ob3ecti.es that the drafters had in indGo.ern ents "ere reluctant to ans"er inquiries +ut by the 2und& and had no real incenti.e to do so- (O) !he idea that the /12& or the international co unity through the /12& could +rescribe conduct under a ended Article /5 co +arable "ith "hat the 2und +rescribed under Article 5 did not +ro.e .iable& if indeed it "as e.er seriously considered-$$
$3 /12& 0rinciples of !und #urveillance over 6xchange <ate 0olicies anne, to the *,ecuti.e 0oard Decision B3#2 (%%C?3)& 2# A+ril 1#%% $$ Do"enfeld& abo.e n B& at BEB-

Also& as so e authors ha.e argued$B& the "ay /128s Article /5 is +resently drafted& the +roof of the intent of a e ber in ani+ulating its currency in order to gain a Ico +etiti.e ad.antageJ is a hard one to gras+& es+ecially ta>ing into account the ne" role of the /12 and its sur.eillance echanis - 2inally& e.en if the /12 "ere to recogniGe a e ber as a currency ani+ulator& it lac>s a dis+ute settle ent echanis or strong re edies to force a e ber to change its e,change rate +olicy$?/n +ractice& countries "ere no" free to choose their e,change rate +olicies (frequently through currency ani+ulation) as long as they did not +eg their currencies to the gold!he /12 "ould in turn see> the stability of the syste and +ro.ide financial su++ort to countries facing balance of +ay ent difficulties- (o si ilar ada+tation "as ade& ho"e.er& at the GA!! le.el e.en though it could no longer rely on the fi,ed syste !he GA!! contracting +arties& concerned "ith the negati.e effects of e,change rate fluctuations on international trade flo"s and ac>no"ledging that 7in certain circu stances e,change ar>et instability contributes to ar>et uncertainty for traders and in.estors and ay lead to +ressures for increased +rotection8& ade a state ent on 30 (o.e ber 1#E$ urging the /12 to i +ro.e its syste in order to ta>e into account 7the relationshi+ bet"een e,change ar>et instability and international trade8$%/n res+onse& the /12 +ublished in 1#E$ a study describing the "ays by "hich such e,change rate instability could affect international trade flo"s-$E !he acade ic and e +irical e.idences "ere inconclusi.e and no syste ic ad3ust ents "ere ade by the contracting +arties to the GA!! in order to address the uncertainty and +otential negati.e effects of e,change rate fluctuations- 0esides& no +articular study "as co issioned by the GA!! on the i +acts of e,change rate isalign ents on the instru ents of the ultilateral trade syste )oncerns resurfaced during the financial crises of the lateF1##0s& "hen large currency de.aluations by so e crisisFhit countries& in certain cases under /12 +rogra es& +ro.o>ed clai s of Iunfair tradeJ fro i +ortFsensiti.e sectors in so e of their ain trading +artners and +ressure for a trade +olicy res+onse- <egular studies by the /12 hel+ed reduce the ga+s bet"een facts and +olitical +erce+tions& +articularly in the i ediate after ath of large e,change rate o.e ents; a ne" study on the relationshi+ bet"een e,change rates and trade by the /12 in 200$ u+dated the 1#E$ study- /t concluded that "hile there "as no co +elling e.idence that in the ediu F run e,change rate fluctuations had a significant negati.e effecti.e on the a ount and direction of trade flo"s& it ac>no"ledged the negati.e i +act of

$B 9ee& inter alia& S/11*<1A((& )laus D- I*,change <ate 1isalign ent and /nternational Da"J& .ol- 10B(3) ' . .. I1T=7 7-& 2011 +- $2%F$3%- 9ee also 2'DG*& (athan& IWalter 1itty and the DragonH An Analysis of the 6ossibility for W!A or /12 Action against )hina8s 1ani+ulation of the NuanJ& .ournal of World Trade $B& no- 2& 2011& +- 3$#F3%3 and /<W/(& Douglas A-& I9+rit de )urrencyJ& !inance and $evelopment& 5ol- $E& (o-2& /12& June 2011 $? !his issue "as sub3ect of a dee+ly enriching discussion held at the /nstitute of /nternational *cono ic Da" (//*D) 2ello"s Dunch eeting at Georgeto"n 'ni.ersity& last January- !he authors "ould li>e to than> all the +artici+ants& and es+ecially 6rof- 1ichael Gadba"& for the in.aluable insights$% GA!! )A(!<A)!/(G 6A<!/*9& 6xchange <ate !luctuations and their 6ffect on Trade 2ortieth 9ession of the )A(!<A)!/(G 6A<!/*9& action ta>en on 30 (o.e ber 1#E$& DCB%?1 $E /12& I*,change <ate 5olatility and World !radeJ& I ! Occasional 0aper ?>& 1#E$& W!CG)C$$$

+rolonged isalign ents of e,change rates& +articularly in a regional conte,t-$# *.en after the creation of the W!A and the considerable enlarge ent of the ultilateral trade syste sco+e& the e,change rate issue "as not incor+orated into the 1arra>esh Agree ents- !he 'ruguay negotiation round focused on tac>ling nonFtariff trade barriers that "ere beco ing a uch greater concern to international trade than the traditional tariff barriers- *.en though the i +ortance of a closer coo+eration bet"een the /12 and the W!A "as highlighted in the resulting agree ents ( $eclaration on the relationship between the WTO with the I ! 'ruguay <ound Declarations)& and an agree ent "as done bet"een the t"o institutions (W!CDC1#B)& no s+ecific echanis "as created to deal "ith e,change rate ani+ulations and isalign ents!he tensions that ha.e arisen concerning the relationshi+ bet"een trade and e,change rate ha.e been dealt "ith& since the 1#%0s& outside of the sco+e of either the /12 or the GA!!CW!A& nor ally through +olitical agree ents bet"een the concerned countries!he 6laGa and the Dou.re accord are i +ortant e,a +les of such agree ents that sought to rebalance de+reciated or o.er.alued currencies causing di.ersion of trade flo"s/n the +resent +olitical landsca+e& ho"e.er& such accords are harder to be reached- After the 200E financial crisis and the +olitical choice of so e of the biggest econo ies to de.aluate their currencies in order to sti ulate econo ic reco.ery and gro"th& the +roble has again arisen and the ultilateral syste has found itself un+re+ared to offer solutions!he acade y is not short of +ro+osals for /12CW!A coo+eration on e,change rate issuesB0& but the +olitical "ill to tac>le the issue see s .ery di - /n 2ebruary 2013& the grou+ co +rising 20 a3or econo ies in the "orld (G20) et in the /nternational 2inancial Architecture Wor>ing Grou+ 1eeting and +roduced a 3oint state ent in "hich they declared the need to 7refrain fro co +etiti.e de.aluation& fro targeting the e,change rate for co +etiti.e +ur+oses and to resist all for s of +rotectionis 8- !hey did not& ho"e.er& conde n onetary easures for do estic +ur+oses that ight& as a consequence& bear an i +act on e,change rates- !his has been inter+reted as a silent endorse ent of the easures underta>en by the '9A& the *'& 'L and ore recently Ja+an and is a signal that& at the +resent& there see s to be no +olitical "ill to discuss the issue through the +olitical channel of the G200raGil has +resented& to this date& three +ro+osals of studying the sub3ect at the W!AAlthough contracting e bers ha.e sho"n sy +athy to the idea of analyGing the +roble & the solution see>ing is et "ith reser.e and s>e+ticis by any "ho consider that the /12 "ould be the a++ro+riate foru to such a discussion!he first sub ission of 0raGil "as +resented to the Wor>ing Grou+ on !rade& Debt and 2inance (WG!D2) in A+ril 2011& suggesting a "or> +rogra consisting in an acade ic research on the relationshi+ bet"een e,change rates and international trade (W!CWG!D2CWCB3)- /n 9e+te ber 20th& 2011& 0raGil +resented its second +ro+osal on the the e& suggesting the e,a of a.ailable tools and trade re edies in the ultilateral syste that ight allo" countries to redress the effects of e,change rate isalign ents (W!CWG!D2CWCB?)!he W!A 9ecretariat +resented its (ote on a <e.ie" of *cono ic Diterature in 9e+te ber 2%th& 2011 (W!CWG!D2CWCB%)& as andated by the Wor>ing Grou+- /t "as
$# Auboin& abo.e n $2& at 13 B0 9ee& inter alia& the "or> done by @'20A'*<& Gary )-& 9)@A!!& Jeffrey J-& IWill the W!A *n3oy a 0right 2utureJ& 0olicy "rief 23422& 6eterson /nstitute& 1ay& 2012

an e,tensi.e research& but curiously it s+ea>s the Ilanguage of the /12J and not IW!A languageJ- /t did not touch the issue of the i +acts of e,change rate isalign ent on W!A +rinci+les& rules and its instru ents/t is "orth noticing that e,change rate de.aluations ha.e the sa e econo ic effects of horiGontal subsidies& +ro oting e,+orts "hile also inhibiting i +orts into the do estic ar>et- !he effects of e,change rate isalign ents on tariffs ha.e been discussed else"hereB1& but also other trade instru ents are +otentially affected by e,change rate isalign ents& such asH tariffs& antidu +ing& subsidies& safeguards& rules of origin& GA!! Articles /& //& ///& 44/5& 3ust to na e so e of the rules that are certainly being affected by e,change rates0raGil8s third sub ission& of (o.e ber 2012 (W!CWG!D2CWC?E)& brought u+ the discussion of the effects of e,change rate isalign ents on such instru ents as "ell as the +ossibility of e,+loring e,isting W!A rules to address such effects- /t is yet soon to consider "hether such initiati.e "ill sti ulate W!A e bers to negotiate ne" trade rules that ta>e into account the e,change rate issueIV ( The ,or/otten le/al lin.B2 Due to the historical and +olitical de.elo+ ents co ented abo.e& any trade and finance e,+erts belie.e that the e,change rate issue is one solely under the aus+ices of the /12- !he +roble "ith that conce+tion is that& although the contracting +artiesC e bers to the GA!!CW!A did not negotiate ne" s+ecific rules to deal "ith the ne" reality of floating e,change rates& the old GA!! rules are still in +lace and ha.e been incor+orated into the W!A legal syste GA!! Article 45 is thus still in force and offers a regulatory fra e"or> for dealing "ith e,change arrange ents that ight be affecting trade ob3ecti.es- Albeit drafted in broad lines and not offering s+ecific re edies& since it "as concei.ed at a o ent "hen the currency issue see ed accordingly neutraliGed& Article 45 is the ain legal lin> bet"een the t"o syste s-B3 !he big question is "hy it has re ained unused by the contracting +artiesC e bers of the GA!!CW!AP !his article bears i +ortant features concerning the relationshi+ bet"een the /12 and the W!A syste s& es+ecially after the fall of the dollarFgold standard- !he Article e,+licitly encourages W!A e bers to see> +olicy coordination on questions "ithin the 3urisdiction of the /12 that affect trade easures& recogniGing the intrinsic relation bet"een trade and finance- )oncerning the s+ecific issue of e,change rates and its i +acts on trade& Article 45H$ states thatH )ontracting +arties shall not& by e,change action& frustrate the intent of the +ro.isions of this Agree ent& nor& by trade action& the intent of the +ro.isions of the Articles of Agree ent of the /nternational 1onetary 2und An i +ortant question has been raised by the acade y regarding the relationshi+ bet"een GA!! Article 45 and Article /5 of /128s Articles of Agree entB$ and "hether
B1 9ee !@A<9!*(9*(& 5era& 1A<TAD& * erson& 2*<<AS& Ducas& I/ +acts of *,change <ates on /nternational !rade 6olicy /nstru entsH !he )ase of !ariffsJ& .ournal of World Trade& .- $?& i- 3& 2012 B2 2or a co +lete analysis of GA!! Article 45 and its a++licability& see !@A<9!*(9*(& 5era& <A1A9& Daniel& 1UDD*<& )arolina& I!rade <egulation of *,change ratesH regulatory as+ects of e,change rates at the 1ultilateral !rading 9yste J& )G!/& unpublished manuscript& 2012 B3 Ane ay also argue that& in a broader sense& Article / of the /12 "hich establishes the ob3ecti.es of the 2und (es+ecially its ite ii) read in con3unction "ith Article /5 for another necessary legal lin> "ith the GA!!& although one along e.en less defined lines-

a .iolation of Article /5 "ould be required in order to deter ine a .iolation of Article 45H$-BB /n order to ans"er these questions& one ust loo> closely to the "ording used in Article 45- !hree different e,change ter s are used throughout the Article& each bearing a s+ecific eaningH e,change arrange ents (Article 45H1); e,change action (Article 45H$); and e,change controls or restrictions (Article 45H#)- !he lin> bet"een GA!! Article 45 and /12 Article /5 is ade ob.ious by their titles& each citing e,change arrange ents as their sub3ect of regulation- !he use of the ter e,change arrange ents at the title of both articles see s to indicate it as a general e,+ression& enco +assing the different actions and echanis s +ro.ided for in these articles6aragra+h 2 of Article 45 establishes that 7in all cases8 in.ol.ing e,change arrange ents& the )A(!<A)!/(G 6A<!/*9& shall 7consult fully8 "ith the /12 and that in such consultations they ust 7acce+t all findings of statistical and other facts +resented by the 2und8 relating to this atter- Also& the )A(!<A)!/(G 6A<!/*9 7shall acce+t the deter ination of the 2und as to "hether action by a contracting +arty in e,change atters8 is in accordance "ith the /128s Articles of Agree ent!hus& in all cases in "hich Article 45 is analyGed& the statistical findings ( e.g. "hether an e,change rate is isaligned) are +resented by the 2und and ust be acce+ted as +art of the facts at dis+osal for an ob3ecti.e assess ent by the +anelCA++ellate 0ody B?- !his is the case of findings concerning GA!! Article 45H$ obligation- /n order to analyGe the Ie,change actionJ ta>en by a e ber that is allegedly frustrating the intent of the +ro.isions of GA!!& the )A(!<A)!/(G 6A<!/*9 ust consult "ith the 2und and acce+t its statistical findings!his does not ean ho"e.er& that the /12 "ill ha.e a say "hether a W!A e ber is in .iolation of Article 45H$ of GA!!- !he only 3udicial +rerogati.e /12 has is on "hether the e,change action is in accordance "ith the 2und8s o"n obligations- !his is i +ortant to the a++lication of the e,ce+tion +resent at Article 45H#- /t reads as follo"sH #- (othing in this Agree ent shall +recludeH (a) the use by a contracting +arty of e,change controls or e,change restrictions in accordance "ith the Articles of Agree ent of the /nternational 1onetary 2und or "ith that contracting +arty8s s+ecial e,change agree ent "ith the )A(!<A)!/(G 6A<!/*9& or (b) the use by a contracting +arty of restrictions or controls in i +orts or e,+orts& the sole effect of "hich& additional to the effects +er itted under Articles 4/& 4//& 4/// and 4/5& is to a>e effecti.e such e,change controls or e,change restrictions-

B$ 9ee 9/*G*D& Deborah *-& IDegal As+ects of the /12CW!A <elationshi+H !he 2und&J in 'merican .ournal of International 7aw& .- #?& 2002& ++ B?1F?21 BB 9ee& in fa.or of the inde+endency of GA!! Article 45H$ a++lication& 1/<A(DA& Jorge& I)urrency under.aluation as a .iolation of GA!! Article 45($)J& in *5*(*!!& 9i on& The /#4#ino +urrency $ispute% 1ew Insights from 6conomics, 0olitics and 7aw& 5o,*'-org 6ublication& )*6<& A+ril 2010& +11BF12?- An the other hand& see& considering the ina++licability of the sa e article& @'20A'*<& Gary& WA(G& Nee& 9@*!@& Let>i& /#4+hina Trade $isputes% <ising Tide, <ising #takes & /nstitute for /nternational *cono ics& Washington& D-)-& 200?- 9ee also& 1A!!AA& Aaditya& 9'0<A1A(/A(& Ar.ind& I)urrency 'nder.aluation and 9o.ereignH A (e" <ole for the World !rade ArganiGationJ& The World 6conomy& 200# B? 9ee W!A& /ndia Vuantitati.e <estrictions on / +orts of Agricultural& !e,tile and /ndustrial 6roducts& 6anel <e+ort& W!CD9#0C<& ? A+ril 1###& +ara- B-11FB-13

!he rationale of this +aragra+h is to a.oid the GA!! echanis of being contrary to the "ellFfunctioning of the /12- Ane of the ain goals of the /12 is to ensure the stability of balance of +ay ents (Article /Hi.) and the financial health of its e bers (Art- /Hi)- /n this sense& and in critical situations& the /12 allo"s for the e,ce+tional use of ca+ital controls and e,change restrictions throughout its Articles of Agree ent-B% 9i ilar e,ce+tions due to /12 echanis s can be found in other GA!! articles& e.g. Article 5//Hc on ulti+le currencies con.ersion; Ad (ote to GA!! Article 5/// regarding e,change fees for balance of +ay ent reasons; Article 4/5H1&3 and B(a) on e,ce+tions to the <ule of (onFdiscri ination; Ad (ote to 9ection 0 of GA!! Article 45/ on ulti+le e,change rates!he e ber "ill be allo"ed to de+art fro a GA!! rule in order to duly a++ly an /12 +ro.ision- /n such cases& as deter ined by GA!! Article 45H2& the final "ord on "hether the e ber is correctly a++lying the /12 +ro.ision and thus not .iolating the GA!! obligation& falls onto the /12 +rerogati.e- Article 45H# is an e,a +le of such case/t is i +ortant to note& ho"e.er& that GA!! Article 45H# a>es clear reference to e,change controls or restrictions& "hile other GA!! articles a>e direct reference to ulti+le e,change rates- !hese are the only e,change actions that are co +rised in the e,ce+tion- As noted abo.e& these e,act ter s are found throughout the /128s Article of Agree ents and indicate s+ecific e,change actions- /t is then +lausible to argue that e,change actions& other than e,change restrictions or controls and ulti+le e,change rates& e.en "hen o+erated in accordance "ith the /12 Articles of Agree ent& or& in contrario sensu& e.en in the absence of a for al /12 conde nation& can still frustrate the intent of the GA!! +ro.isions and thus contra.ene GA!! Article 45H$-BE !his analysis is rele.ant in order to correctly differentiate bet"een ani+ulators of e,change rate (/12 Article /5H3) and IfrustratorsJ of trade ob3ecti.es (GA!! Article 45H$)- Although related& such notions bear i +ortant differences- As already stated& the +roof of& and /128s +olitical "ill to recogniGe& currency ani+ulation is co +licated B#Ane could still argue that any e,change rate ani+ulation 7to gain an unfair co +etiti.e ad.antage8 o.er other countries "ill& if effecti.e& frustrate trade ob3ecti.es- !he o++osite is not necessarily true ho"e.er- !here ay be other e,change actions that do not in.ol.e the s+ecific action of e,change rate ani+ulation that can frustrate the intent of the GA!! +ro.isions/n this sense& the legal discussion at the W!A could o.e a"ay fro the +olitically sensiti.e discussion of identifying currency ani+ulators and could focus on the analysis of the effects of e,change actions on trade instru ents- !he /12 "ould thus be consulted to +ro.ide statistical in+uts on e,change rate isalign ents& "hile the W!A
B% <egarding e,change controls and restrictions the follo"ing articles in the /128s Articles of Agree ent can be citedH Art 5/ section 3 control of ca+ital transfers& Art 5// section 3(b) and section $ on control and restriction of e,change o+erations due to scarcity of currency; Art 5/// section 2(b) on e,change control coo+eration; Art 4/5 section 2 on e,change restrictionsBE 1iranda a>es a si ilar argu ent in 1/<A(DA& Jorge& I)urrency under.aluation as a .iolation of GA!! Article 45($)J& in *5*(*!!& 9i on& The /#4#ino +urrency $ispute% 1ew Insights from 6conomics, 0olitics and 7aw& 5o,*'-org 6ublication& )*6<& A+ril 2010& +- 120 B# 9ee& S/11*<1A((& )laus D- I*,change <ate 1isalign ent and /nternational Da"J& .ol- 10B(3) ' . .. I1T=7 7-& 2011 +- $2%F$3%& stating that the "ay Article /5 is drafted& it is i +robable that one could +ro.e the intent of a e ber in ani+ulating its currency in order to gain a Ico +etiti.e ad.antageJ-

e,+erts "ould deter ine if e,change actions "ere frustrating the ob3ecti.es of GA!! articles/t is i +ortant to stress though that e.en in the absence of an inde+endent .iolation of a s+ecific article of the GA!!& the argu ent based on GA!! Article 45H$ obligation "ould only require to de onstrate that the e,change action frustrated the IintentJ of the said +ro.ision- /n other "ords& an e,change action can .iolate Article 45H$ e.en "ithout .iolating co +letely the GA!! echanis "hose intent has been frustrated a rationale si ilar to the one +resent at GA!! Article 44/// concerning nonF.iolation/n su H a) /12 Article /5 offers a legal basis for conde ning currency ani+ulators& but its a++lication is doubtful due to the sub3ecti.eness of the IintentJ condition and also due to the 2und8s ne" role in international econo ic go.ernance; b) GA!! Article 45 focuses instead on searching for the IfrustratorsJ of trade ob3ecti.es- )urrency ani+ulators "ill& in ost cases& frustrate trade ob3ecti.es& but not all IfrustratorsJ are currency ani+ulators; c) !he a++lication of Article 45 does not de+end u+on the deter ination by the /12 of "hich countries are currency ani+ulators it is u+ to the W!A D90 to deter ine the frustration of GA!! ob3ecti.es; d) !he W!A ust consult and acce+t statistical in+uts fro the /12 regarding e,change arrange ent issues and consider the as +art of its ob3ecti.e analysis; e) *,change actions can .iolate Article 45H$ e.en "ithout .iolating co +letely the GA!! echanis "hose intent has been frustrated a rationale si ilar to the one +resent at GA!! Article 44/// concerning nonF.iolationf) As an e,a +le F countries that aintain de.alued currencies .iolate Article 45H$ (frustration)& through the frustration of GA!! Article //H1 intents (a++lied ad .alore tariffs abo.e bound tariffs)/n the absence of ne" negotiated rules at the W!A to address s+ecific as+ects of the e,change rate and trade issue& Article 45 re ains as the forgotten legal lin> bet"een the /12 and the W!A/t should be redisco.ered by W!A e bers e.en if only as a eans to de onstrate the consequences of the issing lin> to international tradeV2 "on%l#sion )riticis s of both the /12 and the W!A handling of the situation are gro"ing bet"een countries suffering the consequences of "hat has co e to be recogniGed as a Icurrency "arJ- 1any argue that the /12& through Article /5 sur.eillance echanis & is the best institution to deal "ith the issue- 0ut& for decades& /12 has done nothing to counter.ail the i +acts of currency on trade instru ents- W!A "as left alone to handle this crucial issue because the lin> bet"een trade and currency "as lost in the frag entation of 0retton Woods syste !he >ey +roble is that the /12 has undergone a dee+ and eaningful Isilent re.olutionJ that changed its funda ental role in the global econo ic go.ernance fra e"or>- /ts relationshi+ and a++reciation of the sub3ect of e,change rates is nothing li>e "hat it "as concei.ed for during the 0reton Woods negotiations- !he 2und has no longer the control o.er e bers8 e,change rate .alues; neither does it ha.e the intent to do so- 'nder its +resent agenda& the /12 considerers e,change rates as one of the any acroecono ic .ariables it ust o.ersee in order to guarantee national and global econo ic stability- /n this sense& ani+ulating or enduring a certain degree of e,change rate isalign ent can be a .alid tool in restructuring a country8s balance of +ay ent!he strict i +acts on trade are not under the scrutiny of /12 sur.eillance-

!he ultilateral trading syste & ho"e.er& still o+erates under the sa e +resu +tion it had "hen the GA!! "as negotiatedH that e,change rate o.e ents "ere strictly controlled& neutraliGing any +ossible har ful effects on trade instru ents- !he sa e legal structure re ains unaltered- !he ultilateral trading syste fails to ac>no"ledge that such a lin> is no" gone& bearing substantial and horiGontal i +acts for all its rulesAlthough technically the legal basis for an /12 control o.er co +etiti.e currency de.aluations is still +resent in the organiGation8s Articles of Agree ent& the e.olution of its role in the international econo ic go.ernance de onstrates that it is hardly concei.able that the 2und "ould do it& at least not in the "ay the W!A echanis s "ould require in order to neutraliGe the isalign ent effects on trade instru ents!he recent a end ents to the 2und8s rules and +ractices regarding Article /5 sur.eillance echanis indicate that the institution is see>ing to address the issue under its o"n logic- (o reference is ade& though& to "ays of addressing the effects of e,change rate isalign ents on trade rules- Also& no reference is ade to coo+eration bet"een the /12 and the W!A in cases "here 7i +ortant econo ic or financial de.elo+ ents are li>ely to affect a e ber8s e,change rate +olicies8-?0 /t see s .ery unli>ely that the international onetary syste is going bac> to the hard control o.er e,change rate .ariation si ilar to the one in +lace during the dollarFgold standard- /n this sense& the rules of the ultilateral trading syste ust ada+t to this ne" reality& ta>ing into account the effects of e,change rate isalign ents on its echanis s- )ontinuing to ignore the funda ental shift in the international onetary syste "ill only +ost+one a serious +roble and endanger the trade syste to econo ic irrele.ance!he signs are already there& as the +resent Icurrency "arJ has been +ushing countries to ta>e an e.er gro"ing +rotectionist and defensi.e +osition- As /r"in "arned in 2011H Deft unresol.ed& these tensions o.er e,change rate +olicy could gi.e rise to unilateral action- !his "ould not only under ine the credibility of the international institutions that ha.e res+onsibility in this area& but could lead to da aging retaliation that "ould be difficult to contain and further har a "ea>ened "orld econo y- !he solution is for the international co unity& in +articular the /12 and the W!A& to "or> out ne" rules to hel+ defuse current and future dis+utes o.er e,change rate +olicy and clarify the conditions under "hich trade sanctions ight be considered an a++ro+riate re edy-?1 While di+lo ats and e,+erts discuss ho" to deal "ith the +roble & there is already clear e.idence that e,change rate isalign ents are destroying any of the trade instru ents- As "as sho"n by !horstensen& 1arWal and Ducas ?2& o.er.alued currencies can nullify a++lied and bound tariffs negotiated in +ast <ounds- An the other hand& under.alued e,change rates are not only granting subsidies to e,+orts& but also raising i +ort tariffs abo.e the le.els negotiated at the W!A& in clear .iolation of GA!! Article 5/ and Article //- !he e.idence is so strong that the efficacy of all trade defence instru ents& as antidu +ing& antiFsubsidy and safeguard& can be +ut in 3eo+ardy!here are t"o a++roaches being discussed in the acade ic "orld- Ane is loo>ing for the ani+ulators of /12 Article /5& as the "or> of Jose+h Gagnon fro the 6eterson
?0 /12& "ilateral and ultilateral #urveillance $ecision , Integrated #urveillance $ecision & *,ecuti.e 0oard Decision& /12& July 1E& 2012 ?1 /r"in& abo.e n ?& at 33 ?2 !horsensen et al& abo.e n B1

/nstitute in Washington& "ho see>s a solution inside the /12& but also +ro+oses trade tariffs as a +ossible "ay of enforcing good beha.ior fro distorting e bers- ?3 1ore recently& 2red 0ergsten and Jose+h Gagnon +ublished another article in "hich they na e 9"itGerland& Ja+an& /srael& 9inga+ore& )hina& 1alaysia& !hailand& and oil e,+orters as currency ani+ulators-?$ !his +ro+osal tries to de.elo+ a ethodology based on /12 Article /5 conce+t of ani+ulation of e,change rates and is based on the agnitude of reser.es& current account and currency isalign ents- @e na es 9"itGerland& Ja+an& /srael& 9inga+ore& )hina& 1alaysia& !hailand& and oil e,+orters as currency ani+ulators and defines ani+ulation of currencies as the result of go.ern ent +ushing do"n the currency .alue through official financial flo"s (go.ern ent s+ending& ta, rates& and oney creation through interest rate) or ani+ulation through ca+ital control easures such as ta,es or regulatory restrictions- !his a++roach is done under the logic of the /12!he second a++roach is to loo> for the IfrustratorsJ of the ob3ecti.es of the W!A Agree ents& as established by GA!! Article 45- !he idea is to create a echanis inside the W!A that neutraliGe the effects of e,change rate isalign ents on the e,isting trade instru ents as correction of tariffs& or the introduction of an e,change rate isalign ents clause in antidu +ing& antiFsubsidies or safeguards instru ents- !his echanis should follo" all the GA!! traditional ritualsH in.estigation& te +orality and a++lication on a sectorial basis& since the effects of isalign ents are different a ong sectors- Ane e,a +le of a correcting echanis through antiFsubsidies is +ro+osed by Di aF)a +os and Gil-?B !he effects of e,change rate isalign ent are so de.astating that a solution to the +roble ust be sought i ediately& "ithout "aiting for a ne" <ound as +ro+osed by so e cautious inds!he ultilateral trading syste co unity cannot "ait for the endless and inconclusi.e discussions of econo ists that are al"ays loo>ing for the yth that Iat the long range& equilibriu "ill be reachedJ- !he conce+t of ti e for econo ists is not the sa e as for 3urists- !here is no such a thing as .iolating a rule until a solution is reached in the long run- /t see s as there is also a issing lin> bet"een econo ists and la"yers- !hey ust "or> together to guarantee that the W!A aintains its indis+ensable role as a guarantor of international fair trade/n the absence of ne" negotiated rules at the W!A to address s+ecific as+ects of the e,change rate and trade issue& Article 45 re ains the only +ossible legal lin> bet"een the /12 and the W!A- /t is a forgotten lin>& but it ust be re.i.ed and i +ro.edAs cases of trade frustrations ulti+ly& e bers "ill feel ore te +ted to test its a++licability through the W!A Dis+ute 9ettle ent 9yste & by e,+loring Article 45 li its& and this delicate and ut ost i +ortant issue "ill be left& again& to be resol.ed by the A++ellate 0ody of the W!A!he ost urgent tas> of the W!A in these con.oluted ti es is to loo> for the issing e,change rate lin> bet"een the W!A and the /12& lost in the last decades& and rescue it fro the archi.es of the international organiGation8s history?3 9ee GAG(A(& Jose+h& I)o bating Wides+read )urrency 1ani+ulationJ& 0olicy "rief 23428& 6etersen /nstitute& Washington& 2012?$ 9ee 0*<G9!*(& 2red& GAG(A(& Jose+h& I)urrency 1ani+ulation& the '9 *cono y& and the Global *cono ic ArderJ& 0olicy "rief 23435& 6eterson /nstitute& Washington& 2012 ?B 9ee D/1AF)A16A9& Aluisio de; G/D& Juan Antonio Ga.iria& IA case for isaligned currencies as counter.ailable subsidiesJ, .ournal of World Trade& .- $?& i- $& 2012& ++- 3$#F3%3

*ither this lin> is reconstructed or the W!A and the /12 "ill ulti ately fail in their ission as rele.ant international institutions for effecti.e global econo ic go.ernanceBIBLIOG A'H3 A'0A/(& 1arc& The Trade, $ebt and !inance 1exus% at the +ross4roads of icro4 and acroeconomics& discussion +a+er (o- ?& W!A& 200$ A'0A/(& 1arc& !ulfilling the arrakesh andate on +oherence% Ten @ears of +ooperation between the WTO, I ! and World "ank& discussion +a+er (o- 13& W!A& 200% 0*<G9!*(& 2red& GAG(A(& Jose+h& I)urrency 1ani+ulation& the '9 *cono y& and the Global *cono ic ArderJ& 0olicy "rief 1. 0" 23435& 6eterson /nstitute for /nternational *cono ics& Dece ber 2012 0A'G@!A(& Ja es 1-& #ilent revolution% the International onetary !und, 2898, 28:8& /12& 2001- 1111 +0A'G@!A(& Ja es 1-& The I ! and the !orce of -istory% Ten 6vents and Ten Ideas That -ave #haped the Institution& /12 Wor>ing 6a+er W6C0$C%B& 6olicy De.elo+ ent and <e.ie" De+art ent& /12& 200$ 2</*D1A(& 1ilton& I!he )ase for 2le,ible *,change <atesR& 6ssays in 0ositive 6conomics, 'ni.ersity of )hicago 6ress, 1#B3 2'DG*& (athan& IWalter 1itty and the DragonH An Analysis of the 6ossibility for W!A or /12 Action against )hina8s 1ani+ulation of the NuanJ& .ournal of World Trade $B& no- 2& 2011& +- 3$#F3%3 GAD0AW& <- 1ichael& I9yste ic <egulation of Global !rade and 2inanceH A !ale of !"o 9yste sJ& .ournal of International 6conomic 7aw 13(3)& 2010& BB1B%$ GAG(A(& Jose+h& I)o bating Wides+read )urrency 1ani+ulationJ& 0olicy "rief 234 28& 6etersen /nstitute& Washington& 2012 G/A(5/!/& I*.ol.ing <ole and )hallenges for the /nternational 1onetary 2undJ& International 7awyer& .ol 3B& 2001& ++- 13%1F1$0$ GADD9!*/(& 1orris& W*A!@*<9!A(*& Dennis& I)onfronting Asset 0ubbles& !oo 0ig to 2ail& and 0eggarFthyF(eighbor *,change <ate 6oliciesJ& 0olicy "rief 2>4?& 6eterson /nstitute& 2ebruary& 2010 @'20A'*<& Gary& WA(G& Nee& 9@*!@& Let>i& /#4+hina Trade $isputes% <ising Tide, <ising #takes& /nstitute for /nternational *cono ics& Washington& D-)-& 200? @'20A'*<& Gary )-& 9)@A!!& Jeffrey J-& IWill the W!A *n3oy a 0right 2utureJ& 0olicy "rief 23422& 6eterson /nstitute& 1ay& 2012 /12& &uidelines for the anagement of !loating 6xchange <ates& *,ecuti.e 0oard Decision (o- $232F%$C?%& /12& 1#%$/12& 'rticle I) of the !und=s 'rticles of 'greement% 'n Overview of the 7egal !ramework& /12 Degal De+art ent in consultation "ith the 6olicy De.elo+ ent and <e.ie" De+art ent& A++ro.ed by 9ean @agan& /12& 200? /12& $ecision on "ilateral #urveillance Over embers= 0olicies & *,ecuti.e 0oard Decision& /12& June 1B& 200% /12& 200%a /12& I ! 6xecutive "oard 'dopts 1ew $ecision on "ilateral #urveillance Over embers= 0olicies& 6ublic /nfor ation (otice (6/() (o- 0%C?#& June 21& 200% /12& 200%b /12& odernizing the 7egal !ramework for #urveillance , "uilding "locks Toward an Integrated #urveillance $ecision& +re+ared by the 9trategy& 6olicy and <e.ie" De+art ent and Degal De+art ent& A++ro.ed by 9iddharth !i"ari and 9ean @afan& /12& 1arch 1?& 2012 /12& 2012a

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!</22/(& <obert& &old and the $ollar +risis& Nale 'ni.ersity 6ress& 1#?0& 1#B +-