Exploring the Nexus of Exchange Control Policy and WTO Law: An Examination of Regulations, Justifications, and Critiques amidst the Post-Pandemic Economic Landscape

Abstract

Liberalization of exchange controls is seen as a key driver of the increase in international trade. Therefore, although exchange controls mainly fall within the IMF, the WTO has sought to restrict exchange controls to an extent that it is in conformity with a member’s obligations under the IMF. The various covered agreements under the WTO law include provisions that seek to restrict exchange controls. These provisions include restrictions on exchange controls where they contravene the principles of national treatment and the most favored nation. However, there are also provisions that are specifically directed toward exchange controls and the relevant trade barriers that may come into being as a result of the imposition of exchange controls. However, the obligations under these provisions may be subject to exceptions where such obligations clash with the obligations that Member states may have under the IMF’s Articles of Agreement. Exceptions from the liberalization of exchange controls are also provided where countries are facing balance of payment difficulties. Although the said exceptions are applied differently based on whether a country is a developed economy or a developing economy, most exceptions have been interpreted rather narrowly. The narrow interpretation of exchange control exceptions which are mainly depended upon by developing countries may be due to the increased global financial and economic integration and the need for increased global trade. However, this economic outlook has been impacted due to the Covid-19 pandemic and the various global events that took place after the pandemic, such as the economic fallout from the pandemic and the Russia-Ukraine war. 59 These events have created a period of economic uncertainty and have brought into view the still remaining stark economic disparities that remain between developed and developing economies. Furthermore, due to the current economic uncertainty and rising inflation, the Federal Reserve has resorted to increasing interest rates, which has resulted in a steep appreciation of the U.S. dollar, the world’s reserve currency against other currencies. This has created an environment of financial instability for most developing countries, creating balance of payment difficulties. Given the current economic environment, it has been argued that the traditional narrow interpretation given to exchange controls should be subject to rethinking since most developing nations may resort to temporary exchange controls to ensure financial stability. However, it is conceded that granting a wider interpretation would have a negative impact on global trade. De-dollarization has also been discussed as an alternative to granting a wider exception to exchange controls. De-dollarization may not restrict trade in a way that exchange controls would. However, de-dollarization has been a trend that has been growing only recently as a measure by developing countries to counter financial instability and its implications and viability should be subject to further research.

 

Keywords: World Trade Organization Law, Exchange Controls, De-dollarization

JEL Classification: K33, K39, B17, B22, F1, F13, E42, G18