Is It a Subsidy? An Evaluation of China's Currency Regime and its Compliance with the WTO

Abstract

IS IT A SUBSIDY? AN EVALUATION OF CHINA'S CURRENCY REGIME AND ITS COMPLIANCE WITH THE WTO Matthew R. Leviton* INTRODUCTION The Chinese Government recently removed the decade-long peg of the yuan to the dollar, prompting widespread speculation among pundits and economists concerning the potential effects on the U.S. economy. 1 China's currency (the renminbi or yuan) was initially pegged against the dollar in 1994, which prevented the yuan from fluctuating in response to market forces. 2 Unlike the free-floating U.S. dollar, China maintained a fixed exchange rate through governmental intervention. 3 The value of the yuan is now tied to price movements within a basket of currencies, but the central bank still retains significant discretion in setting the yuan's value each day. 4 A consequence of China's strict mone- * Expected J.D., American University, Washington College of Law, May 2006. I wish to thank Professors Ala'i and Smyth for their guidance and insight, the talented editors and staff of the UCLA Pacific Basin Law Journal, and my family for their continued encouragement and support. 1. See Keith Bradsher, China's Currency Shift: News Analysis; Saying Goodbye to Mr. Greenspan, N.Y. TIMES, July 22, 2005 (explaining that the People's Bank of China revalued the currency by 2 percent, increasing the yuan's value in relation to the dollar from 8.277 to 8.11). The yuan is now permitted to trade in a range of 0.3 percent each day, theoretically creating the possibility of 6 percent appreciation each month. Id. 2. See Board of Governors of the Fed. Reserve Sys., Fed. Reserve Stat. Re- lease: Foreign Exchange Rates, 1990-99 (indicating that China revalued its currency in relation to the dollar from 5.8 to 8.7 yuan on Jan. 3, 1994), available at http://www. federalreserve.gov/releases/hl0/hist/dat96-ch.txt (last updated Nov. 8, 2004); see also Bradsher, supra note 1 (stating that before severing the peg, the yuan had remained at 8.28 to the dollar since 1997). 3. See JOHN J. JACKSON ET AL., LEGAL PROBLEMS OF INTERNATIONAL Eco- NOMIC RELATIONS § 22.1 (4th ed. 2002) (distinguishing between floating exchange rates, which increase or decrease in value based on supply and demand, and fixed exchange rates, which remain unchanged through central bank regulation of cur- rency inflows and outflows). 4. Bradsher, supra note 1 ( To determine the new peg, the central bank will look at how a basket of foreign currencies moved the day before. But the central bank did not reveal which currencies it will track or their relative weightings within