U.S. currency bill likely misses target
U.S. Senators Charles Schumer (D, New York) and Lindsey Graham (R, South Carolina) have announced plans to introduce a bill allowing the Commerce Department to take account of currency undervaluation when calculating anti-dumping duties.
The target is clearly China. It threatens to inflame the already rancorous and dangerously escalating dispute with Beijing over exchange rate policy to no good purpose.
Legislative pressure will not make China’s government any more likely to accelerate the renminbi’s revaluation. If anything it will cause the government to postpone a revaluation most officials concede will eventually be necessary.
China’s government cannot afford to show weakness in succumbing to pressure from “western devils” (“gwai lo”) without losing face in the eyes of its own public. China’s Premier Wen Jiabao has already branded U.S. pressure on the currency issue as a form of “protectionism.” The Schumer-Graham bill is likely to draw an even more angry response.
So the Schumer-Graham bill is a piece of election year theatre, but a counterproductive one. It threatens to worsen already poor relations between two countries that need to be friends but are currently experiencing a steady escalation in tensions on everything from economics to Tibet and weapons sales to Taiwan.
Trading insults is not going to bring the currency dispute any closer to resolution. The only constructive way forward is to take the issue out of the headlines, allowing China to appreciate the renminbi in its own time, prodded by a domestic inflation problem and the need to control inflows of hot money.
The U.S. Treasury Department is already required to analyze the exchange rate policies of foreign currencies and consider whether they manipulate their currencies to gain an unfair trade advantage, reporting the findings to Congress annually, under the terms of the 1988 Omnibus Trade and Competitiveness Act. The law also mandates separate six-monthly reviews of specific aspects of exchange rate and economic policy.
The 1988 law was passed the last time the United States was worried about the loss of manufacturing jobs overseas, at that time to Japan, through the alleged under-valuation of the yen. So there is nothing new in the use of legislation to tackle the perceived undervaluation of foreign currencies (or overvaluation of the dollar).
But legislators have become increasingly frustrated by the Treasury’s refusal to label China as a “currency manipulator.” In 2005, leading legislators asked the nonpartisan Government Accountability Office (GAO) to review whether the Treasury was faithfully performing its duties under the law, a fairly obvious attempt to put pressure on the department.
In its report, GAO found that many experts believed that China’s currency was already undervalued — though by widely varying amounts, and some maintained undervaluation could not be measured with any degree of accuracy.
Nonetheless, it concluded “Treasury has generally complied” with the reporting requirements, noting however that its discussion of U.S. impacts had become less specific over time. “Recent reports stress the importance of broad macroeconomic and structural factors behind global trade balances.”
One of the problems with the 1988 Act’s test is that “currency manipulation” implies a degree of intent that is hard to prove. The Schumer-Graham bill neatly sidesteps this problem. Treasury is required to report on whether currencies are “misaligned” and does not have to consider whether the misalignment is intentional or what might be behind it.
It also has a couple of other innovative elements. Rather than seeking to apply broad penalties to China, it would instead allow the finding to be used in anti-dumping (AD) and anti-subsidy (countervailing duty, CVD) investigations as a means to apply higher penalties to dumped or subsidized exports from countries with artificially low exchange rates.
It would also mandate a complaint to the World Trade Organisation.
Unfortunately, this is a blind alley. The United States is more likely to be found violating the WTO agreements by taking currency valuations into account than China is to be found violating them for keeping its currency too low.
WTO CURRENCY RULES
The WTO has very specific rules on when countries may impose anti-dumping and countervailing duties (GATT Article VI) as well as how to handle disputes about exchange rate issues (GATT Article XV). The anti-dumping and countervailing duty provisions have subsequently been elaborated in very detailed agreements at the end of the Uruguay Round. None of them allow the United States to take action against China directly.
To prove dumping, the United States must show products are being imported at “less than normal value.” Less than normal value is defined as less than the comparable price when the product is destined for consumption in China; or less than the price at which it is sold in third countries, or below the cost of production plus reasonable margin for selling costs and profit.
“Due allowance shall be made in each case for differences in conditions and terms of sale and other differences affecting price comparability.” And the agreement says strict comparison with domestic sales prices “may not always be appropriate” where all domestic prices are fixed by the State, which has long been used to justify a constructed cost approach when dealing with “non-market economies.”
Nowhere does Article VI mention taking into account currency misalignments. The only reference is to “multiple currency practices” that can in certain circumstances constitute a subsidy to exports or a form of dumping. But China does not maintain multiple exchange rates. It has a single exchange rate, which the U.S. Congress just happens to think is misaligned.
Similarly, the countervailing duty rules are carefully elaborated in the 1994 Agreement on Subsidies and Countervailing Measures and require that subsidies be specific measures tied to exports in order to be actionable.
The Agreement defines specific as involving a direct transfer of funds; government revenue otherwise due that is foregone (tax credits); providing specific goods and services other than general infrastructure; or some form of income or price support. Benefits must be tied in law or practice to export performance. Again, nowhere does the agreement allow countervailing measures to be imposed for general currency undervaluation.
COMPLAINING TO IMF INSTEAD
Instead countries are supposed to raise currency issues under GATT Article XV, which deals with “Exchange Arrangements.” It does say that countries “shall not, by exchange action, frustrate the intent” of the GATT/WTO agreements. But it directs complaints to the International Monetary Fund, which must decide whether currency practices violate its own Articles of Agreement. The GATT/WTO does not become directly involved.
Moreover, it specifically states that nothing in the GATT should preclude countries from using exchange controls or exchange restrictions that are permitted by the IMF under its own Articles of Agreement. So far the IMF has not found China’s exchange rate practices to be inconsistent with its obligations under Article IV.
Unless and until the IMF finds China to be violating Article IV, a complaint to the WTO will go nowhere. Congress is sending its complaint to the wrong international organization. Instead a WTO dispute panel is more likely to find the United States has breached its obligations by trying to take account of currency misalignments in dumping and anti-subsidy investigations.