U.S. currency bill likely misses target

March 16, 2010

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.


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.


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.


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China is in a cylce they can’t stop. It would require the US and other developed countries to stop it. China is competitive buy an artificial currency not because they are more productive. If they left the Yuan free then they will be forced to increrase productivity and that is difficult to do plus will create unemployment (social unrest). China to stop buying T-bonds is an empty threat they can’t stop buying otherwise the Dollar will decrease value what goes against China’s interest.

Posted by axiom321 | Report as abusive

Maybe it is time for the US to look at doing its own manufacturing. This globaliztion experiment seems a dismal failure for the US citizen.
Maybe US businesses need to look into building our own goods and services from our own available raw materials.
US citizens should start reading labels and buy US manufactured goods from US materials.
Maybe then the US will be able to come to the table with something other than “hat in hand”.

Posted by GeorgeSherman | Report as abusive

This article goes against logic and reason. Why would we want to let China continue to manipulate their currency to the detriment of global trade? The EU, Brazil, India, the US, the UK, and many South American countries have complained that China’s peg to the dollar creates an unfair trade advantage. This Chinese mercantilist approach to global trade is what is creating global economic imbalances which contributed to the recession the world has experienced over the last 2 years.

If China isn’t going to step up to the plate and do the responsible thing, (which they are required to do as a member of the WTO), then there needs to be consequences. George Bush refused to push the consequences hoping that China would act out of good will and revaluate the RMB. Obviously that never worked. If China won’t correct their mercantilist policies, then we need to show them the consequences of their actions. I think the bill Mr. Dodd is suggesting is rightly due. The US is the #1 export market for China. If we slap tarriffs on their exports to compensate for the manipulated exchange rate, then that will make China step onto a fair playing ground.

China has shown that they can’t be trusted to fulfill WTO commitments.

Free Trade Only Works When Everyone Plays By The Rules!!!

Posted by Voice-of-Reason | Report as abusive

China is a currency manipulator, plain and simple. Any govenerment that refuses to let its currency float and comes up with and arbitrary peg is de facto a currency manipulator. There is simply no other way to put it.

I hate it when non-Mandarin speakers spend a few weeks in China on business and use their limited knowledge to defend Chiness policies. First off “gwai lo” is cantonese and not a slang used by mainlanders – laiwai and dabizi are more likely. The US should not concern itself with Chinese feelings or how the Chinese public will react to our demands for a fair playing field! They will always claim domestic concerns and hurt feelings when it is in their interest. The US needs to look out for its own interests — in the end we will come to an accomodation on trade that is more fair if we are firm, but only when we hold thier feet to the fire. They will not change of thier own free will and think we are weak for not looking out for our own interests as they do. In the end, after some real tough talk and negotiations, they will give us what we want because it is in their interest to do so and not because they want to….access to the US market is just too valuable to them not to make the modest changes we demand, but they will only make them if we demand it of them!

Lastly, there is not such thing as free trade, simply a series of trade preferences codified under WTO. In the end the Chinese got a sweetheart deal in 1999 under Clinton and now we are trying to figure out a way to make the playing field a little more level and surprise the Chinese are happy with things just the way they are. The deal as it is currently constructed is bad to America, the world and in the long run China too.

Posted by zhongguotong | Report as abusive

right on zhongguotong!

The U.S.; society, politicians and media, needs to stop reacting to China’s feigned indignation and just focus on doing good business. Why are we always worried about letting them save face? That’s just a show. Negotiate on the numbers, screw the emotion.

National economies should compete on the basis of productivity, quality and inventiveness; not on the basis of lower standard of living, poorer environmental quality and artificial currency manipulation.

Posted by PapaDisco | Report as abusive

If there is no law that prevents the Chinese from doing what they are doing then the laws should be changed, or ignored.

Posted by DanG | Report as abusive

I agree with George Sherman, we need to start reading labels and support our own businesses. The cheap labor or India, China, Tawian create cheap goods yes but at the expense of the United States as a whole. Look at our industrial jobs, gone. All shipped to China, India – Midal Steel anyone? When you call customer service, who do you talk to? If an American you are lucky.

There is a great balancing that will take place if globalization continues. The living standards of the United States will fall as jobs go overseas for cheaper labor and resources. If we don’t protect something then the living standards between us and the rest of the world will meet in the middle. Does anyone here want to live like they do in India or China (besides Hong Kong)? Yes its protectionism. But is it also patriotism?

Let me also say that I am a conservative before I get labelled otherwise.

Compare how we live to how Europe lives? Cost of living – through the roof, standard of living – worse than the United States for sure and Europe was once the center of the world for business. It will happen if globalization and ‘free trade’ continue. We cannot compete with cheap labor.

And yes China is completely manipulating is currency. To argue otherwise is ignorance or politics. And to say that the United States wants it only for our benefit is false. They do manipulate the currency and yes it would help us for it to float but its also protectionism on their side.

Posted by Andymc7 | Report as abusive