Over the first ten days of April, rapidly moving events substantially lowered the bookies' odds for a near-term confrontation between the US and China over China's alleged manipulation of its currency. In retrospect, the key move to break the logjam came with a phone conversation between President Obama and President Hu Jintao, on Thursday 1 April. In the week following, top lieutenants of both presidents worked through a combination of trade, security, and diplomatic issues and, at least for the time being, produced tentative steps to reduce tensions and provide for more lasting changes. First, the US Treasury Department announced that the 15 April deadline for labeling China a "currency manipulator" had been put off, at least until after the G20 heads of state summit in June. In turn, Chinese President Hu Jintao has agreed to attend the Nuclear Security Summit, hosted by President Obama in Washington, on 12-13 April. And Beijing has signalled it will allow the yuan to strengthen in coming months--most likely through a gradual loosening of currency bands.
Where Does This Leave Congress and Pending Retaliation Against Chinese Currency "Manipulation"?
To understand where we are we should first review congressional actions - or more accurately, threats of action--over the past decade.
Proposed Legislation: 2003-2009
Ironically, given the recent outburst of congressional animus and inflammatory rhetoric against Beijing's "undervalued" currency--abetted by trade economists who should know better--the current bills before Congress are much more nuanced (though still bad policy) than earlier proposed legislation. For instance, in 2003 andagain in 2005-2006, Senator Charles Schumer (Democrat - New York), backed by Sen. Lindsay Graham (Republican - South Carolina), introduced and pushed for what might be termed "blunt force" retaliation against China. Specifically, S.1586 in the 108th Congress, provided that 180 days after the legislation became law, "there shall be imposed a rate of duty of 27.5% ad valorem on any article that is the growth, product or manufacture of the People's Republic of China, imported directly or indirectly into the US" unless the president certified that China had ceased manipulating its currency "for purposes of preventing an effective balance of payments and gaining an unfair competitive advantage in international trade." With regard to GATT-legality, S.1586 made a perfunctory, and bizarre, reference to Article XXI that allows WTO members to take any action "necessary for the protection of its essential security interests."
New Bills in 2007
As the US-China trade imbalance continued to increase, in 2007 a raft of new bills were introduced; and a complicated dance began between the Senate Finance and Banking committees over jurisdiction: there were three main bills, H.R.2942 in the House; and S.1607 (Finance Committee) and S.1677 (Banking Committee) in the Senate. The three bills were broadly similar and represented a substantial change from the mandatory, quick-response retaliation of the 2003-2005 legislation. And what is more interesting and relevant here is that the 2007 legislative model in large part has endured and forms the basis for the most important bills in 2010. For the purpose of this brief essay, S.1607 will be used for the basic description. First, in 2007, the Treasury Department had introduced an "intent" test to determine whether a currency was being manipulated. S.1607 removed the intent factor by replacing the term "manipulation" with "fundamentally misaligned." Treasury is mandated to determine fundamental misalignment through economic modelling and to inform Congress of the methodology used in this determination. If a nation's currency is fundamentally misaligned through government action, Treasury must identify that government for priority action and commence negotiations to rectify the misalignment. If there is no successful result after 180 days, the US will take certain unilateral actions:
cease all US government purchases of goods and services from the designated country;
reflect the undervalued currency in anti-dumping decisions and duties, thereby increasing any subsequent anti-dumping duties;
oppose future Overseas Private Investment Corporation and multilateral bank financing for the offending country;
block any IMF rules that would benefit the offending country;
and oppose any change in status from a non-market economy to a market economy.
Finally, the bill would direct the president to seek advice and action from the IMF.
If there is no positive result within 360 days, the US must initiate a WTO dispute settlement case.
The bill allowed a presidential waiver under certain specified rules. After labeling a country a "priority" currency manipulator, the president could waive the above named unilateral actions if he determined that such actions would harm national security or vital economic interests. He would be required to explain his reasoning in detail to Congress. Subsequently, if the president invoked a waiver again, Congress reserved the right to introduce a joint resolution of disapproval. If the resolution passed and was then vetoed, it would take a two-thirds majority of both houses to override the veto.
2010 to Present
On March 16, a bipartisan group of twelve senators, led by Senators Schumer, Graham and Debbie Stabenow (Democrat - Michigan), introduced the Currency Exchange Rate Oversight Reform Act of 2010 (S.3134). The bill represents a merging and compromise among competing legislative approaches adopted earlier by different committees. With several important exceptions S. 3134 tracks the major provisions of S.1607. It does attempt to restrict presidential waiver authority by mandating that for a second waiver the president must explain why taking the unilateral actions would be "out of proportion" to the benefits of retaliation. The most important difference, however, relates to the use of currency calculations in subsidy and countervailing duty actions. Congress has been pressing the Obama administration - and more specifically the Department of Commerce--to define currency manipulation as a countervailable subsidy, subject to countervailing duties--and Senators Stabenow and Jim Bunning (Republican - Kentucky) had introduced a bill S.1027 to that end. (When the bill was first introduced in 2008, both then- Senators Obama and Clinton supported it). On the other side, Senators Max Baucus (Democrat - Montana) and Charles Grassley (Republican - Iowa) had strongly resisted such a linkage, arguing that it would run afoul of WTO law. In a compromise, S.3134 merely mandates that the Commerce Department must initiate an investigation to determine whether or not currency undervaluation is a countervailable subsidy in individual cases. It also mandates a currency countervailing duties investigation specifically for China if the administration names it as a currency manipulator on 15 April.
It is too soon to know how the Administration's about-face will play out in Congress. Rep. Sander Levin (Democrat - Michigan), the new chairman of the House Ways and Means Committee, and something of a trade hawk, has reacted cautiously during the run-up to the April deadline. On 4 April, he praised the administration's decision to postpone the currency report on China, though warning that is multilateral efforts failed in coming months the administration "will have no choice but to take appropriate action." On the other hand, Sen. Grassley, ranking Republican on the Senate Finance Committee, strongly criticized the delay, stating that "everyone knows China manipulating the value of its currency," and that; "If we want the Chinese to take us seriously, we need to be willing to say so publicly." Sen. Schumer also took a harder line and vowed to continue to push the bill immediately despite the administration's accommodation with China (possibly attaching it to "must-pass" legislation, according to Senate Democratic aides). Further, while Rep. Levin adopted a conciliatory stance, it is not clear that many of his colleagues in the House forebear. On 15 March, a bipartisan group of 130 House members signed a letter to the Administration urging it to name China as a currency manipulator, apply the US countervailing duty law, and file a case against the PRC in the WTO. If all else fails, stated the letter, the administration "should use all tools at its disposal, including applications of tariffs on Chinese imports."
On Krugman and Bergsten
Reintroduction of the potential of unilateral tariffs against Chinese imports (harking back to dominant legislative proposals from 2003-2006) must be weighed against a new support given to such actions by two leading US international trade economists: Paul Krugman and C Fred Bergsten (2010). In remarks at a labour-supported think tank, and in an op-ed in the Times, Krugman argued that in a tit-for-tat battle over currency manipulation the US would suffer much less than China. And he concluded that if other tactics failed, one sometimes had to employ unilateral force ("a baseball bat") to force a change of course; in this case forcing the PRC to revalue its currency. If "sweet reason" failed, he argued, the US should impose a "temporary" 25% surcharge on Chinese imports: "Its time to take a stand." At the same event, Bergsten associated himself with Krugman's analysis and conclusions, stating Chinese currency manipulation "is blatant protection, and letting it continue is destructive of the open global trading system.sometimes you have to fight fire with fire." It should be noted, however, that some days later at a congressional hearing, Bergsten presented a three-part strategy to deal with the situation, including:
naming China currency manipulator on 15 April;
seeking a decision by the IMF to launch a special consultation with China leading to a revision upward of the yuan;
and finally, instituting a WTO case against China to determine if Chinese currency policy violated WTO rules.
He did not refer in the prepared testimony to the earlier exchanges with Krugman. In the short term, given events and decisions over the past two weeks, pressure may ease for congressional action on the Chinese currency issue. But it is also true that the Krugman/Bergsten discussions did have an important impact on members of Congress and staff. And in the future, one can be sure that this defense of unilateralism will be frequently cited. After all if a Nobel Prize-winning economist endorses such action, what's the beef?
Claude Barfield is a resident scholar at AEI.
Bergsten, C Fred (2010), "Correcting the Chinese Exchange Rate: An Action Plan," Testimony before the Committee on Ways and Means, US House of Representatives, March 24, 2010.
Krugman, Paul and C Fred Bergsten (2010) Currency manipulation: How should the U.S. respond? Economic Policy Institute - Panel 2 Discussion
Hufbauer, Gary and Claire Brunel (2007), "The US Congress and the Chinese Yuan," paper presented at the conference on China's Exchange Rate Policy, Peterson for International Economic Policy, 19 October (revised 26 October), Washington, D.C.
Ikenson, Daniel (2007), "Bark Dwarfs Bite in China Currency Legislation", Blog posted 14 June (CATO).
Krugman, Paul (2010), "Taking on China," New York Times, 14 March.
Morrison, Wayne M and Marc Labonte (2009a), "China's Currency: A Summary of the Economic Issues", CRS Report for Congress, RS 1625, Washington, D.C., 17 June.
Morrison, Wayne (2009b), "China-US Trade Issues", CRS Report for Congress, RL 33536, Washington, D.C., 17 September.