As mentioned earlier, Senators Max Baucus (D-MO), Charles Grassley (R-IA), Charles Schumer (D-NY), and Lindsey Graham (R-SC) unveiled their bill on currency manipulation today at 1:30 PM ET after China once again escaped being tagged a "currency manipulator" by Treasury. (The Chinese are momentarily gleeful about Treasury's action.) The entire bill has just been posted online at the Senate Finance Committee website. Here are the key provisions from the summary of "The Currency Exchange Rate Oversight Reform Act of 2007":
New overall approach. The legislation requires Treasury to develop a biannual report that identifies two categories of currencies: (1) a general category of “fundamentally misaligned currencies” based on observed objective criteria and (2) a select category of “fundamentally misaligned currency for priority action” that reflects misaligned currencies caused by clear policy actions by the relevant government.
New Consultations Required. The legislation requires Treasury to engage in immediate consultations with all countries cited in the report. For “priority” currencies, Treasury would seek advice from the International Monetary Fund (IMF) as well as key trading partners.
New Consequences. For “priority” currencies, important consequences take effect should consultations fail to result in adoption of appropriate policies to eliminate the misalignment.
Immediately upon designation
- Oppose IMF governance changes that benefit a country whose currency is designated for priority action
- Take fact of the priority designation into account in determining whether to grant a country “market economy” status for purpose of
After 180 days of failure to adopt appropriate policies
- Reflect currency undervaluation in dumping calculations for products produced or manufactured in the designated country.
- Forbid federal procurement of goods and services from the designated country unless that country is a member of the WTO Government Procurement Agreement (“GPA”).
- Request the IMF to engage the designated country in special consultations over its misaligned currency.
- Forbid Overseas Private Investment Corporation (OPIC) financing or insurance for projects in the designated country.
- Oppose new multilateral bank financing for projects in the designated country [from the World Bank, for example].
After 360 days of failure to adopt appropriate policies
- Require the U.S. Trade Representative to request dispute settlement consultations in the World Trade Organization with the government responsible for the currency
- Require the Department of the Treasury to consult with the Federal Reserve Board and other central banks to consider remedial intervention in currency markets
New Waiver Provision. The President could initially waive the consequences after the first 180 days if such action would harm national security or the vital economic interest of the
New Congressional Input. The bill would create a new body with which Treasury must consult during the development of its report. Of the nine members, one would be selected by the President and the remainder by the Chairmen and Ranking Members of the Senate Finance and Banking Committees, as well as the
Democrats Charles Schumer of New York and Max Baucus of Montana and Republicans Lindsey Graham of South Carolina and Charles Grassley of Iowa also are seeking to change how the U.S. Treasury determines if countries are engaging in currency manipulation by dropping a requirement that the U.S. find evidence of intent.
Instead, the Treasury would look for signs that a country's currency is ``fundamentally misaligned,'' and then target the country for action such as a World Trade Organization complaint.
``It is our job to make sure Treasury does it's job,'' Baucus said at a Washington news conference. ``Today we are giving them the tools...''
Under the legislation, if adopted by Congress and signed into law, Treasury would need to show only that a currency is out of line with its real market value based on government intervention and the accumulation of dollar reserves. The legislation would apply to all countries, not just China.
If a country is deemed to be misaligned the U.S. Trade Representative's office would have one year to file a complaint at the WTO with that nation and the Treasury Department would have to consult with the Federal Reserve and other central banks to consider ``intervention in currency markets.''
It would require the Treasury to seek consultations with the International Monetary Fund when it finds manipulation and to submit a plan Congress within 30 days of a finding. Democrats in the House Ways and Means Committee are set to propose their own bill in the coming weeks...
Under current U.S. regulations, the U.S. uses the actual exchange rate on the date of sale of a product to determine the scope of dumping, which occurs when a country sells goods overseas at less than the price they are sold at home.
Under the measure proposed today, the Commerce Department would adjust its calculation of prices of goods to reflect a realistic exchange rate if a country doesn't adjust its currency value 180 days after it is deemed to be ``fundamentally misaligned'' with the dollar. This would have the effect of raising anti-dumping duties on imports.
In addition, companies from that country could be cut out of U.S. government contracts and export financing and the U.S. would be obligated to oppose new World Bank and other multilateral loans for that nation.
As I've mentioned before, this bill is convoluted. It involves the Treasury, Federal Reserve, other central banks, the IMF, World Bank, and the WTO (have we missed someone here?) Worse yet, sanctions include both tariffs and "currency market intervention"--not only by the Fed but also other central banks (!) Reuters tries to make sense of it all:
The legislation, which does not mention China or any other country by name, sets out a series of actions that increase in severity over time.
Ultimately, a country identified by the United States as having a "fundamentally misaligned" currency could face legal action at the World Trade Organization and coordinated currency intervention by the Federal Reserve and other central banks, according to a summary of the bill...
"This breakthrough proposal is like nothing else because it's tough, wide-reaching and WTO-compliant," Schumer said in a statement.
The final package borrows elements of a bill Baucus and Grassley introduced last year as an alternative to a Graham-Schumer proposal, which was opposed by the Bush administration and many business groups. That bill threatened China with a 27.5 percent tariff on its exports to the United States over the currency concerns.
"The previous legislation got China's attention; the purpose of this legislation is to force change," Schumer said...
The bill requires Treasury to develop a new report that identifies two categories of "fundamentally misaligned currencies." Those misaligned by clear government action would be targeted for priority action by the United States, while others would face less intense pressure for reform.
For any country labeled as a priority country, Treasury would be required to immediately seek advice from the International Monetary Fund and key trading partners on how best to address the issue.
Treasury also would be required to oppose any favorable change in IMF governance practices for a targeted country, while the Commerce Department would have to take the targeted country's currency practices into consideration when deciding whether it qualifies as a "market economy" under U.S. anti-dumping laws.
China has asked to be considered a market economy believing that would lead to lower U.S. anti-dumping duties. Penalties increase if a targeted country has failed to adopt "appropriate policies" after six months.
The Commerce Department would be required to include the degree of currency undervaluation in its calculation of anti-dumping duties on the targeted country.
The country would also be denied access to the U.S. government procurement market, unless it is a member of the WTO's government procurement agreement. China is currently not a member of that pact.
Treasury also is instructed after six months to request the International Monetary Fund to engage in consultations with the targeted country on the currency issue.After one year, the U.S. Trade Representative's office would be required to initiate a currency case at the WTO.
The Treasury Department also would be required to consult with the Federal Reserve and other central banks on possible "remedial intervention in currency markets" against the targeted country, according to the bill summary.
The legislation allows the president to waive penalties that kick in after six months if he decides they would harm U.S. national security or economic interest. However, Congress would be given a chance to overrule that decision.
Treasury also would be required to consult with senior members of the Senate Finance Committee and the House of Representatives Ways and Means Committee in developing its currency report.
The FT has a short article on the bill, though it does not add much more. So far, the (relatively) clear explanation is the summary offered by the Senate Finance Committee mentioned at the beginning of the post. However, it still sounds quite unwieldy in practice as it involves going back and forth across international bodies and gradually increasing sanctions. While I am sure that this bill or something like it aimed at China will gain support in Congress--likely by a veto-proof two-thirds majority in both houses--the practicalities of implementing it need to be subject to greater consideration for it to be a usable piece of legislation. We'll see if Schumer is right in describing it as a "breakthrough proposal."