I have long spoken of the US Congress's pending bill on perceived Chinese currency undervaluation. Supposedly, it will be able to get a two-thirds majority in both houses of Congress to override a likely Bush veto by obtaining bipartisan support. Also, it will be WTO-legal. The WTO-legal part is the sticking point as the WTO, to my knowledge, has not established a precedent on currency undervaluation being a form of illegal subsidy. Thus, opinions on how this bill will look like vary as its workings remain closely held--for now. The Financial Times suggests a convoluted path: Step 1: America will ask the IMF to calculate just how "undervalued" the yuan is. Step 2: Based on the figure obtained from the IMF (10% undervalued, 30% undervalued, etc.), the US will file a case against China in the WTO's Dispute Settlement Body. Like I said, it's convoluted:Senate leaders are close to finalising legislation that they hope will lead to a reversal of long-standing US policy of opposing intervention in currency markets, according to people familiar with the matter.
The Senate bill is to be introduced in the next month and will mandate the US Treasury to intervene in global markets if currencies become fundamentally"misaligned", people involved in the process said.
The consensus in Congress in favour of currency legislation hardened after talks with China led by Hank Paulson, the Treasury secretary, failed to secure big concessions on trade and foreign exchange imbalances.
The bill has not been finalised but details are emerging as Democrats and Republicans seek to build a veto-proof majority. The legislation is an attempt by a bipartisan coalition of Senate leaders to correct what they view as tactical and strategic failures in US international economic policy.
For four years the Bush administration has opposed intervention in currency markets as part of an attempt to isolate and press China into embracing exchange-rate flexibility. But congressional leaders now believe that the effort has failed to sway Beijing and has inhibited co-ordinated policy action through the Group of Seven industrialised nations over other weak currencies such as the yen...
Congressional aides are drawing up an approach to Beijing that shifts the emphasis to the World Trade Organisation from the International Monetary Fund, which is viewed as having been ineffectual in tackling global imbalances.
A new WTO case proposed in the bill would seek to define China's weak currency as an unfair subsidy and look to the IMF to measure the percentage by which it is undervalued. Fred Bergsten, of the International Economic Institute, said that the percentage could then be applied to Chinese goods.
"A ruling that the currency was undervalued by10 per cent could mean a tariff of 10 per cent on all Chinese exports," Mr Bergsten said. He added that if the US brought the case, it was more likely to be resolved through consultations than a WTO ruling.
The latest working draft of the legislation is more moderate than many observers expected and does not include recourse to unilateral tariffs on Chinese goods.
While the details of the bill are somewhat murky, you can rest assured that it is coming around--perhaps as early as this month. An aide to Senate Finance Committee chairman Max Baucus (D-Montana) said so, and there is very little reason to doubt him or her. From Reuters:
Work on a Senate bill aimed at pressuring China to raise the value of its currency should be completed in the next few weeks, a spokeswoman for Senate Finance Committee Chairman Max Baucus said on Thursday.Unfortunately, this article does not give substantive clues on how this bill will work, either. Also, it suggests that the US will apply sanctions without consulting the WTO, which would be in contravention of WTO rules. Regardless, expect these niggling issues to be worked out when the bill finally sees the light. The test case of Schumer-Graham was last year's news; this year should see the deployment of the "Real McCoy." It should be an exciting ride; whether it will be a fun one is another matter entirely for the world economy.The much-anticipated legislation is intended to give the Bush administration new tools to prod China without running afoul of World Trade Organization rules...
Lawmakers in the U.S. House of Representative also have promised action on China legislation this year.
One bill with substantial bipartisan support would allow the Commerce Department to impose duties offsetting what many lawmakers believe is a 15- to 40-percent price advantage from China's exchange rate policies. [But isn't this a unilateral application of tariffs in contravention of WTO rules?]
Baucus and Sen. Charles Grassley, an Iowa Republican, are crafting legislation with two of China's toughest critics in Congress -- Sen. Charles Schumer, a New York Democrat, and Sen. Lindsey Graham, a South Carolina Republican.
They agreed last year to work together after Schumer and Graham gave up efforts to pass their own bill threatening China with a 27.5 percent tariff unless it increased the yuan's value against the dollar.
Graham has promised the new bill will have "bite," while Schumer has predicted it would pass both the Senate and the House of Representatives with two-thirds support -- enough to override any veto by President George W. Bush.
One expected target of reform is a semi-annual Treasury Department report on foreign currency practices that Baucus and many other lawmakers believe has become too weak a tool to pressure China, or any other country, on currency issues.
"I think that this report is a policy tool that has seen its day," Baucus said in December, after the Treasury once again infuriated many lawmakers by failing to formally label China as a "currency manipulator" in the report. "A new approach is overdue," he said.
Treasury's next currency report has been delayed because of high-level talks with the Chinese last week and is expected to be released soon. Its latest verdict on China currency practices could shape whatever legislation emerges this year if lawmakers believe U.S. Treasury Secretary Henry Paulson is prepared to taking tougher action on his own.
Last year, Baucus and Grassley introduced a bill which did not specifically target China, but gave the U.S. Treasury Department increased tools to press countries with fundamentally misaligned currencies.
It directed the Treasury Department to engage with the International Monetary Fund and other countries to resolve major currency imbalances with the dollar and raised the possibility of nontariff sanctions if such talks failed.
In China's case, the bill threatened disapproval of U.S. government-backed insurance for projects in that country; denial of international financing; U.S. opposition to more Chinese voting power at the IMF; and continued designation as a "non-market economy" under U.S. anti-dumping laws.
Grassley, in particular, has emphasized his preference for a "broad-based" currency bill that would respond to changing global economic circumstances.
"Today, the problem country is China. Tomorrow it may be country X," Grassley said.
