WASHINGTON, DC – Responding to China's repeated failure to float its currency, U.S. Senators Charles Schumer (D-NY), Debbie Stabenow (D-MI) and Bob Casey (D-PA) announced on Monday their plan to offer legislation to vigorously address currency misalignments that unfairly and negatively impact U.S. trade.
If passed, the legislation would provide less flexibility to the Treasury Department when it comes to citing countries for currency manipulation. It would also impose stiff new penalties on designated countries, including duties on the countries' exports and a ban on any companies from those countries receiving U.S. government contracts.
The announcement comes on the eve of Chinese President Hu's arrival in Washington for a state visit.
Senator Schumer said: “China’s currency manipulation is like a boot on the throat of our economic recovery. We are sending a clear message to the Chinese government: if you refuse to play by the same rules as everyone else, we will force you to. China's currency manipulation would be unacceptable even in good economic times. At a time of persistent, high unemployment, we simply will not stand for it. There is no bigger step we can take to promote U.S. job creation, particularly in the manufacturing sector, than to confront China's currency manipulation. This is not about China bashing; it's about defending the United States.”
Senator Stabenow said: “China's policy of currency manipulation forces Michigan companies into unfair competition, with Chinese goods priced as much as 40 percent lower because of their undervalued currency. This legislation will require the U.S. government to get tough on China's unfair trade practices that are hurting our economy and costing us jobs.”
Senator Casey said: “China’s currency manipulation has contributed to job loss and weakened economic growth in Pennsylvania and across the country. China has been allowed to develop an unfair advantage while going virtually unchecked. A comprehensive approach is required to level the playing field for Pennsylvania workers and employers.”
By manipulating its currency, countries can gain an unfair advantage over U.S. manufacturers by effectively lowering the price of their exports as compared to domestic goods. Currency manipulation also imposes a direct cost on U.S. exports, making American goods sold abroad more expensive. This creates an unfair trade advantage, which ultimately harms U.S. manufacturers, workers, and farmers, and contributes significantly to the U.S. trade imbalance.
Currency misalignment and the continuing trade imbalance with China have severely impacted the U.S. manufacturing sector in relation to both domestic sales and exports. The U.S. has lost over 5.3 million manufacturing jobs in the last decade. Since the beginning of the recession, millions of Americans have lost their jobs and unemployment has been hovering around 10 percent for several months.
The debate about China's currency manipulation has been going on in the Senate since 2004, when the U.S. trade deficit with China ballooned to the largest imbalance ever recorded with a single country, in part because China undervalued its currency by pegging it to the U.S. dollar. In 2005, Schumer and Senator Lindsay Graham (R-SC) offered the first legislation to combat China's currency manipulation by imposing 27.5 percent tariffs on Chinese goods. The bill helped put pressure on the China, which slowly began letting the yuan appreciate that same year. But according to the Peterson Institute for International Economics, China's currency remains between 25 and 40 percent undervalued against the dollar. This is fundamentally the same level of undervaluation that existed in 2005.
The Currency Exchange Rate Oversight Reform Act of 2011 combines the best elements of the Schumer-Graham bill that was passed by the Senate Finance Committee in 2007 and a separate bipartisan measure advanced by Stabenow along with Senators Sherrod Brown (D-OH) and Olympia Snowe (R-ME). It would:
• Create a new approach to identifying currency manipulators by requiring that the Treasury Department base its determination strictly on objective measures related to currency exchange rates. Under current law, Treasury also has to determine that the misalignment is a willful attempt to gain a trade advantage before it can cite the country. The new legislation would eliminate the need to show intent.
• Establish important consequences immediately upon designation, moderately severe consequences if consultations have not resulted in appropriate policies and identifiable actions to eliminate misalignment after 90 days, and more severe consequences if consultations have not resulted in appropriate policies and identifiable actions to eliminate misalignment after 360 days
• Establish two tracks by which the Department of Commerce can take action should a foreign country refuse to float its currency. One path would be to utilize anti-dumping laws to enable Commerce to counter the effect of misaligned currency, as outlined in the previous Schumer-Graham legislation. The other path, originally contained in the Stabenow-Snowe-Brown legislation, would allow Commerce to apply countervailing duties to goods coming into the United States from nations that misalign their currency.
A full summary of the bill appears below.
The Currency Exchange Rate Oversight Reform Act of 2011
The Currency Exchange Rate Oversight Act of 2011 will reform and enhance oversight of currency exchange rates. The bill provides consequences for countries that fail to adopt appropriate policies to eliminate currency misalignment and includes tools to address the impact of currency misalignment on U.S. industries.
Under current law, Treasury is required to identify countries that manipulate their currency for purposes of gaining an unfair competitive trade advantage. In recent years, Treasury has found that certain countries’ currencies were undervalued. However, based on its interpretation of the law’s legal standard for a finding of “manipulation,” Treasury has refused to cite such countries as currency manipulators. The bill repeals the currency provisions in current law and replaces them with a new framework, based on objective criteria, which will require Treasury to identify misaligned currencies and require action by the administration if countries fail to correct the misalignment.
Establishes New Objective Criteria. The legislation requires Treasury to develop a biannual report to Congress 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 currencies for priority action” that reflects misaligned currencies caused by clear policy actions by the relevant government.
Strengthens Existing Countervailing Duty Law to Address Currency Undervaluation. The legislation clarifies that the Commerce Department already has authority under U.S. law to investigate whether currency undervaluation by a government provides a “countervailable subsidy” and must do so if a U.S. industry requests investigation. In recent years, the Commerce Department has been reluctant to exercise its authority under the law. This legislation, therefore, seeks to strengthen and reaffirm existing law and the Commerce Department’s obligations under the law.
The legislation also makes it clear that the Commerce Department is required to investigate currency undervaluation as a “countervailable subsidy” if Treasury designates a “priority” currency and a U.S. industry requests an investigation. Under existing trade laws, if Commerce and the International Trade Commission find that subsidized imports are causing economic harm to a U.S. industry, the administration must impose duties on those imports to counter the effect of the subsidy.
Requires New Consultations. 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.
Triggers Tough Consequences. For “priority” currencies, important consequences are triggered unless a country adopts policies to eliminate the misalignment.
Immediately upon designation of a “priority” currency, the administration must:
• Oppose any IMF governance changes that benefit a country whose currency is designated for priority action.
• Determine whether to grant a country “market economy” status for purpose of U.S. antidumping law.
After 90 days of failure to adopt appropriate policies, the administration must:
• 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.
After 360 days of failure to adopt appropriate policies, the administration must:
• 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 Treasury to consult with the Federal Reserve Board and other central banks to consider remedial intervention in currency markets.
Limits Presidential Waiver. The President could initially waive the consequences that take effect after the first 90 days if such action would harm national security or the vital economic interest of the United States. However, the President must explain to the Congress in writing how the adverse impact of taking an action would be greater than the potential benefits of such action. Any subsequent economic waiver would require the President to explain how the adverse impact of taking an action would be substantially out of proportion to the benefits of such action. Furthermore, any Member of Congress may thereafter introduce a joint resolution of disapproval concerning the President’s waiver. Should the disapproval resolution be approved, the President may veto it, and the Congress would have the opportunity to override the veto.
Establishes New Consultative Body. 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 and the House Ways and Means and Financial Services Committees. The members must have demonstrated expertise in finance, economics, or currency exchange.