The trade balance between United States and China has been heavily in favor of the People’s Republic for a long time. An often-cited reason for this phenomenon is the de facto pegging of the Renminbi (‘RMB’) to the US Dollar. It is believed that the Chinese Government actively purchases American dollars with the aim of artificially undervaluing its own currency. The result of this exercise is that even cheaper Chinese goods reach the American markets.
Some justify controlling the valuation of a country’s own currency as a sovereign act. However, the Articles of Agreement of the International Monetary Fund (‘IMF’) prohibit currency manipulation to achieve an unfair trade advantage. In theory, the United States should have no reason to complain about the Chinese practice, because it provides the U.S. population access to cheaper goods and allows the administration to boast about the strength of the dollar. Unfortunately since the 2009 recession, the United States has not viewed the Chinese practice with any such sympathy. President Obama and the Treasury Secretary have both expressed concerns that such undervaluation is harming the American economy.
The issue is increasingly inviting reactions that go beyond strongly worded criticism. The Department of Commerce has altered its long adhered to policy of not imposing countervailing duties (‘CVD’) upon products from non-market economies (‘NME’). The exemption for NME is based on the assumption that pervasive state control in these economies makes it impossible to establish an effective benchmark against which the Department of Commerce could measure whether a particular government action created a countervailable subsidy. Interestingly, China remains the only non-market economy country whose products have been targeted.
The latest in the series of onslaughts is the Currency Exchange Rate Oversight Act of 2011 (‘Currency Act’), a bi-partisan bill passed by the Senate. Though many remain doubtful of its appeal with the House of Representatives and the President, Senator Carl Levin describes the provisions of the bill as tools for American businesses “to fight” foreign companies being backed by foreign governments. In order to establish the urgency of the legislation, he highlights the inadequacy of the present statute under § 301 of Trade Act of 1988, which mandates the Treasury to issue semi-annual report on currency management by other countries. The bill’s supporters argue that Treasury’s reprimands to countries indulging in currency manipulation have proven to be ineffective in causing any meaningful change. It is noteworthy, that the May 2011 § 301 report explained how an under-valued RMB is counter-productive for tackling domestic inflation in China, but nothing more.
Under § 4(a)(3) of the proposed law, the administration would be required to take specific action if the Treasury accords a country with a priority currency designation and that country does not adopt policies to eliminate the ‘misalignment’ (i.e., a systematic and sustained undervaluation of exchange rate under § 2(5) of the Act) within specified periods of time. The new law seeks to utilize the dispute settlement mechanism under the World Trade Organization against the government responsible for the misaligned currency. Another salient feature of the bill is the representation that shall be required from the Office of the President before any bilateral trade agreement can be ratified stating the country in question has not indulged in currency manipulation in the past ten years.
Skeptics argue that such an enactment can hinder the prospects of American businesses operating in China, invite sanctions from WTO, and impose a significant threat of trade war. The Economist has labeled it “legally flawed, economically dangerous and unnecessary.” Professor Andrew T. Guzman shares similar concerns. He explained that under the WTO regime, imposition of CVD is justified only in the event of a ‘subsidy’ being extended by a foreign government. Currency management being brought under the ambit of ‘subsidy’ is an extremely unlikely possibility for the WTO, according to him. He advocates exploring diplomatic solutions; since currency management is a sovereign affair and an international remedy cannot be feasible option.
Adding further credibility to the diplomacy argument is that China has allowed the RMB to appreciate by nearly 4% this year in response to the pressure.
Any discussion on protectionist trade policy inevitably makes a reference to the Smoot-Hawley Act of 1930. Passed during the Hoover administration, this post-depression statute was targeting cheap imports from Canada and allegedly helped set off a worldwide movement toward higher tariffs. However with passage of time, the Act and the protectionist rationale behind it, has found sympathy from respected corners. The merits of current equation shall be tested in the House of Representatives.
In the 21st century, when market forces of demand and supply are almost holy, currency rates dictated by Government policy are certainly unsettling. But China is not the only country in the world actively managing its currency rate. With the view of protecting its export-oriented industries, Swiss National Bank in effect devalued the Swiss franc, pledging to buy “unlimited quantities” of foreign currencies to force down its value. The Indian rupee was systematically de-valued in 1966 and 1991. A concrete American policy on the issue of currency manipulation will have a major impact chiefly due to the dollar’s status as the reserve currency and the uncertainty, which has engulfed the world currency markets today.
How do you believe the RMB is undervalued? Evidence?
Well, the article attempts to explore an allegation and a proposed response to counter it. However, one can find some references to RMB’s undervaluation, here http://online.wsj.com/article/SB10001424052970204573704577187670284231172.html.