House Ways And Means Plans To Seize Yuan Issue

The House Ways and Means Committee rejected arguments by China and some economists that the manipulation of the yuan has been harmless to US trade. China recently stated that America could no longer be a low-cost manufacturer of goods because it no longer has an appropriate labor force. Many  members of the House and Senate believe that China built an export machine using an artificially low value of the yuan meant to keep the prices of its goods in foreign markets cheap.

Ways and Means has recently suggested that the Administration be forced to take a new approach. The new CURRENCY REFORM FOR FAIR TRADE (H.R. 2378, AS AMENDED) spells out how China should be treated as a trade partner in the future.

China suppresses the value of its currency (the RMB), making China’s exports cheaper than they would be if China allowed its currency to be set by the market. China’s currency policy places a drag on U.S. economic growth and job creation. Nobel Prize winning economist Paul Krugman estimates that China’s currency policy reduces U.S. GDP by 1.4 percentage points annually. According to Fred Bergsten of the Peterson Institute, allowing the RMB to appreciate to its real value would make U.S. manufacturers more competitive and create an estimated 500, 0000 U.S. manufacturing jobs here in the United States.

As a general matter, under the U.S. countervailing duty law, remedial tariffs can be imposed on imports benefitting from foreign government subsidies for export, if it is shown that imports benefitting from such subsidies cause or threaten injury to a U.S. industry producing the same or similar products. To date, however, the Department of Commerce has declined to investigate foreign government currency practices as a countervailable subsidy.

In addition:

The most important element of the bill, as amended, reverses a long-standing Commerce practice that is far more restrictive than required under U.S. law and WTO disciplines. Specifically, in the past, Commerce has resisted finding an export subsidy if the subsidy is not limited exclusively to circumstances of export (i.e., when non-exporters may benefit). The Currency Reform for Fair Trade Act, as amended, precludes Commerce from imposing this bright-line rule and, instead, requires Commerce to consider all the facts in making its determination of export contingency.
The Currency Reform for Fair Trade Act, as amended, also provides important guidance to Commerce in assessing whether a “benefit” exists in circumstances involving material currency undervaluation resulting from government intervention. Specifically, Commerce is directed to assess “benefit” in terms of the additional currency the exporter receives as a result of the undervaluation and to use widely-accepted IMF methods for determining the level of undervaluation.
In all cases, however, the Act, as amended, preserves Commerce’s authority – and responsibility – to consider each case on its merits.

China may want to reconsider its position on the yuan. Premier Wen Jiabao  said earlier this week that if China were to raise the value of the yuan by 20% to 40% as requested by the US a countless number of Chinese companies would go bankrupt and workers would be laid off resulting in social instability. The alternative which faces the People’s Republic is a trade war.

Douglas A. McIntyre