The Yuan Currency Manipulation Report

The Treasury Department must decide whether to name China a “currency manipulator” today. Though officials could appear weak by dodging the issue or delaying the twice-yearly report, its impact may be overblown.

The law which governs the Treasury’s action, the OMNIBUS TRADE AND COMPETITIVENESS ACT OF 1988 (H.R. 3), gives the President fairly wide berth as he pressures China or any other nation.

The Secretary of the Treasury shall analyze on an annual basis the exchange rate policies of foreign countries, in consultation with the International Monetary Fund, and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. If the Secretary considers that such manipulation is occurring with respect to countries that (1) have material global current account surpluses; and (2) have significant bilateral trade surpluses with the United States, the Secretary of the Treasury shall take action to initiate negotiations with such foreign countries on an expedited basis, in the International Monetary Fund or bilaterally, for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage.

In other words, a report critical of China would be public rebuke but would not have any immediate consequences on the value of the yuan, at least in so far as China can influence it, or on trade sanctions, if the US wished to avoid them. The “currency manipulator” tag sets off a series of negotiations that may lead nowhere. It would then be up to the President whether he wants to levy trade tariffs. That, however, could take months to determine.

The Administration has a “once in a lifetime” chance to put more than rhetorical pressure on the People’s Republic. A charge of currency manipulation would allow other countries such as  Germany and Japan to more aggressively join the debate. The US has a stick to wield and, if it does not, China will be allowed to slip through a crack in US policy.

Douglas A. McIntyre