Congress Attacking China Currency Problem

The US Treasury Department’s decision not to label China a currency manipulator has triggered a
sharp and quick response from the leadership of the trade committees in Congress. In its
semi-annual congressionally mandated International Economic and Exchange Rate Policies report, the
Treasury said that even though China’s currency, the yuan, is undervalued, it does not meet the
technical requirement that the policy is being carried out for the purpose of preventing effective
balance of payments adjustment or gaining unfair competition advantage in international trade.

The report said, “Even though the Treasury has not designated China according to the criteria
of the law, the Treasury forcefully raises the Chinese exchange rate regime with Chinese
authorities at every available opportunity and will continue to do so.” It went on to say China
should not hesitate any longer to take “far more vigorous action” to rebalance its economy and to
tackle the currency’s undervaluation. Shortly after the report was issued, the China central bank
allowed the yuan to break through what had been a symbolically important level of 8 to the dollar.
The move was seen as an effort by the Chinese to cool down the debate in the United States over its
currency policies.

That did not satisfy members of Congress who serve on committees with jurisdiction over trade
matters. Sens. Max Baucus, D-Mont., chairman of the Finance Committee, and Charles E. Grassley,
R-Iowa, the ranking committee member, introduced legislation that would require the Treasury
Department to develop a new report that identifies “fundamentally misaligned currency” as something
requiring US action and eliminating the “intent” criteria. The bill would mandate the Treasury to
consult with key trading partners and the International Monetary Fund to address currency problems.
In addition, the Department of Commerce would be required to consider currency manipulation in
evaluating anti-dumping cases.

On the House side, Democrats on the Ways and Means Committee said they plan to address
currency manipulation problems in a number of ways with legislation that would put pressure on
China and the administration to act. One such measure is the Ryan-Hunter bill, which is pending in
the House and now has 105 cosponsors. It would define exchange-rate manipulation as a prohibited
export subsidy and clarify that the US countervailing duty law applies to both market and nonmarket
economies, such as China.

June 19, 2007