Chinese Currency Issue Heats Up

The war of words over China’s currency policies is escalating, as members of Congress step up their
pressure on the U.S. and Chinese governments to address the issue, which they say amounts to an
illegal trade subsidy.

The latest development is the introduction of tough new legislation by 14 senators directing
the Treasury and Commerce secretaries to act if it is determined that China is a currency
manipulator. The key provisions of the Currency Exchange Rate Oversight Reform Act are as follows:

  • The bill requires the Department of the Treasury to take “priority action” when it finds an
    undervalued currency.
  • Using international guidelines, Treasury is directed to issue a biannual report that states if
    a country is “fundamentally misaligning” its currency.
  • If that is determined, Treasury must immediately engage the foreign government to resolve the
    problem, and if the problem is not resolved within 90 days, the bill triggers punitive measures
    such as preventing the federal government from buying goods and services from the offending
  • If, after a year, the problem is not resolved, the U.S. Trade Representative is directed to
    bring a case to the World Trade Organization against that country.
  • The bill requires the Department of Commerce to act when a U.S. company is hurt because of
    undervalued currencies.
  • Commerce also is directed to investigate charges and impose penalties for other types of

One of the new legislation’s sponsors, Sen. Debbie Stabenow, D-Mich., who has sponsored
similar but weaker legislation that has gotten nowhere in the past, said: “Our workers are losing
their jobs because countries like China continue to place artificial discounts of up to 40 percent
on their products and then sell them here at a cheaper price.  This unfair practice puts our
manufacturers and businesses at an extreme disadvantage and costs us jobs.”

The Senate legislation comes on the heels of a letter sent to the secretaries of Treasury and
Commerce last week by 130 House members urging Commerce Secretary Gary Locke to levy countervailing
duties on Chinese imports and calling on Treasury Secretary Timothy Geithner to brand China a
currency manipulator in a report due out April 15 dealing with currency manipulation throughout the
world. Both the Bush administration and the Obama administration have preferred negotiations with
China instead of legislation, and Geithner told the Associated Press last week he has not yet made
up his mind as to what he will do with China in the upcoming currency manipulation report.

The Chinese government has reacted sharply to all of these actions, saying it is not about to
be “bullied” into taking any action on its currency other than what it already has done voluntarily
and in China’s own self interests. The yuan has been pegged to the U.S. dollar since 2008, rather
than being permitted to float.

Chinese Premier Wen Jiabao says the Chinese yuan is not undervalued, and he warned that
politicizing the issue will not help in fighting the world economic crisis. “It would be unfounded
and meaningless for some people in the United States to back their calls for China to be labeled as
a currency manipulator by citing China’s trade surplus and U.S. deficit [and their effect on the
United States and] recovery needs.” He added that calling China to raise its currency rate in order
to help U.S. exports “would be an egotistical practice,” and that he hopes the United States will
be “an advocator of free trade rather than an obstructer.

In a dispatch from Beijing, the Washington Post quoted Chinese Commerce Minister Chen Deming
as saying that the United States will be the loser if it and China engage in a “trade war.” Chen
said: “If some congressmen insist on labeling China a currency manipulator and slap punitive
tariffs on Chinese products, then the Chinese government will find it impossible not to react. If
the United States uses the exchange rate to start a new trade war, China will be hurt, but the
American people and U.S. companies will be hurt even more.”

Charles Blum, executive director of the Fair Currency Coalition, which includes textile
lobbying organizations, said he believes the new Senate legislation will “enhance and reform” the
U.S. government’s oversight of foreign currency practices and “bring us one step closer to leveling
the playing field and … increase domestic production and put millions of Americans back to work.”

March 23, 2010