WASHINGTON — October 25, 2011 — The Fair Currency Coalition (FCC), is an alliance of business,
agriculture, and labor interests that supports passage of legislation clarifying that prolonged
undervaluation by any country of its currency is actionable under U.S. countervailing duty
law. Our members believe that the damage done to U.S. domestic industry by the fundamental
misalignment of currencies, such as the RMB (RMB), requires effective legislation to counteract
such misalignment without delay. A petition to this effect and its list of signers can be
The most important issue facing America right now is job creation. One of the most
pernicious disincentives to job creation is foreign currency manipulation, with China’s
fundamentally undervalued currency as the chief offender.
Just how devastating China’s substantial undervaluation of the RMB has been as a major driver
of U.S. jobs lost has been documented in a recent paper of the Economic Policy Institute,
Growing U.S. Trade Deficit with China Cost U.S. 2.8 Million Jobs Between 2001 and 2010, by
Robert E. Scott. This paper’s analysis shows that, of the 2.8 million U.S. jobs lost during
the ten years covered, U.S. manufacturing was the hardest-hit economic sector with 1.9 million job
Both the House and the Senate also have agreed that foreign currency undervaluation is a
deterrent to job creation. Within the past 13 months, both chambers have passed legislation
by healthy, bipartisan majorities, explicitly recognizing that a fundamentally undervalued currency
can constitute an export subsidy that is both prohibited and countervailable under the relevant
provisions of the World Trade Organization (WTO). By a vote of 348-79 on September 29, 2010,
the House approved this measure in H.R. 2378, the Currency Reform for Fair Trade Act. The
Senate did the same by a vote of 63-35 on October 11, 2011, in passing S. 1619, the Currency
Exchange Rate Oversight Reform Act.
If job creation indeed is a priority, the next logical step is for the House to pass H.R.
639, the Currency Reform for Fair Trade Act of 2011. This bill’s countervail remedy is the
same as that in H.R. 2378, and H.R. 639 currently has a majority of 230 co-sponsors in the House,
including 62 Republicans.
The debates and public commentary that have accompanied consideration of these bills and
their countervail remedy, in particular, have led to statements made in opposition that are
mistaken and overlook important points. Although the countervail remedy would apply to
imports into the United States from any country with a fundamentally misaligned currency, much of
the ongoing discussion has centered on China’s RMB, both because China has been rapidly emerging as
a very influential economic force world-wide, and because there is a broad consensus that the RMB
has been for years and remains substantially undervalued due to the protracted, large-scale
interventions by the Government of China (GOC) in the exchange markets. It is just this sort
of extreme that the countervail remedy is meant to address.
A country that fundamentally misaligns its currency by substantial undervaluation over an
extended period of time acts contrary to the principle of comparative advantage and creates serious
Especially since joining the World Trade Organization, China has adhered to a policy of
substantially undervaluing the RMB and has not allowed its currency to be valued by the market’s
fundamentals of supply and demand. While the RMB’s nominal value has risen from 8.28 RMB/U.S.
dollar in July 2005 to 6.38 RMB/U.S. dollar now, the RMB continues to be substantially undervalued
on a real, trade-weighted, inflation-adjusted basis. <#_ftn1> This relative
rigidity of the RMB’s value in real terms, which the Chinese government has mislabeled as a policy
intended to create stability, instead has led to increasingly severe and destabilizing imbalances
for China’s trading partners and for China itself and has impeded the global economic recovery, as
Chairman Ben Bernanke of the Federal Reserve recently indicated.
The greatest beneficiaries of the RMB’s fundamental misalignment are China’s state-owned
enterprises and state-supported enterprises that are geared for export. The Chinese
government also gains the advantages of adding perhaps 20-25 million new jobs in China annually,
generating large trade surpluses for China, and amassing enormous foreign reserves that facilitate,
inter alia, China’s purchases of assets and raw materials in other countries. While the
estimated 75-85 million members of the Chinese Communist Party fare well under this system, the
balance of China’s population in excess of 1.2 billion people are left at or near a subsistence
level. The low standard of living for so many Chinese is exacerbated by inflationary
pressures that are attributable to the Chinese government’s capital controls, which are integral to
the Chinese government’s undervaluing of the RMB. More specifically, the required conversion
into RMB of foreign currencies earned in trade abroad leads to a loss of the RMB’s purchasing power
that is not completely contained by the Chinese government’s practice of borrowing back or
sterilizing the RMB exchanged for U.S. dollars, the euro, and yen.
The United States and China’s other trading partners are likewise disadvantaged by the RMB’s
fundamental misalignment. Due to the RMB’s artificial weakness, U.S. companies are unfairly
hampered in exporting successfully to China and also to third-country markets targeted by Chinese
companies. In particular, prices of U.S.-origin goods expressed in RMB are often simply too
high for most would-be purchasers in China. By the same token, due to the U.S. dollar’s
artificial overvaluation caused by the RMB’s substantial undervaluation, U.S. companies are
confronted in the U.S. market by a steady influx of Chinese-origin goods at low prices expressed in
U.S. dollars. This problem, along with its consequent trade deficits for the United States,
persists even with those products that are assembled in China from parts manufactured
elsewhere. The key is that the prices of those products exported from China to the United
States reflect the RMB’s enforced undervaluation relative to the U.S. dollar and are not
necessarily set to incorporate the true costs of the parts or of the Chinese assembly.
Another considerable difficulty that is attributable to the RMB’s fundamental misalignment,
and which is not infrequently overlooked, is the luring of U.S. companies to China. For a
large number of U.S. companies, the choice presented is a stark one. Unable to compete
against Chinese companies aided by the RMB’s substantial undervaluation, U.S. companies can either
go out of business or move to China. When investing in China, U.S. companies immediately
stand to gain, because the U.S. dollars they bring to China are converted into a much greater
number of RMB than would be the case if the RMB were realistically valued. This huge subsidy,
as well as other subsidies that are bestowed upon foreign investors by Chinese national,
provincial, and local governmental authorities, has attracted a good many U.S. companies and led to
lost jobs and income for the U.S. workers left behind and lost revenues for the U.S. federal,
state, county, and city governments.
Ongoing and substantial undervaluation of any currency is an insidious sort of measure in
that it has more serious effects than might at first be evident. It seems quite clear,
however, that China’s insistence for so many years upon fundamentally misaligning the RMB will have
a worse and worse impact on the U.S. economy and globally as long as China continues this
behavior. China’s undervaluation of the RMB is antithetical to the notion of comparative
advantage, negating largely or completely the true comparative advantages that the United States
and other countries have, while overriding or compensating for comparative disadvantages that China
has. If China had not wedded itself to this policy and had rather trusted the market to value
the RMB, it is very unlikely that the extreme imbalances and their detrimental effects just
described would now exist. While not perfect, there is a self-correcting quality to the
market’s fundamentals of supply and demand. In the normal course, the RMB some time ago
should, and would, have strengthened against the U.S. dollar had the Chinese government not been
intervening in the exchange markets on such a massive scale of $30 – $40 billion per month for so
The RMB’s enforced undervaluation is a main element of the Chinese government’s overall plan to
develop its system.
As the foregoing review illustrates, the RMB’s substantial undervaluation has been having
very far-reaching consequences for China, for the United States, and globally. China’s policy
of fundamentally misaligning its currency is by no means the only way in which China has been
skewing its trade policies in its perceived favor. Other subsidies, lax protection of
intellectual property, indigenous innovation, weak enforcement of its antitrust law passed in 2008,
and a lack of transparency in its statutes and regulations, among others, have rightly been
identified along with fundamental misalignment of the RMB and capital controls as practices by
China that are major barriers to smooth trading relations between China and the United States.
As important as each of these areas is, the RMB’s substantial undervaluation can be seen as a
critical linchpin of the Chinese government’s basic approach to managing its economy and
affairs. This appraisal is reinforced by Chinese governmental officials’ strident comments as
the Congress has worked its way closer to passage of the countervail remedy. Moreover, as
Chairman Bernanke and economists Paul Krugman and Fred Bergsten have all variously observed over
the last several years, the RMB’s fundamental misalignment is a subsidy that stimulates exports
from China and curtails imports into China. This subsidy also encourages foreign direct
investment in China from the United States and elsewhere. When weighing, or having once
committed to establishing, a presence in China, a company from the United States that otherwise
would likely either go or have gone out of business will be challenged with the dilemmas of sharing
its intellectual property with Chinese partners, deciphering obscure regulations to do business in
China, and so on.
In other words, of all of China’s policies, the one that is the most mercantilist and that
has the most pervasive influence is China’s substantial undervaluation of the RMB. The RMB’s
fundamental misalignment puts U.S. companies in the quandary either of (a) remaining in the United
States, gradually losing market share and revenue, and sooner or later quite possibly shuttering or
downsizing, or of (b) relocating to China aided by the RMB’s weakness and by other subsidies and
perhaps doing well for a while, but then quite possibly succumbing to the adverse effects on
foreign enterprises situated in China of China’s numbing and debilitating trade policies. The
United States and its interests are hurt in either case.
As a first step toward rectifying this unacceptable situation, passage of H.R. 639 is
warranted to clarify that U.S. companies and workers can invoke the countervail remedy when injured
by low-priced imports into the United States from countries like China that deliberately undervalue
their currencies to a substantial extent. Recourse to that remedy (a) will help U.S. domestic
industries to stay in their prime market of the United States and avert the option of transferring
to China by enforcing fair trade in the U.S. market, (b) can very reasonably be defended as
WTO-consistent (as noted below), (c) can appropriately apprise the Chinese government in a firm
manner that the RMB’s fundamental misalignment and other Chinese governmental subsidies are not
acceptable to the United States and will be offset and monitored by the United States through (i)
the mechanism of countervailing duties under the law and (ii) closer scrutiny at the WTO through
the procedures of notification and counter-notification, and (d) ease the pressure on U.S.
companies to move to China, so that (i) U.S. jobs stay in the United States and are not exported,
(ii) more wealth and revenue are created and shared in the United States for better standards of
living and constructive purposes here, and (iii) there is at least somewhat less opportunity for
the Chinese government to affect adversely U.S. companies that are still doing business in the
United States than when U.S. companies are in China.
The Countervail Remedy Is Neither Unilaterally Protectionist Nor Punitive
Export-contingent subsidies have always been viewed under the General Agreement on Tariffs
and Trade (GATT) and now under the WTO’s Agreement on Subsidies and Countervailing Measures (SCM
Agreement) as highly distortive of international trade. Ad Article VI, ¶¶ 2 and 3, note 2 of
the GATT recognizes that in certain circumstances multiple currency practices can constitute a
subsidy to exports that may be met by countervailing duties. Article 3 of the SCM Agreement
prohibits export-contingent subsidies and directs that no member state of the WTO shall grant or
maintain any such subsidies.
When a country such as China fundamentally misaligns and undervalues its currency by means of
protracted, large-scale interventions in the exchange markets, its companies that export to the
United States receive from their government more of their national currency in exchange for the
U.S. dollars remitted by their U.S. customers than if there were no such undervaluation and skewing
of the exchange rate. This governmental financial contribution benefits the exporting company
and so is a subsidy under the SCM Agreement and the GATT. Moreover, this subsidy is
contingent upon, or tied to, the exportation of the goods to the United States and hence is an
export subsidy. This export-contingency is underscored by the fact that, when goods are sold
domestically and priced in the home market’s currency rather than in U.S. dollars, there is no
In the absence of any jurisprudence under the GATT or at the WTO on this specific question,
it cannot be known with certainty what the result of a dispute settlement at the WTO would
be. There are, however, solid legal grounds for the conclusion that China’s enforced
undervaluation of the RMB is an export-contingent subsidy that violates China’s obligations at the
WTO. In that case, as seen, that subsidy is prohibited by the SCM Agreement, and exports of
particular products from China into the United States may be subject to countervailing duties to
the extent of the RMB’s fundamental misalignment when injury caused by that subsidization results
to a U.S. industry that manufactures merchandise like the subject imports.
In short, it is reasonable for the United States to interpret and implement the WTO’s
relevant texts by clarifying in U.S. domestic law that extraordinary, undervalued misalignment of a
currency like that of China’s RMB can be treated as an export-contingent subsidy that is both
prohibited and countervailable. As indicated earlier, export-contingent subsidies are seen as
being so extremely disruptive of balanced, sustainable trade across national boundaries that they
are considered to have no redeeming qualities. The countervail remedy does no more than
offset or neutralize the subsidy when imports injure a specific U.S. domestic industry and restores
a level playing field by imposing on the U.S. importer of record a countervailing duty in the
amount of the subsidy. There is nothing punitive about this remedy.
The Chinese government’s fundamental misalignment of the RMB is quintessentially
protectionist and at odds with China’s commitments to the WTO in connection with its protocol of
As just reviewed, charges of protectionism by the United States in seeking to neutralize by
means of the countervail remedy the prohibited and countervailable subsidy of the RMB’s substantial
undervaluation are in error. As has been amply described in this written statement, it is
China that has been wrongly engaged in protectionism by the mechanism of fundamentally misaligning
the RMB. Not only does that practice constitute a prohibited and countervailable export
subsidy and act to block imports into China, it also runs counter to the assurances that China made
to the Working Party in connection with China’s accession to the WTO. The following excerpts
from the “Report of the Working Party on the Accession of China,” WT/ACC/CHN/49 (1 Oct. 2001)
(Working Party’s Report), are worth quoting at length and are jarringly at odds with what has
transpired since then.
Some members of the Working Party raised concerns about China’s use of forex controls to
regulate the level and composition of trade in goods and services. In response, the
representative of China stated that China was now a member of the International Monetary Fund
(“IMF”) and that recently its system of forex had undergone rapid change. Significant moves
had been taken to reform, rationalize and liberalize the forex market. The practice of
multiple exchange rates in swap centres had been abolished. China had already unified its
forex market and removed many of the restrictions on the use of forex.
Outlining the historical development of China’s forex reform, the representative of China stated
that the purpose of China’s forex reform was to reduce administrative intervention and increase the
role of market forces. From 1979, a forex retention system was applied in China, although
forex swap was gradually developing.
In early 1994, official RMB exchange rates were unified with the market rates. The
banking exchange system was adopted [sic] and a nationwide unified inter-bank forex market was
established, with conditional convertibility of the RMB on current accounts. Since 1996,
foreign invested enterprises (“FIEs”) were also permitted into the banking exchange system, and the
remaining exchange restrictions on current accounts were eliminated. On 1 December 1996,
China had formally accepted the obligations of Article VIII of the IMF’s Articles of Agreement,
removing exchange restrictions on current account transactions. Accordingly, since then the
RMB had been fully convertible on current accounts. It was confirmed by the IMF in its Staff
Report on Article IV Consultations with China in 2000 that China had no existing forex restrictions
for current account transactions.
30. In response to requests from members of the Working Party for further information, the
representative of China added that for forex payments under current accounts, domestic entities
(including FIEs) could purchase forex
at market exchange rates from designated banks or debit their forex accounts directly upon
presentation of valid documents. * * * * He also
noted that current account forex receipts owned by domestic entities had to be repatriated into
China, some of which could be retained and some sold to the designated banks
at market rates. A verification system for forex payment (imports) and forex receipt
(exports) had also been adopted.
Concerning the exchange rate regime in particular, the representative of China noted that since
the unification of exchange rates on 1 January 1994, China had adopted a single and managed
floating exchange rate regime based on supply and demand. PBC [the People’s Bank of
China] published the reference rates of RMB against the US dollar, the HK dollar and the Japanese
yen based on the weighted average prices of forex transactions at the interbank forex market during
the previous day’s trading. The buying and selling rates of RMB against the US dollar on the
inter-bank forex market could fluctuate within 0.3 per cent of the reference rate. For the HK
dollar and Japanese yen, the permitted range was 1 percent. Designated forex banks could deal
with their clients at an agreed rate. Under such contracts the exchange rate of the US dollar
was required to be within 0.15 per cent of the reference rate, whereas for the HK dollar and the
Japanese yen, the permitted range was 1 per cent. The exchange rates for other foreign
currencies were based on the rates of RMB against the US dollar and cross-exchange rates of other
foreign currency on the international market. The permitted margin between the buying and
selling rate could not exceed 0.5 per cent.
32. The representative of China further noted that since 1 January 1994, designated forex
banks had become major participants in forex transactions. * *
Depending on its macro-economic objectives, the PBC could intervene in the forex open market in
order to regulate market supply and demand, and maintain the stability of the RMB exchange
The representative of China stated that China would implement its obligations with respect to
forex matters in accordance with the provisions of the WTO Agreement and related declarations and
decisions of the WTO that concerned the IMF. The representative further recalled China’s
acceptance of Article VIII of the IMF’s Articles of Agreement, which provided that “no member
shall, without the approval of the Fund, impose restrictions on the making of payments and
transfers for current international transactions.” He stated that, in accordance with these
obligations, and unless otherwise provided for in the IMF’s Articles of Agreement, China would not
resort to any laws, regulations or other measures, including any requirements with respect to
contractual terms, that would restrict the availability to any individual or enterprise of forex
for current international transactions within its customs territory to an amount related to the
forex inflows attributable to that individual or enterprise. The Working Party took note of
36. In addition, the representative of China stated that China would provide information on
exchange measures as required under Article VIII, Section 5 of the IMF’s Articles of Agreement, and
such other information on its exchange measures as was deemed necessary in the context of the
transitional review mechanism. The Working Party took note of this commitment.
“Working Party’s Report” at 5-6 (emphasis and bracketed material added).
As the underscored passages of these excerpts from the Working Party’s Report indicate, some
members of the Working Party were concerned that China’s controls over foreign exchange would
adversely affect other member states’ trade in goods and services. This concern is
understandable in light of the adverse effects on trade caused by China’s dual-exchange rates prior
to 1994 and the RMB’s peg to the U.S. dollar thereafter into 2001 when the Working Party met.
At the same time, it also is evident from the Chinese representative’s statements to the Working
Party that China acknowledged and pledged to implement its obligations regarding forex matters at
the WTO as well as at the IMF. China, in other words, and the Working Party were in agreement
that the policy that a country follows in forex matters is subject not only to the IMF’s
jurisdiction, but also to the jurisdiction of the WTO.
The heart of China’s message to the Working Party in 2001 accordingly was that, since
unifying its dual exchange rates at the start of 1994, China had “adopted a single and managed
floating exchange rate regime based on supply and demand.” “Working Party’s Report,” ¶
31. Even with the GOC’s announced narrow bands for daily forex trading, therefore, the
Working Party’s members reasonably relied on the GOC’s assurances and expected that the RMB would
shortly arrive and then be maintained at its equilibrium level. In fact, that goal would have
been realized years ago, soon after China’s joining the WTO, had the GOC actually allowed the RMB
to revalue in accordance with the market’s forces of supply and demand.
It is very disappointing that China has not adhered during the intervening years to its
representations before the Working Party in 2001 of having a “managed floating exchange rate regime
based on supply and demand,” but instead has effected — in a misguided effort to achieve
“stability” — an exceptionally rigid and hence destabilizing exchange-rate program over a
protracted period of time. As remarked earlier, this approach of artificially setting the
exchange rate between the RMB and the U.S. dollar has predictably added to inflationary pressure in
China along with serious trade imbalances and a sizeable shift in jobs to China’s advantage and the
detriment of the United States. This fundamental misalignment also risks dangerous,
broad-based competitive currency depreciation internationally and defensive measures by other
countries to offset and counteract the impact of the RMB’s substantial undervaluation.
<#_ftn2> With these attendant threats looming, the fact that China’s government
has persisted in this fashion for so long is dangerous and troubling.
The international community is at risk of ignoring and undermining important historical
lessons painfully gained from the Great Depression and acted upon during and immediately after
World War II.
In combination with high tariff barriers, such as the Smoot-Hawley tariffs, the period
between World War I and World War II was plagued by competitive currency depreciation. From
this experience it was realized that balanced trade and investment across national boundaries is
dependent upon orderly, flexible exchange rates. As Harry Dexter White, the principal U.S.
negotiator at Bretton Woods, observed at the time of the IMF’s founding in 1944, “A depreciation in
exchange rates is an alternative method of increasing tariff rates; and exchange restriction is an
alternative method of applying import quotas.” <#_ftn3> As he also noted,
The world needs assurance that exchange depreciation will not be used as a device for
obtaining competitive advantage in international trade; for such exchange depreciation is never a
real remedy. It inevitably leads to counter measures, and the ultimate effect is to reduce
the aggregate volume of trade. This is precisely what happened in the period of the 1930’s
when competitive exchange depreciation brought wider use of import quotas, exchange controls and
similar restrictive devices. <#_ftn4>
At this juncture in 2011, it is vitally important for the United States to rejuvenate its
manufacturing base, not only for the sake of the U.S. economy and national security, but also in
order to bolster a sustainable rebalancing of international trade and investment as envisioned by
the IMF and the GATT at their creation in the 1940s. Integral to that effort will be exchange
rates that reflect market fundamentals.
Standing up for rules, reciprocity, and results on orderly exchange arrangements is not a
trade war and is not an improper incursion of China’s national sovereignty
President Reagan’s trade policy was expressed by him as requiring
rules of law, which were
reciprocally respected by the parties to the agreement, and which yielded
results, the three Rs. As far as China’s disregard for orderly exchange arrangements
is concerned, there are rules, and the United States is respecting those rules, but the Government
of China is not, and without reciprocity by China, the results of orderly exchange arrangements and
sustainable trade and investment internationally are being thwarted by China’s intransigence.
Passage of H.R. 639 would confirm the rules that fundamental misalignment of a foreign currency is
a prohibited countervailable export subsidy and that the countervail remedy may WTO-consistently be
employed when there is injury to a U.S. domestic industry caused by imports from a country with a
fundamentally misaligned currency.
That measured response by the United States is not a declaration of a trade war. If
China reacts by compounding its illegal actions on exchange rates with more unlawful activity, that
will be inappropriate and a decision by China that likely will be ill-received by the other members
of the international community. By its membership in the WTO and the IMF, China has ceded a
significant portion of its sovereignty over the management of its currency, just as the other
members of the WTO and the IMF have mutually ceded some of their sovereignty in this respect.
All that is being sought is that China responsibly meet its international legal obligations.
H.R. 639 can help in this regard. The alternative of bilateral and multilateral talks with
China has been occurring unsuccessfully for years.
In remarks to the Economic Club of New York on October 14, 2011, Secretary of State Hillary
Clinton expressed powerfully and succinctly what is at stake for the United States generally.
In her words,
Simply put, America’s economic strength and our global leadership are a package deal. A
strong economy has been a pillar of American power in the world. It gives us the leverage we
need to exert influence and advance our interests. It gives other countries the confidence in
our leadership and a greater stake in partnering with us. And over time, it underwrites all
the elements of smart power: robust diplomacy and development and the strongest military the world
has ever seen.
The FCC agrees with Secretary Clinton.
Posted on October 25, 2011
Source: Fair Currency Coalition