Goldman Previews Today's "Anti-Chinese Currency Manipulation" Bill

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Today, at around 5:30 pm, the Senate will pass currency legislation squarely targeting alleged Chinese "currency manipulation" (which as a reminder is pegged to the USD, which begs the question just who is manipulating their currency). And while the PBOC pegged the USDCNY at a new all time low last night in what appears to be an attempt to placate US lawmakers, it may have been premature. As Goldman explains the likelihood of anything real happening as a result of this legislation, which will not pass Congress in its current form, is virtually negligible. That said, here is what the Senate in theory is attempting to achieve: "The bill would impose new penalties on countries whose currencies are found to be "misaligned," including tariffs on goods imported from those countries and an eventual WTO complaint. Like previous legislative efforts on this front, the likelihood of enactment seems low. House passage of the Senate bill seems unlikely, though it is clearly possible that the House could pass its own version of the currency bill instead." Bottom line: much ado about nothing, although China will probably not be too happy either way.

From Goldman Sachs

Congress is once again considering legislation to penalize the imports of countries that it considers to have intentionally undervalued currencies; China is its clear focus. Last week the currency bill offered by Senator Brown (D-OH) and a number of his colleagues overcame a key procedural hurdle in the Senate and final passage appears likely on October 11. The Brown bill is similar to proposals Congress has considered over the last few years and would make three important modifications to the way US trade law treats currency valuation:

  • Currency “manipulator” label: The bill establishes objective criteria that the Treasury must use to identify “misaligned” currencies, rather than the more subjective “manipulation” designation that the Treasury currently uses in its semi-annual report to Congress on foreign exchange. All instances of currency misalignment would require some type of action if not corrected; cases of intentional misalignment caused by foreign countries' policy actions—labeled under the legislation as “priority misalignment”—would require the administration to take more aggressive steps, as detailed below.
  • Anti-dumping and countervailing duties: Countervailing duties are currently applied under US law against specific goods from certain countries that are found to be subsidizing their exports. The Senate bill would require the Department of Commerce (DOC) to investigate currency undervaluation as a countervailable subsidy (under current law, the DOC has this option but is not required to do so). In addition, if “priority misalignment” hasn’t been corrected within 90 days, the full extent of currency undervaluation as calculated by the DOC or International Trade Commission (ITC) would also be explicitly reflected in anti-dumping duties. This means that domestic companies facing competition from imports would still need to file product-specific complaints with the DOC and ITC, but could add currency undervaluation to their complaint, and thus increase the remedial tariffs put in place if they are successful. This is similar to the currency bills proposed over the last few years, but unlike the original legislation offered by Senators Schumer (D-NY) and Graham (R-SC) in 2005, which would have imposed an across the board tariff on all imports from countries with undervalued currencies.
  • WTO complaint: If misalignment continues for more than 360 days, the US Trade Representative would be required to request dispute settlement proceedings in the World Trade Organization (WTO). The Treasury would also be required “to consult with” the Federal Reserve Board on remedial intervention in currency markets, though the Federal Reserve would not be required to take any action.

Why is this trade legislation coming up now, just as global economic growth appears likely to slow? The electoral cycle seems to play only a minor role; after all, Congress seems to have come closest to passing currency-focused legislation in non-election years. Economic weakness is probably a somewhat more important factor; there is a clear relationship between the unemployment rate and tariff activity (see for instance “Trade Rhetoric Likely to Heat Up,” US Daily, June 14, 2010). But the primary factor behind the renewed focus on China's foreign exchange policy appears to be the fact that Congress will soon take up legislation to liberalize trade.

It is not unusual for Congress to consider "protectionist" legislation at the same time it considers "free trade" legislation. For instance, in 2002 the Bush Administration announced steel tariffs shortly before Congress was due to vote on “Trade Promotion Authority” legislation that allowed “fast track” trade negotiations. A few years later in 2005, Republican leaders backed incremental currency legislation in order to win support for the Central American Free Trade Agreement (CAFTA). On October 12 (i.e., this Wednesday), the House and Senate are expected to pass bilateral trade agreements with Colombia, Panama, and South Korea. The Senate's likely passage of currency-focused legislation one day earlier on October 11 appears to be another example of the same phenomenon. (Senate leaders may have also decided to bring up the currency bill for a vote to preempt any effort to add it to the package of trade agreements.)

That said, even if momentum behind the Senate's currency bill fades somewhat once the bilateral trade agreements have been enacted, the outlook for this issue will remain uncertain, mainly because the division between supporters and opponents of such legislation is more blurred than ever. The Obama Administration is not clearly opposed to legislation to penalize countries with "misaligned" currencies, like the Bush Administration was. On one hand, President Obama co-sponsored similar legislation in 2007 when he served in the US Senate, and most of his Democratic allies in Congress support it. On the other hand, the President raised doubts about the bill last week by suggesting that he does not want to pass “laws that are symbolic knowing that they’re probably not going to be upheld by the WTO.” The upshot is that while a veto is possible if the Senate's currency bill reaches the President's desk, it is by no means assured.

Republican opposition is also not as clear cut as it once had been. Although House Speaker John Boehner (R-OH) has warned that the Senate's currency bill is “dangerous,” and could start a “trade war,” former Massachusetts governor Mitt Romney, arguably the leading Republican presidential contender, has indicated that he supports citing China for currency manipulation in Treasury’s semi-annual report, as well as filing a complaint in the WTO and the application of tariffs in retaliation for China’s foreign exchange policy.

The upshot is that the currency bill that the Senate is likely to pass on October 11 is unlikely to become law, but what will happen instead isn't entirely clear. The most likely scenario is that at some point over the next few months, the House will take up a different bill to address the currency issue, but one that does so in a more incremental manner than the Senate’s approach. This would allow House members who want to vote on currency issues an opportunity to do so, but would most likely not result in a bill reaching the President's desk, since differences between the House and Senate approaches could take months if not longer to resolve, and might push the issue past the election.