Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate. As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives. It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments.

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress. It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor.

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame. It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it.

Here is the gist of the bill.

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good. Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage. Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered. The precise formula is still a bit unclear to me, though.

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away. As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country. 

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings. That would lead, inevitably, to higher dumping duties.

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill. But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale. The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/​punitive measures on national economic security grounds. That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively.

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively. Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices. Congress promised to get tough if the administration continued to fiddle. So it had to walk the walk. 

Despite some harsh provisions, it could have been worse. Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative. Here’s why.

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued. The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008. The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005. Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation. By then—15 months from now—the Yuan is likely to have appreciated considerably more. It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years. If that is the case, there should be no need for action.

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority. But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.

Thus, the preferable and much wiser gradual approach it is, by default.