Ways and Means Committee Hearing Adds Pressure to Address Chinese Currency

March 25, 2010

The House Ways and Means Committee concluded a hearing yesterday on China’s exchange rate policy, escalating congressional pressure on the Obama Administration to to the address the country’s currency undervaluation. All four of the hearing’s witnesses testified that China’s currency, the renminbi (RMB), is intentionally undervalued by 20% to 40% and that the U.S. Treasury Department should label the country as a manipulator in an upcoming report on currency misalignments.

If the Obama administration labels China as a currency manipulator in the biannual report due out on April 15, it would be required to begin negotiations with China to address the issue and could lead to World Trade Organization (WTO) challenge by the U.S. China was last cited as a currency manipulator in 1994, but the negotiations did not produce any major results. Since then, successive administrations have refrained from designating the country as a manipulator or invoked a national security waiver to avoid pressing the Chinese for action. For its part, the Obama administration has yet to comment on how it will rule in the upcoming report.

Recently however, a bi-partisan group of Senators introduced legislation that would limit the President’s ability to avoid labeling China a currency manipulator. This group of Senators and House participants at yesterday’s hearing argue that China’s undervaluation amounts to a trade subsidy that should be addressed. Some U.S. Representatives have gone as far as to suggest that U.S. unilaterally impose tariffs against Chinese goods until the country corrects its currency misalignment, a move that many fear would trigger a full blown trade war.

Chinese government officials have repeatedly stated that they will not bow to outside pressure seeking to influence its currency. However, after meeting with China’s Vice Minister of Commerce yesterday, U.S. Treasury Secretary Timothy Geithner indicated that over time, he believes the Chinese will allow the currency to gain.