House Passes Trade Sanctions Bill Aimed at China's Currency

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September 30, 2010

The House of Representatives has passed legislation that would allow the U.S. to seek trade sanctions against China and other nations for manipulating their currency to gain trade advantages. As written, the Currency Reform for Fair Trade Act (H.R. 2378) would amend U.S. countervailing duty law under 19 USC 1677 to allow countervailing duties to be imposed to address subsidies related to a “fundamentally undervalued currency.” The bill would consider a currency to be a “fundamentally undervalued currency” for CV duty purposes, if during an 18 month period, the following criteria were met:

·         Large-scale government intervention in foreign exchange markets - the government of the country (including any public entity within the territory of the country) engages in protracted, large-scale intervention in one or more foreign exchange markets;

·         Currency undervalued 5% for 18 months - the real effective exchange rate of the currency is undervalued by at least 5 percent, on average (see bill for description of how this would be determined);

·         Persistent current account surpluses - the country has experienced significant and persistent global current account surpluses; and

·         Reserves exceed certain thresholds - the foreign asset reserves held by the government of the country exceed certain amounts.

The bill would also expand the definition of “export subsidy” under 19 USC 1677(5A)(B) by stating that in the case of a subsidy relating to a fundamentally undervalued currency the fact that the subsidy may also be provided in circumstances not involving export shall not, for that reason alone, mean that the subsidy cannot be considered contingent upon export performance to encourage the further analysis by the International Trade Administration (ITA).

Under the bill, the benefit of a “fundamentally undervalued currency” would be the difference between the amount of the fundamentally undervalued currency that was provided and the amount of the currency that would have been provided if the exchange rate were not undervalued.

The measure is intended to address China’s currency, which many economist view as being undervalued by as much as 40 percent and giving Chinese exporters a competitive advantage. The lopsided vote of 348-79 showed bipartisan support for the bill and the frustration of lawmakers on both sides of the aisle over China’s trade practices. However, critics contend that the legislation will increase the cost to consumers in the U.S. and risks sparking retaliation by China against American products.

Despite the economic concerns driving the bill, its fate is uncertain. After the House passed the bill on September 29, 2010, Charles Schumer (D-NY), the most vocal supporter of the bill in the Senate, announced that the upper chamber will consider the bill before the November elections.