China Facing U.S. Trade Sanctions for Keeping Yuan Undervalued

by admin on January 12, 2011

Guest post by Xingjian Zhao, an attorney at Diaz Reus & Targ focusing on complex commercial litigation and cross-border transactions.

[Published on China Forum.]

China’s cheap currencyCurrency Reform for Fair Trade Act

China may soon be forced to pay the high price of its cheap currency.

When the Ways and Means Committee of the U.S. House of Representatives approved the Currency Reform for Fair Trade Act of 2010 in September, it included language that “fundamental exchange-rate misalignment by any foreign nation is actionable under United States countervailing and antidumping duty laws.” The Senate almost certainly will take up this measure during the current session of Congress.

This bill reflects U.S. legislators’ growing frustration with China’s protectionist attitude towards its currency. American trade groups contend that the yuan is undervalued as much as 40 percent against the U.S. dollar, increasing the relative cost of American exports in China and keeping the price of Chinese imports artificially low in the U.S. Many see this disparity as a major component of the U.S.’s large trade deficit with China. Rancor over China’s currency policies has increased in recent months in the wake of China’s continuing failure to deliver on recent promise to move to a more flexible exchange-rate system. Since making such a pledge in mid-July, the yuan has risen less than 2 percent against the U.S. dollar.

Currency Reform for Fair Trade Act of 2010

The most important element of the Currency Reform for Fair Trade Act is that it gives the U.S. Department of Commerce plenary power to impose trade sanctions on foreign governments that engage in manipulative currency practices. Under existing U.S. laws, tariffs can be imposed on imports benefiting from foreign government subsidies for export if it is shown that imports benefiting from such subsidies cause or threaten injury to a U.S. industry producing the same or similar products. To date, however, the Commerce Department has declined to investigate and classify foreign government currency practices as a convertible subsidy.

The bill reverses the Commerce Department’s longstanding reluctance to find a foreign government culpable of imposing an “export subsidy” if the subsidy in question is not limited exclusively to the circumstances of export (i.e., non-exporters may benefit from a particular currency policy). The bill precludes the Commerce Department from imposing this bright-line rule, and instead requires the Department to consider all the facts in making its export contingency determination. In effect, the Commerce Department may no longer dismiss a claim based on the single fact that a subsidy is available in circumstances in addition to export.

Moreover, the bill provides important guidance to the Commerce Department in assessing whether a “benefit” exists in circumstances involving material currency undervaluation resulting from government intervention. Specifically, the Commerce Department is directed to assess “benefit” in terms of the additional currency the exporter receives as a result of the undervaluation, and to use widely-accepted IMF standards for determining the extent of undervaluation.

Prevailing WTO Norms

In sum, the Currency Reform for Fair Trade Act aims to make U.S. commercial law and trade policy more consistent with prevailing WTO norms that tend to be more protectionist and less tolerant of manipulative practices such as currency undervaluation. Consequently, under the Act, countervailing duties may only be imposed when the Commerce Department finds, based on an assessment of all the facts, that the WTO criteria for an export subsidy have been satisfied—that is, only if: (1) the foreign government’s interventions in the currency markets result in a “financial contribution,” (2) a “benefit” is thereby conferred, and (3) the resulting subsidy is “contingent on export.”

The legislation would apply only to a relatively small share of the total trade between the U.S. and China—namely, only products that are subject to countervailing duties will be penalized. Currently, fewer than 60 products from China are subject to antidumping or countervailing duties. Moreover, the Act does not impose duties; it would merely authorize the Commerce Department to treat currency manipulation as an illegal export subsidy in countervailing duty investigations. Consequently, there is now growing support for even more aggressive action against Chinese currency manipulation, such as a flat 25 percent tariff across all Chinese imports.

Michaeldiazjr.com will be following developments in this story and report back to our blog readers as they happen.

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