When China revalued its currency in 2005, essentially unhooking it from the U.S. dollar and allowing it to "float," many nations breathed a sigh of relief. Prior to this, China's yuan was believed to be grossly undervalued -- analysts say by as much as 40 percent -- which gave Chinese manufacturers an unfair trading advantage over those in other manufacturing nations. While the yuan has climbed in value by about 32 percent since 2005, many say it's not enough.
According to the International Monetary Fund (IMF), the yuan is still undervalued by between 5 percent and 10 percent. The U.S., the EU, Brazil, India, and others allege that the People's Bank of China (PBOC), the national bank, is continuing to manage the yuan's exchange rate below equilibrium to make China's exports more competitive. Beijing has vociferously protested the accusations, claiming economists and analysts are using "inaccurate methodology" and "shaky calculations" to value the yuan.
Last month, a bipartisan group of U.S. senators introduced S. 1114
: the Currency Exchange Rate Oversight Reform Act of 2013. The proposed legislation is similar to a 2011 bill
that was approved by the Senate but died in committee. The new bill will officially classify deliberately undervaluing currency as a form of government subsidy and outline steps to mitigate it with measures such as import duties.
The bill's authors, led by Senators Sherrod Brown (D-Ohio) and Jeff Sessions (R-Ala.), say it's a way to level the playing field for American manufacturers and help close a $300 billion trade deficit with China. According to the Economic Policy Institute, ending currency manipulation would increase U.S. net goods exports by between $184 billion and $387 billion and create over 2.2 million American jobs.
If it becomes law, the Currency Exchange Rate Oversight Reform Act will require the U.S. Treasury Department to identify undervalued currencies using a new "misalignment" standard and substantiate charges by U.S. manufacturers. If the currency undervalues are found to be actionable subsidies, the federal government would be required to levy import tariffs on the responsible country. In addition, government agencies would be prohibited from buying goods manufactured in that country. If these actions don't get results, the U.S. would then be required to approach World Trade Organization (WTO) dispute settlement resources.
Supporters of the bill include the AFL-CIO, the United Steelworkers unions, the Alliance for American Manufacturing (AAM), and many textile industry interests.
If the bill succeeds, it will likely be combined with a companion bill in the House called "H.R. 1276: the Currency Reform for Fair Trade Act of 2013." This bill amends title VII of the Tariff Act of 1930 to clarify that import duties may be imposed on goods imported from nations that undervalue their currencies. This bill is currently sitting in the House Ways and Means Committee.
If the bill becomes law, it will surely upset Chinese trading partners. When similar legislation was introduced in the Senate in 2011, Beijing said the measure risked damaging trade relations and undermining the global economic recovery.
House Speaker John Boehner opposed the earlier Senate bill, noting that the bill posed "a very severe risk of a trade war." He was joined in opposition by the U.S. Chamber of Commerce and libertarian think tank the Cato Institute, which sees the legislation as protectionism and objects to relying on the IMF and the WTO for resolution.
"The U.S. cannot use the IMF to discipline members for failing to revalue their currencies in line with some unknowable 'fundamental equilibrium exchange rate,'" wrote the institute, which believes that the U.S. deficit with China is not due to undervalued currency but mismanagement and overspending by Washington.
Steven Capozzola, spokesman for the AAM, says the political opposition to the legislation isn't based on reality and predictions of a trade war are unfounded.
"The currency bill in question is very mild and reasonable," Capozzola told IMT. "It simply allows U.S. firms to file trade cases based on injury due to currency manipulation. If anything, it could help to end a trade war that Beijing has long since launched and continues to wage. Simply put, China cheats, and continually acts in a predatory, protectionist manner."
Some opposition in Congress may have evaporated since 2011. The U.S. trade deficit with China is at record levels, and the Chinese economy is slowing, with labor costs rising faster than productivity. Many analysts expect China's GDP to expand by less than 7.5 percent this year -- which would be its worst economic performance since 1990 -- and the IMF has warned that Chinese growth could drop to just 4 percent by the end of this decade without action.
The "action" the Chinese government might be tempted to take is further weakening
of the yuan's exchange rate, a move that would upset its international trading partners. Even if China does not drop the yuan's value further, other nations are alleged to be purposely lowering their currency values.
"It is no longer just China manipulating its currency," said Senator Brown
. "There are a number of other countries -- especially in East Asia -- engaging in this practice, and... we don't have the tools to address it."