The Senate, with strong bipartisan support, recently passed legislation to address currency manipulation by countries that significantly undervalue their currency. The bill, known as the Currency Exchange Rate Oversight Reform Act of 2011 (S. 1619), is designed to address currency manipulation through traditional trade remedies, rigorous oversight by the Department of Treasury and Congress and increased U.S. actions in multilateral bodies, most importantly the World Trade Organization and the International Monetary Fund.
S. 1619’s prospects in the House are uncertain: House Republican leadership has indicated an unwillingness to bring the bill up for a vote despite significant bipartisan support. A similar bill passed overwhelmingly in the House just last year with a vote of 348 to 79. The Currency Reform for Fair Trade Act (H.R. 639), this year’s House-proposed legislation, has 230 cosponsors. If either S. 1619 or H.R. 639 were allowed to reach the House floor, it would likely pass by a comfortable margin.
China’s Currency Practices
Although S. 1619 addresses currency manipulation by any country, it was passed largely in response to growing and deepening frustration over China’s practices. In recent years, China has significantly undervalued its currency, the renminbi (RMB), by intervening in foreign currency markets and applying controls that prevent the RMB from floating freely on international markets. Many economists argue that by undervaluing its currency by 25 to 30 percent (or more) against the dollar, the Chinese government provides an unfair competitive advantage to Chinese producers in global export markets. Moreover, estimates indicate that a fairly valued or “equilibrium level” RMB would increase U.S. gross domestic product and create over two million U.S. jobs. An undervalued RMB makes China’s exports much cheaper than they would be if China allowed its currency to float freely on international markets. It also makes U.S. exports to China more expensive, with a negative impact on U.S. manufacturing jobs and global trade imbalances.
One important remedy in S. 1619 provides that the U.S. Department of Commerce should investigate currency practices and apply tariffs to imported products that harm U.S. industries under the countervailing duty law. This incremental remedy, applied on a case-by-case basis, could be incredibly important in bringing China and other countries that undervalue their currencies into compliance with international norms. It is important to remember that any tariff increase would apply only to the specific product under investigation. As such, it would gradually increase pressure on the currency violator but should not break open the flood gates into an all-out trade war – a specter that opponents of the legislation have raised in their rhetoric. The bill also requires the Treasury Department to analyze harmful currency policies and coordinate remedies internationally, through bilateral and multilateral negotiations.
Historical Concern About Competitive Currency Policies
Global trade frictions caused by competitive currency policies, like those addressed by S. 1619, are not new: After a series of damaging competitive currency exchange actions in the 1930s, the United States, Britain and France agreed in 1936 to avoid “unreasonable competitive exchange advantage” and later were joined in this pledge by Belgium, the Netherlands and Sweden. “Beggar-thy-neighbor” policies, such as competitive currency devaluations, continued to be of concern to global leaders while rebuilding monetary and trade systems after World War II. Countries negotiating the international agreements establishing the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade (GATT) – the precursor to the World Trade Organization – made specific references to the “great dangers” that could result if a country used its exchange policy to create an unfair export subsidy for its products in global markets. In August 1971, President Nixon imposed a tariff on imported products that was rescinded only when industrial countries agreed to appreciate their currencies. This measure, known as the “Nixon Shock,” was prompted, in part, by U.S. concern over Japan’s and Germany’s undervalued currencies.
Increased Oversight Of Currency Undervaluation By The Treasury Secretary
S. 1619 requires the treasury secretary to report to Congress on global currency market developments, and the impact of major trading partners’ economic and monetary policies on the U.S. dollar, twice a year – by March 15 and September 15. In these reports, the treasury secretary must determine whether a currency is “fundamentally misaligned” and if it is, whether it should be designated for “priority action.” Fundamental misalignment is defined by the bill as “a significant and sustained undervaluation of the prevailing real effective exchange rate, adjusted for cyclical and transitory factors, from its medium-term equilibrium level.”
A fundamentally misaligned currency can be designated for priority action under specific circumstances, including when a country has engaged in protracted large-scale intervention in the currency exchange market, or has accumulated excessive foreign exchange over a prolonged period. However, the law also gives the treasury secretary discretion to designate a currency for priority action if warranted. Once a currency is designated for priority action, a number of processes are triggered, including the application of traditional U.S. trade remedies and U.S. actions at multilateral institutions.
U.S. Trade Remedies
S. 1619 was passed, in part, as a response to the Commerce Department’s refusal to investigate China’s currency policy in a series of recent trade actions, including countervailing duty investigations brought by the U.S. paper and aluminum industries. These industries alleged that China’s currency policies significantly undervalue the RMB and create an illegal export subsidy.
Under current U.S. trade law, a U.S. industry injured by unfairly traded imports can file a petition with the Commerce Department and the United States International Trade Commission seeking import tariffs, specifically antidumping and countervailing (antisubsidy) duties, to both increase the price of a “dumped” product to “fair value” and counteract illegal subsidies. The purpose of these tariffs is to enable U.S. producers to compete in the U.S. domestic market with unfairly traded imports, thereby saving U.S. manufacturing jobs in industries that otherwise might shut down.
Once a currency is designated for priority action, the Senate bill requires the Commerce Department to adjust the antidumping duty “to reflect the fundamental misalignment of the currency of the exporting country.” It also requires the Commerce Department to investigate currency subsidies just as it does other properly alleged illegal subsidies and to apply countervailing duties as a remedy for such subsidization. An increase in the overall tariff amounts applied to unfairly traded imported products is the desired result of this legislation.
Many trade lawyers view Commerce’s recent reluctance to investigate currency subsidies, in part, as stemming both from its concern that the Treasury Department is more fundamentally suited to address international currency policies and from the Obama administration’s overall reluctance to confront China’s economic policies amid the global economic downturn.
Though Commerce consistently has refused to investigate China’s currency policy, the currency policies of other countries have previously been investigated under U.S. trade law, albeit none more recently than Commerce’s 1983 investigation in a case concerning Mexico.
Multilateral Action By The Treasury Secretary
S. 1619 also directs the treasury secretary to negotiate with countries that have a fundamentally misaligned currency and to apply pressure through multilateral institutions on countries with a currency designated for priority action. The treasury secretary leads negotiations with countries that have fundamentally misaligned currency to seek policy changes that will fairly value the currency.
Once a currency is designated for priority action, however, S. 1619 directs the treasury secretary to broaden negotiations, bringing in other countries and multilateral institutions that deal with monetary policy and global trade. These steps include consulting with the International Monetary Fund and encouraging other governments to pressure the offending country to change its policies. The country must take action to remedy the misalignment within 90 days of being designated for priority action in order to prevent additional U.S. actions, including prohibiting the U.S. government’s procurement of products and services from the country and requesting the IMF to examine whether the country has violated its obligations under the IMF’s Articles of Agreement. In particular, the IMF’s Articles direct member countries to “avoid manipulating exchange rates . . . to gain unfair competitive advantage over other members.”
S. 1619 calls for the Overseas Private Investment Corporation to refuse new financing for projects located within a country with misaligned currency, and for U.S. directors at a number of multilateral banks – including the International Monetary Fund, the World Bank, the International Finance Corporation and the Inter-American Development Bank – to oppose new financing for the country. Finally, it also calls for the United States to oppose changes in the governance of multilateral banks that would benefit a country whose currency is designated for priority action. Developing countries, including China and Brazil, recently have called for increased power at the IMF. Although earlier this year Treasury Secretary Geithner acknowledged U.S. support for a greater role for Brazil at the IMF, it is doubtful the U.S. would support a greater role for China without a change to its currency policy.
World Trade Organization Action Against Persistent Violations
If a country fails to adopt polices to fairly value its currency within 360 days of being designated for priority action, then S. 1619 requires the Office of the United States Trade Representative to begin WTO dispute settlement procedures in order to determine whether the country’s currency practices are consistent with its WTO commitments. It also directs the treasury secretary to work with the Federal Reserve Bank and consider U.S. intervention in global currency markets.
The President can waive remedies under S. 1619 if it would cause serious harm to national security or an adverse impact on the U.S. economy that is outweighed by the benefits of the action. However, Congress, through a joint resolution of both chambers, can override presidential waivers for persistent violations, thus subjecting a country to WTO dispute resolution even if the president opposes such action.
The United States is not alone in attempting to deal with currency practices that promote one country’s exports at the cost of another’s prosperity. The government of Brazil has proposed an initiative to address currency practices at the WTO and will conduct a seminar at the WTO on this issue in the spring of 2012. Earlier this year, at a meeting of G-20 finance ministers and central bankers, Mexico’s central bank governor stated that Asian countries should adopt flexible exchange systems. Because Mexico will chair the G-20 in 2012, this could be an indication that currency issues will be on the agenda of the upcoming G-20 summit.
Until multilateral forums create a global solution, though, incremental solutions, like the application of antidumping and countervailing duties, will provide much-needed relief for U.S. industries injured by unfairly traded, and underpriced, imports. S. 1619 offers an incremental and judiciously applied remedy under narrow circumstances. Plus, many aspects of the legislation prompt U.S.-led multilateral cooperation that could provide long-term solutions to global trade friction resulting from predatory currency policies.
 See Currency Exchange Rate Oversight Reform Act of 2011, S. 1619, 112th Congress (Oct. 11, 2011).
 See Currency Reform For Fair Trade Act, H.R. 111-646, 111th Congress (Sept. 28, 2010).
 See Currency Reform for Fair Trade Act, H.R. 639, 112th Congress (2011).
 See Robert E. Scott, The Benefits of Revaluation, EPI Briefing Paper #318 (Economic Policy Institute June 17, 2011).
 On December 19, 2011, the Court of Appeals for the Federal Circuit affirmed, on different grounds, the Court of International Trade’s decision that the Commerce Department cannot apply the countervailing duty law to nonmarket economies, including China. Options for the Commerce Department’s continued application of this law to China include: requesting a rehearing by the Federal Circuit, either by a panel or en banc; filing a writ of certiorari with the U.S. Supreme Court; or Congress's passage of legislation explicitly applying the countervailing duty law to nonmarket economies. See GPX Int’l Tire Corp. v. United States, 2011 U.S. App. LEXIS 25069, No. 2011-1107 Slip Op. (Fed. Cir. Dec. 19, 2011).
 See Susan Cromwell, Analysis: Boehner Stands Firm Against China Currency Bill, Reuters.com, Oct. 12, 2011.
 See Sir Joseph Gold, Exchange Rates in International Law and Organization (American Bar Assoc. 1988).
 See U.N. Economic & Social Council, 2d Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, Verbatim Report of the Thirty-Second Meeting of Commission A, E/PC/T/A/PV/32 (July, 23, 1947).
 See, e.g., Detlev F. Vagts, Centennial Essay: International Economic Law and the American Journal of International Law, 100 A.J.I.L. 769, 782 (2006).
 The current law, the Trade Act of 1988, mandates that the treasury secretary must annually analyze the exchange rate policies of foreign countries and consider whether any “manipulate” their currencies for the purpose of gaining unfair advantage in international trade. In contrast, S. 1619 contains precise economic definitions of fundamental misalignment. The Trade Act of 1988 also does not provide remedies, such as import tariffs or bans on government procurement, for violators. See Omnibus Trade and Competitiveness Act of 1988 (Pub. L. No. 100-418, §§3004(b) and 3005).
 See Tariff Act of 1930, as amended, 19 U.S.C. § 1671 et. seq. (2011).
 See Currency Exchange Rate Oversight Reform Act of 2011, Section 6(a)(1).
 See Final Negative Countervailing Duty Determination: Pork Rind Pellets from Mexico, 48 Fed. Reg. 39,105 (Dep’t of Commerce Aug. 29, 1983). Commerce conducted a full investigation of Mexico’s Dual Level Currency Exchange System, which had a controlled exchange rate and a free exchange rate. Mexican exporters were required to use the controlled rate. Commerce found the controlled rate did not provide an illegal subsidy because exporters received fewer pesos per dollar than if the peso were freely exchanged. Economists widely acknowledge that China’s exporters receive more RMB per dollar than they would if the RMB were freely traded, thus providing a “benefit” necessary for the imposition of a countervailing duty.
 See Trade Act of 1988, supra, note 12. Although the Trade Act of 1988 has provisions requiring the treasury secretary to report on currency manipulators and to negotiate bilaterally and at the IMF, it does not contain direct economic remedies, such as the prohibition of government procurement or application of countervailing duties.
 See The Articles of Agreement of the International Monetary Fund, Art. IV, § 1(iii).
 See U.S. Geithner: We Want Brazil To Have Greater Voice At IMF, Dow Jones International News, Feb. 7, 2011.
 See Nathalie Boschat, Yuan, Inflation Likely Under Spotlight At G-20 Central Bank Event, Dow Jones International News, Feb. 18, 2011.
Gilbert B. Kaplan is a Partner in King & Spalding’s Washington, DC office and is in the International Trade Practice Group. His practice focuses on international trade cases and trade policy issues.
Jennifer D. Jones is an attorney in King & Spalding's Austin, Texas office and is in the International Trade Group. Her practice focuses on international trade remedies and litigation.