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Obama Cautious On China Currency Bill

by Mike Godfrey,, Washington

11 October 2011

While the Senate appears to have delayed momentarily a vote on the Currency Exchange Rate Oversight Reform Act, President Barack Obama has warned its sponsors to ensure that the legislation is consistent with the international treaties and obligations of the United States, particularly with the World Trade Organization (WTO).

The Act would, after an analysis of those currencies which are “fundamentally misaligned”, allow countervailing import duties to be imposed as an offset to the calculated amount of currency undervaluation. Countervailing duties would be available to any US industry that could demonstrate that it has been injured by imports from the country with the undervalued currency.

While the proposed legislation does not name China, it would certainly seem to apply to the current level of the Chinese renminbi (RMB), and the President, at a news conference, was asked, if the bill was passed, whether he would veto it, or sign it.

In his reply, Obama said that “it is indisputable that (China) intervenes heavily in the currency markets, and that the RMB, their currency, is lower than it probably would be if they weren’t making all those purchases in the currency markets to keep the RMB lower". He added that China has been “very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the US”.

Emphasizing that “trade is great as long as everybody is playing by the same rules,” and that “the legislation that is being presented in Congress is an effort to get at that,” his main concern is that “whatever tools we put in place, let’s make sure that these are tools that can actually work, that they’re consistent with our international treaties and obligations”.

He was concerned, not only at the effectiveness of the proposed bill, but also, if it was not effective, the probability of disputes with China at the WTO and retaliation against US exports to China.

"I don’t want a situation where we’re just passing laws that are symbolic knowing that they’re probably not going to be upheld by the WTO,” he said, “and then suddenly US companies are subject to a whole bunch of sanctions. I think we’ve got a strong case to make, but we’ve just got to make sure that we do it in a way that’s going to be effective.”

The proposals in the Senate appear to hang their validity on WTO rules that allow for the application of countervailing duties to offset or neutralize export subsidies. However, to date, currency manipulation has not been found to be an export subsidy, for the reason that non-exporters (for example, US tourists in China) benefit from the undervalued currency as well. However, it has also been pointed out previously that WTO appeal rulings have decided that a subsidy can be considered an export subsidy even if it is available in some circumstances that do not involve export.

TAGS: tax | economics | law | World Trade Organisation (WTO) | China | legislation | trade disputes | United States | import duty | currency | trade

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