Political India: Engaging America

In a move that may cause an unprecedented disruption to the delicate balance of trade negotiations between the United States and China, the United States Senate has passed a bill aimed at punishing China for allegedly manipulating its currency and holding it at an artificially low level.

Bill 1619, known as the “Currency Exchange Rate Oversight Reform Act of 2011,” passed by a majority of 63-35 in the Democrat-controlled Senate faces stiff opposition in the Republican-controlled House of Representatives and also from the White House.

Already, Speaker of the House John Boehner was said to have denounced the bill a day after it passed the Senate, saying it posed a “very severe risk” of starting a trade war between the world’s two biggest economies.

Under the bill’s proposals, the administration would be required to identify “fundamentally misaligned currencies” on a semi-annual basis. As a preliminary step, the bill would task the Secretary of the U.S. Treasury to seek to consult bilaterally with “the country that issues such currency in order to facilitate the adoption of appropriate policies to address the fundamental misalignment.”

If the misalignment were not corrected at that point the bill would then start introducing penalties, initially via multilateral platforms including the International Monetary Fund and the Overseas Private Investment Corporation.

In the case of what the Senate bill describes as “persistent failure to adopt appropriate policies”, that is, if there was no remedial action taken 360 days after the currency in question was identified as misaligned, Congress would then authorise the administration to take action at the World Trade Organisation.

It would also permit the U.S. government to directly attack the price misalignment in the export sector by adjusting the calculation of the export price under the U.S.’ current antidumping laws, a move towards subsidies and trade protectionism that, some warned, could spark off a wider trade war with China.

While China was nowhere named directly in the bill, a bitter brew of contention between China and the U.S. over the currency issue has been simmering for several years now.

Responding to the passage of the Senate bill Chinese Foreign Ministry spokesman Ma Zhaoxu said in a written statement, “China calls on the U.S. government, its Congress and various communities to oppose the pressure put on the RMB exchange rate by domestic legislation and to tackle trade protectionism.”

Turning the Senate’s argument on its head Mr. Ma argued that the U.S. Senate was “essentially practising trade protectionism by making an accusation of currency manipulation... which is a serious violation of the rules of the World Trade Organisation”, a sentiment also echoed by China’s Commerce Ministry Spokesman.

Labels: currency manipulation, U.S.-China ties