The China Currency Conundrum

By Scott Lincicome

On October 15th, the Treasury Department will issue its Semi-Annual Report to Congress on International Economic and Exchange Rate Policies, in which the US Government officially determines whether its trading partners are engaging in "currency manipulation," as defined under US Law (Sections 3004 and 3005 of the Omnibus Trade and Competitiveness Act of 1988). In April, Treasury declined to deem China to be a "currency manipulator" - a bold reversal of President Obama's protectionist campaign rhetoric on the issue and a move I've applauded as the lone "free trade" action of the President's short tenure.

Most economists agree that China's currency (the Renmibi or RMB), despite appreciating about 15% against the Dollar since 2005, remains undervalued by around 10-15%. US labor unions and some manufacturing groups steadfastly believe that that the RMB's undervaluation has given Chinese exports a competitive advantage in the US market and disadvantaged US exports in China, and thus is the key driver of the large US-China trade deficit. They therefore have intensely lobbied the US government to label China a "currency manipulator" in the Treasury Report, to challenge China's currency practices at the WTO, and/or to make "currency manipulation" a "prohibited export subsidy" under US anti-subsidy (or "countervailing duty") laws. The last of these demands would lower the standard for finding "currency manipulation" and essentially make every Chinese export to the United States subject to a countervailing duty equal to the amount of the currency undervaluation. (Nothing like a 15% tax on all Chinese imports - including shoes, clothing and industrial inputs - to really jumpstart the ailing US economy! Yikes.)