US Congressional Efforts To Act On China Currency Legislation Move Into High Gear

Tuesday, September 07, 2010

With mid-term elections just on the horizon, efforts to act on pending China currency legislation appear to have accelerated with an new plan to add a currency component to the recently announced "Make it in America" initiative.

Needless to say, any successful effort to legislate punitive tariffs on US imports of Chinese textiles and apparel (due to perceived imbalances in the Dollar-Renminbi exchange rate) would have the most profound impact on the global trade, which could be good or bad -- depending upon where you make your textiles and also depending how the US government would implement such a program. For example, If you export from a competing country to the US, your exports may become more competitively priced; on the other hand, US producers may find that they are better able to compete with Chinese imports thanks to would be higher import tariffs on Chinese goods.

Nevertheless, assuming the US government imposed higher import duties, I don't think it would matter much as many Chinese exporters would simply bypass the tariffs by shipping through third parties -- a practice well documented from when the US maintained safeguard quotas on Chinese textiles. From my viewpoint, I think this is simply an example of history repeating itself and underscores the difficulty in trying to legislate solutions to bilateral trade problems.

I want to thank David Spooner of Squire Sanders & Dempsey for the following detailed analysis of pending legislation:

With control of the House of Representatives hanging in the balance and an unemployment rate approaching 12% in several swing districts, congressional leaders are eager to demonstrate support for domestic manufacturing.  Particularly in congressional districts along the I-70 Corridor (Interstate 70 is the highway that runs from western Pennsylvania, through Wheeling, West Virginia, and across Ohio), Members of Congress face an electorate that blames supposedly "unfair trade" for a lack of jobs.  These political pressures have only been stoked by recent Commerce Department and Court of International Trade decisions that have fueled talk of a "need for Congress to get tough on China trade matters."  As the mid-term elections approach, a confluence of events has made prospects for passage of China currency legislation perhaps higher than ever.

Congressman Tim Ryan's (D-OH) "Currency Reform for Fair Trade Act" (H.R. 2378) has been pending in Congress, in some form, for years.  The bill, which has a remarkable 133 co-sponsors, would make it easier for the Treasury Department to label China a currency "manipulator" and would require the Commerce Department to boost its tariffs in anti-dumping and countervailing duty cases to account for a supposedly undervalued yuan.  Though Congress has held several hearings on China trade legislation since 2007, most Hill denizens have thought that controversial measures, such as Rep. Ryan's bill, had little chance of passage, until now. . . .

Why?  The above-cited pressures of the congressional mid-terms led to the recent announcement of a "Make it in America" initiative by the House Democratic majority.  On July 22, the House Leadership held a press conference to unveil the "Make it in America" initiative, pledging to pass a series of bills in the coming weeks to boost American manufacturing and to reduce the trade deficit.  House Speaker Nancy Pelosi (D-CA) released a statement on the new strategy, in which the Speaker pledged "to force China and other countries to honor fair trade principles" and in which the Speaker criticized Republicans for "protecting tax breaks for companies that ship jobs overseas." Soon after, the House approved the first "Make it in America" trade-related bill, passing by voice vote the End the Trade Deficit Act (H.R. 1875),  a bill to prohibit the Administration from submitting any new trade agreement until a commission comes up with a detailed plan to end the trade deficit by 2019.

It is looking increasingly likely that the "Make it in America" effort will also have a currency piece.  At the press conference announcing the initiative, Majority Leader Steny Hoyer (D-MD) announced that the Ways & Means Committee would hold a hearing on Congressman Ryan's China currency bill in mid-September, upon Congress' return from its August recess.  Indeed, the Committee has scheduled such a hearing for September 15.  Ways & Means Committee Chairman Sander Levin (D-MI), in a notice announcing the hearing, declared that China "deliberately undervalues" the yuan in a way that costs the U.S. jobs and decried the 1% increase in the value of the yuan since China announced greater exchange flexibility in June.

Recent policy decisions by the Court of International Trade and the Commerce Department have greatly increased the likelihood that Congress may do more than hold a hearing, that Congress may actually move Congressman Ryan's bill.  Just after Congress' announcement of a hearing on China trade legislation, on August 4, the Court of International Trade (CIT) ordered the Commerce Department to refrain from applying both the anti-subsidy (also called the countervailing duty or cvd law) and the anti-dumping law to China at the same time.  Chief Judge Restani's ruling, made in the context of a Commerce investigation of Chinese off-road tire exports, means that Commerce cannot employ a special non-market economy dumping methodology and employ the anti-subsidy law, in the context at least of its off-road tires investigation, unless and until Commerce either obtains additional statutory authority from Congress or adopts administrative measures to ensure that Commerce does not "double count" Chinese subsidies when it imposes tariffs on "unfairly traded" exports.

Then, in the midst of Congress' August recess, the Commerce Department's Import Administration announced it had decided not to launch a countervailing duty (anti-subsidy) investigation into whether the value of China's currency constitutes a subsidy.  The decision was made in response to allegations in two pending countervailing duty cases on aluminum extrusions and glossy paper, and were much anticipated, as the Administration had said for months that it was considering launching a currency investigation.  Commerce released a lengthy memorandum justifying its decision, and it is clear from the memorandum, coupled with the fact that the glossy paper and aluminum extrusion case currency allegations were ably pleaded, that Commerce's currency announcement represents a blanket decision not to countervail the yuan in all future cvd cases.

Putting aside substantive considerations, the timing of Commerce and Court of International Trade's decisions could not have been worse — coming just before the mid-term elections and a congressional hearing on China trade legislation.  Indeed, the head of the United Steelworkers Union, a key force in congressional races along the I-70 corridor, issued a statement earlier this week, in response to Commerce's ruling, declaring that "the time has now come for Congress to take strong action by providing the tools necessary to hold China accountable for its deliberate currency undervaluation."  There are only four legislative weeks left until Congress adjourns for the mid-terms, but in this short window, the risks are high that Congress will finally act on a China currency measure.

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