The Treasury Department released on 15 October its semi-annual report to Congress on foreign currency practices. This report examines the exchange rate policies of major U.S. trading partners that together account for more than 80 percent of U.S. foreign trade in goods and services.
Among other things, Treasury again found that China is not manipulating its currency, although it voiced concern over the recent lack of flexibility of the yuan and China’s renewed accumulation of foreign exchange reserves. This finding was largely expected despite the pressure exerted on the Obama administration by various legislators and industry groups to adopt a tougher line on currency-related matters. Treasury said that it will continue to work with China both in the G-20 and the bi-lateral Strategic and Economic Dialogue “to pursue policies that permit greater flexibility of the exchange rate and lead to more sustainable and balanced trade and growth.”
The Treasury report mentioned several factors that suggest that the yuan remains undervalued, including the stability of the yuan against the U.S. dollar over this past year, a 6.9 percent decline in the real effective value of the yuan between February and August 2009, continuing productivity growth in the mainland Chinese economy and the acceleration of foreign reserve accumulation by mainland China this year. Treasury still believes that exchange rate adjustment will not be sufficient in and of itself to “reduce materially China’s current account surplus or achieve more balanced, sustained Chinese growth.” According to the report, to achieve this China needs to continue to reform its development strategy away from export and investment-led growth and into a more sustainable consumption-driven economic framework. Treasury believes that this will require “measures of a scale sufficient to bring about market changes in the pattern of saving and investment”, including better social services and a stronger safety net to reduce the need by households for precautionary savings. Chinese authorities have committed to move the mainland Chinese economy in this general direction and the People’s Bank of China has reiterated its commitment to continued exchange rate reform.
Meanwhile, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) has launched an effort to persuade House legislators to co-sponsor a bill introduced by Reps. Tim Ryan (Democrat-Ohio) and Tim Murphy (Republican-Pennsylvania) in May 2009 aimed primarily at correcting the alleged misalignment between the U.S. and mainland Chinese currencies. The legislation is modelled after a bill introduced during the previous session of Congress by Rep. Ryan but includes several changes that are ostensibly designed to both broaden its appeal among moderate legislators and make it less vulnerable to criticism or a potential legal challenge. Essentially, the legislation would expressly designate “fundamental exchange rate misalignment” as an actionable countervailable subsidy in countervailing duty investigations and subject to offset by anti-dumping duties in AD duty proceedings. The misalignment could theoretically entail either undervaluation or overvaluation of a currency and both scenarios are provided for in the legislation, although the undervaluation provisions are obviously much more relevant for Hong Kong and mainland Chinese exporters.
This legislation has garnered 72 co-sponsors in the House to date and the U.S. labour movement would probably like to see that number rise to at least 100 in order to give the legislation some momentum into next year.
