The US Government and China’s Currency

From February 26th through the 27th I attended a symposium at the University of Texas in Austin, TX on China’s Emergence: Effects on Trade, Investment, and Regulatory Law.

Here are some thoughts on the more notable issues raised at the symposium:

Timothy Reif, the incoming General Counsel of the Office of the US Trade Representative, spoke as a private citizen to open the event as its keynote speaker. He expressed a desire for China to “stop manipulating” its currency and to move on currency reevaluation. Currently, China’s currency trades in a limited range of .5 percent daily against the dollar (up from .3 percent daily pre-2007).

Responding to a question, Reif acknowledged that China’s economy and the world’s economy would need time to adjust to a freely-floating regime. He suggested that China might not be prepared to freely float the RMB until perhaps 5-10 years in the future. Still, Reif speculated that if the Obama administration did not push China to take some actions toward reevaluating its currency, then the United States Congress may take aggressive action against China.

Reif’s speculation may be based on fears grounded on prior Senate actions directed against China’s currency valuation. (The following paragraph’s information is supplemental. The issues were alluded to, but not discussed in depth. The summary is provided for readers’ reference.)

In 2005, Senator Schumer introduced a bill in the Senate, S.295, that would impose an additional duty of 27.5 percent on “Chinese goods imported into the United States unless the President submits a certification to Congress that the People’s Republic of China (PRC) is no longer manipulating the rate of exchange and is complying with accepted market-based trading policies.” (Thomas.Loc.Gov) That bill was not put to a vote and, even if passed, would have been non-compliant with WTO standards. However, in 2006 and 2007, Schumer and others in the Senate tried again with a bill believed to be WTO-compliant. That bill was the Currency Exchange Rate Oversight Reform Act of 2007, which was placed on the Senate legislative calendar after passing the Senate Finance committee with a 20-1 vote; but the bill ultimately did not come to a floor vote.

Ultimately, Reif did not indicate support for China to take any particular policy. He expressed no opinion on support for a wider managed band in which the currency could trade, nor for increased disclosure on which currencies are included in China’s market basket. His believes it is imperative that China’s currency appreciate, but at the time and in this venue he could not comment on exactly how the appreciation should be managed.

The most interesting question raised by Reif’s talk was to what degree will US President Obama and the Congress push against China to appreciate its currency during this economic downturn that is negatively affecting both countries. His comments seem to reflect that if America’s economy fails to improve, then domestic pressure will encourage Obama and/or Congress to take significant action to counter “imbalances” caused by China’s currency policy.

(Part III will include commentary on presentations from Raj Bhala (Law Professor at the University of Kansas), and John Greenwald (International Trade Lawyer).