House Approves Bill Targeting China's Undervalued Currency

The House has passed legislation that targets China's undervalued currency, the yuan or renminbi, as a countervailable subsidy.

The House has passed legislation that targets China 's undervalued currency, the yuan or renminbi, as a countervailable subsidy. The bill had been expected to pass the House, given that at least 40 Republicans were co-sponsors of the bill. The bill passed the House by a large margin (348-79), with only five Democrats voting against the legislation, while 99 Republicans voted for the bill.

The Senate has yet to approve companion legislation, but there are indications that measure could make it to the Senate floor during the upcoming lame duck session following the November midterm elections.

Senate Majority Leader Harry Reid (D-Nev.) said he and Minority Leader Mitch McConnell (R-Ky.) are discussing plans for the post-election session that is expected to run into December. Current plans call for the Senate to convene the first part of the lame duck session the week of Nov. 15. After a break for Thanksgiving, Reid's office said the Senate will return the week of Nov. 29. No target for adjournment in December so far has been announced.

The legislation approved last week by the House would change the longstanding Commerce Department practice of refusing to investigate a subsidy where individuals or groups other than exporters benefitted from the subsidy. The bill also establishes a four-part test to determine if a currency is substantially undervalued, including determinations of whether there are large-scale government interventions in the markets, undervaluation of at least 5 percent, a significant and persistent global current account surplus, and excessive foreign asset reserves.

The measure would allow, but not require, the United States to levy tariffs on countries that undervalue their currencies, which makes their goods cheaper relative to U.S. products.

Traditionally, only direct subsidies to an industry, rather than the indirect help that comes from an undervalued currency, have been considered a reason for retaliatory tariffs. Because so many countries have managed their currency rates for so long, it is unclear that the WTO would uphold any U.S. efforts to make the manipulation of a currency a justification for action.

The Chinese renminbi is widely considered by economists to be undervalued –– perhaps by as much as 40 percent, representing a hefty subsidy for Chinese exports. Chinese officials say they agree the renminbi should float more freely, but they have allowed only a limited and slow appreciation since a new policy was announced in June.

The likelihood of a broader trade dispute is considered slim by economists and other analysts familiar with relations between the two countries. But there is little disagreement that the mood has darkened. Some business groups have argued against openly aggressive action against China , but they also acknowledge that Chinese officials have been making it harder for foreign firms to do business.

China responded to the House action by accusing the United States of protectionism and said the measure would not narrow the multibillion-dollar U.S. trade deficit with China . The country's Commerce Ministry gave no indication whether Beijing might retaliate, though it has imposed antidumping duties in recent months on imports of U.S. chicken, steel and nylon.

In addition, Commerce Ministry spokesman said the latest U.S. action "does not fit World Trade Organization rules." And, he added, "You cannot say the renminbi exchange rate is undervalued because of the U.S. trade deficit with China and impose such protectionist measures based on this." 

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