NRF POSITION ON CHINA CURRENCY
Industry Letter to Senate
Fair Currency Coalition Response
Chinese currency policy and the value of the Yuan are central issues in the debate over U.S.-China trade relations. Some claim that the Yuan is greatly undervalued vis-à-vis the dollar, and blame it as the driving factor behind the sizable bilateral trade deficit with China and the loss of U.S. manufacturing jobs. Their proposed remedy is to impose trade barriers to imports from China through various means, including changes to the U.S. antidumping and countervailing duty laws discussed in the following sections. They would also essentially force the U.S. Trade Representative to initiate dispute settlement proceedings at the World Trade Organization (WTO) against Chinese currency policy and the Secretary of the Treasury to determine that China is a currency manipulator. Not surprisingly, these proposals are strongly endorsed by certain domestic industries, such as steel and textiles, that for decades have relied on, and continue to seek new means to impose trade barriers against imports, particularly from China.
There is no real disagreement that China must move toward a currency whose value is set by the market. The only disagreements are the means to effect that change and how quickly it can reasonably be accomplished without creating further turmoil in the financial sector, and adversely impacting the U.S. economy. As a guiding principle, we oppose unilateral, counterproductive, and WTO illegal restrictions on imports of Chinese goods as a policy tool to compel action by China. By the same token, we are convinced that the best course of action is dialogue and negotiation through mechanisms such as the SED and the Joint Commission on Commerce and Trade (JCCT). A deft diplomatic strategy by the United States will ultimately be a much more effective tool in identifying mutually-beneficial goals, and moving the Chinese Government in a more constructive direction, while strengthening, rather than undermining the important U.S.-China economic relationship.
By the same token, we will continue to oppose the use of trade remedies as a means to address China’s currency policy for two reasons. First, as explained in the sections below, many of the proposed changes to the trade remedies laws would violate WTO rules. Second, there may be widespread consensus among economists that the Chinese currency is undervalued, but there clearly is no agreement over the extent to which the Yuan is undervalued. Thus, any attempt to quantify the degree to which the Yuan may be undervalued, with the degree of specificity required in an antidumping or CVD case, will result in an entirely arbitrary and inaccurate calculation.
Finally, it should be noted that there has been a significant change in the economic environment that existed when the currency issue first gained attention five years ago. Since 2005, the Yuan has appreciated approximately 20 percent against the dollar, which had a noticeable impact on retail sourcing patterns. As demand collapsed in the wake of the global financial crisis, there was a precipitous drop in the U.S. merchandise trade deficit, including with China. In the two weeks following the People’s Bank of China announcement that it would again allow the yuan to appreciate within a limited band, the currency rose 0.81 percent, which is over 18.5 percent on an annualized basis. Change this dramatic would raise serious concern about significant volatility in currency markets. Under these circumstances, and given the precarious state of the global economy, prudence would dictate a very careful approach to the entire currency issue.
Thus, before acting on any legislation targeting Chinese currency policy, Congress and the Administration need to ask three questions: (1) Does the legislation conform to WTO rules?; (2) Will the legislation be effective in achieving the stated goal?; (3) Will any benefits of the legislation outweigh the harm it may inflict on U.S. companies, workers, and the economy? If the answers to any one of these questions is no, then the entire exercise will be seen as merely protectionist political posturing.
Retailers Oppose Efforts to Define Currency Undervaluation as a Countervailable Export Subsidy
In the 110th Congress, the retail industry strongly opposed several bills that would have redefined countervailable subsidies to include the undervaluation of a foreign currency through exchange rate manipulation or misalignment, determined by examination of a foreign country’s balance of trade with the United States and other trading partners, the amount of foreign direct investment, and foreign currency reserves. NRF argued that this unilateral attempt by Congress to redefine what constitutes a countervailable subsidy would conflict with WTO rules and risk trade retaliation or reciprocal action to the detriment of U.S. companies and workers.
The WTO Subsidies Code identifies three types of subsidies – prohibited; actionable (i.e., subject to countervailing duties); and non-actionable (i.e., permitted). Articles 1 and 2 of the Subsidies Code specify that to be countervailable, a subsidy must be: (1) a financial contribution from a government (2) that provides a benefit (3) to a specific industry or industries or enterprise or group of enterprises.
Because the “benefit” from currency valuation is generally available to all economic players in a country, the proposed legislative change would conflict with the specificity requirement under WTO rules. Because currency policy does not involve the transfer of anything of tangible value from the government, the proposed legislation would also conflict with the financial contribution requirement under WTO rules. Currency policy also cannot meet the WTO definition of a prohibited subsidy because its benefit is not contingent on exportation and does not require the use of domestic goods.
Moreover, determining currency misalignment based on a country’s trade balance, amount of foreign direct investment, and foreign currency reserves fails to recognize that these matters are influenced by many factors that may not have anything to do with a country’s currency policy. Defining a countervailable subsidy in a way that violates WTO rules would undermine efforts to ensure that other countries abide by international trade rules, and would also expose exports of U.S. goods and services to possible trade sanctions.
Retailers Oppose Requiring Adjustments to Dumping Margins to Offset Currency Undervaluation
One particular issue that will make the U.S. antidumping remedy even more unpredictable and arbitrary is the proposal to require adjustments to antidumping margins in investigations and reviews to offset the amount by which a country’s currency may be undervalued or “misaligned.” This proposal was contained in a bill (S. 1919) introduced in 2008 by the Chairman of the Senate Finance Committee, Max Baucus (D-MT).
Perhaps the biggest problem with this proposal is that there is no widely accepted benchmark for determining the extent to which a particular currency may be undervalued. In the case of China, it was claimed the Yuan was undervalued by 15 to 40 percent. That is a huge range that demonstrates the imprecision of the calculation. Thus, any calculation by the Commerce Department, that has no expertise on such matters, will be an entirely arbitrary exercise, and therefore subject to political influence. However, the bigger threat from this proposal is the precedent that would allow any country to game the antidumping process by unilaterally setting an arbitrary value on another country’s currency. The result will be to make the trade remedies system even more unpredictable for U.S. importers and exporters.
Another problem with this proposal is that it would violate Article 2.4.1 of the WTO Agreement on Antidumping (AD Agreement), which establishes the rule for currency conversion and adjustments by reference to the value set by currency markets:
“When the comparison [between export price and normal value] requires a conversion of currencies, such conversion should be made using the rate of exchange on the date of sale, provided that when a sale of foreign currency on forward markets is directly linked to the export sale involved, the rate of exchange in the forward sale shall be used.” (emphasis added)
No other provision of the AD Agreement would permit this type of adjustment. Notably, Article VI.2 of the General Agreement on Tariffs and Trade applies only to multiple currency practices, not “fundamentally misaligned currencies.”
In addition, the surrogate country methodology used in AD investigations against imports from China and other non-market economy (NME) countries already addresses the effect of any currency undervaluation. In calculating an AD margin in NME cases, the Commerce Department uses market-based values from a surrogate country to determine the normal value of the subject imports, which it then compares to the U.S. export price. As a result, the AD calculation effectively offsets the effect of the currency undervaluation on price. Requiring an additional adjustment would violate WTO rules by capturing the effect of the undervaluation twice.