Schumer, Graham Introduce Legislation to Crack Down on Unfair Currency Manipulation by Countries Like China
Push Comes After Administration Declined To Cite China For Currency Manipulation Even As New Studies Confirm Currency is Still 20-40% Undervalued
Misaligned Currencies Distort Prices, Making U.S.-Made Goods More Expensive at Home and Abroad
Schumer-Graham Legislation Will Mandate that Treasury Department Report Misalignments to Congress and Take Steps to Eliminate Unfair Advantages
WASHINGTON, DC - On the heels of the Obama Administration's decision not to cite China for currency manipulation, U.S. Senators Charles E. Schumer (D-NY) and Lindsey Graham (R-SC) announced Friday that they have re-introduced legislation to vigorously address currency misalignments that unfairly and negatively impact U.S. trade. If passed, the Currency Exchange Rate Oversight Reform Act of 2009 would mandate that the U.S. Treasury Department report biannually to Congress to identify currency misalignments, require immediate Treasury engagement with countries cited in the report, and set up a series of consequences should a country fail to take action to eliminate the misalignment.
"Global economic conditions may make it difficult to cite China for manipulation at the present time, but we believe our legislation will help hold China's feet to the fire on this issue," Schumer said. "While China's currency is appreciating some against the dollar, it is still not being allowed to freely float. That has a negative impact on U.S. manufacturers, U.S. exports, and the economy as a whole, and action must be taken."
"I have always believed that it is in China's best interest to allow their currency to float," said Graham. "That remains true today. China has made some limited progress on this issue but not near enough to bring its currency to its true value. It serves both the United States and China to accelerate the pace of the Yuan's appreciation. It is our hope that China acts -- pursuing a legislative solution to this issue has never been our primary goal -- but we will continue to apply pressure until the market determines the true value of the yuan."
By manipulating its currency, a country gains an unfair advantage over U.S. manufacturers by effectively lowering the price of their exports as compared to domestic goods. Conversely, currency manipulation also imposes a direct cost on U.S. exports, making American goods sold abroad more expensive. This creates an unfair trade advantage, which ultimately harms U.S. manufacturers, workers, and farmers, and contributes significantly to the U.S. trade imbalance.
Senators Schumer and Graham have been leaders in the fight against currency manipulation since 2004, when the U.S. trade deficit with China ballooned to the largest imbalance ever recorded with a single country, in part because China undervalued its currency and kept it pegged to the U.S. dollar, rather than allowing it to float freely as is the case with almost all other major world currencies.
Currency misalignment and the continuing trade imbalance with China have severely impacted the U.S. manufacturing sector in relation to both domestic sales and exports. The U.S. has lost over 5.3 million manufacturing jobs in the last decade. New York alone has lost approximately 275,000 manufacturing jobs over the same time period. Since 1999, South Carolina has lost nearly 35 percent of its manufacturing jobs, over 117,200 positions.
In a written response to questions asked as part of his confirmation hearing, Treasury Secretary Timothy Geithner said that he believed China was manipulating its currency to create an unfair trade advantage; however, last month's Treasury report lists the renminbi, also known as the Yuan, as undervalued but stops short of listing China as a currency manipulator, as Senators Schumer and Graham have argued for years. While the Senators agree that China has taken small steps to increase the value of the renminbi since they threatened legislative action in 2007, they believe China has not done enough and is still keeping its currency misaligned in order to gain an unfair trade advantage.
Since China originally de-pegged the renminbi in July 2005, the currency has appreciated by about 17 percent against the dollar (8.28 renminbi to the dollar in July 2005, compared to 6.84 today). But during that time, China's current account surplus has not appreciably declined - the IMF reports that China's current account surplus will remain at least 10 percent of GDP as far as the eye can see.
According to a new study by William Cline and John Williamson of the Peterson Institute for International Economics, China's currency remains between 21 and 40 percent undervalued against the dollar, depending on various factors (e.g., whether other countries in the region also appreciate their currencies against the dollar as China reforms its policies). This is fundamentally the same level of undervaluation that existed in 2005.
The Currency Exchange Rate Oversight Reform Act of 2009 would create a new, objective rubric by which currency manipulation is measured, eliminating the need to prove that currencies are misaligned due to clear government manipulation. Instead, the bill would create a new category for "fundamentally misaligned currencies," referring to currencies that are misaligned for any reason, including government manipulation. The bill also provides Treasury with a clear set of tools and penalties to use to go after and eliminate the misalignments. China's "undervalued" renminbi, as labeled by Treasury in last month's report, would likely fall into this new category.
The bill, identical to the bill that was reported out of the Finance Committee on a 20-1 vote in 2007, would:
* Create a new overall approach to identifying currency manipulators by requiring that the Treasury Department develop a biannual report that identifies two categories of currency:
(1) A general category of "fundamentally misaligned currencies" based on observed objective criteria, and
(2) A select category of "fundamentally misaligned currency for priority action" that reflects misaligned currencies caused by clear policy actions by the relevant government.
* Require Treasury to engage in immediate consultations with all countries cited in the report. For "priority" currencies, Treasury would seek advice from the International Monetary Fund (IMF) as well as key trading partners.
* Establish important consequences immediately upon designation, moderately severe consequences if consultations have not resulted in appropriate policies and identifiable actions to eliminate misalignment after 90 days, and more severe consequences if consultations have not resulted in appropriate policies and identifiable actions to eliminate misalignment after 360 days.