How to Strengthen the Currency Exchange Rate Reform Bills

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Includes: CYB, UDN, UUP
by: Howard Richman

The House Ways and Means Committee held hearings on September 15 on China's Exchange Rate Policy. They were considering two bipartisan bills that would tackle Chinese currency manipulations, Rep. Ryan's Currency Reform for Fair Trade Act. (HR 2378) and Sen. Schumer's Currency Exchange Rate Oversight Reform Bill (S. 3134).

My father, son and I submitted written testimony to the Committee and have published it on the Ideal Taxes Association website as our Working Paper #3. Here is the summary of our testimony:

S. 3134 and HR 2378 are excellent proposals. Just four amendments need to be made in these bills in order to make them more effective, in line with our scaled tariff proposal: (1) Change method of determining currency manipulators so that any country with over $100 billion of currency reserves and an overall trade surplus with the world is defined as a currency manipulating country, (2) Change method for calculating the countervailing duty as being half of the value of each currency manipulator’s exports to the United States after subtracting its imports from the United States, (3) Eliminate the need for piecemeal Commerce Department lawsuits by providing in the bill for a single Commerce Department suit involving all of the products of a given country so that the countervailing duty be an across the board tariff upon all of the products of that country, and (4) Provide that the rate of the countervailing duty be recalculated every quarter based upon the most recent trade data. With these four changes, S. 3134 and HR 2378 become functionally equivalent to the scaled tariff and would jumpstart our economy, restore our blue-collar middle class, and preserve our children’s economic future.

And here is the part of our testimony in which we analyze the two bills and suggest our changes:

The Currency Exchange Rate Reform Bills

Currently there are two excellent bipartisan bills which would end currency manipulations: the Currency Exchange Rate Oversight Reform Bill (S. 3134) introduced by Senator Charles Schumer and the Currency Reform for Fair Trade Act (HR 2378) introduced by Representative Timothy Ryan. Each bill has a different method for determining whether a country is manipulating its currency and the extent of those manipulations. Both bills work through the anti-dumping and countervailing duty suits of the Commerce Department. Either bill could be turned into our scaled tariff proposal through some simple minor amendments:

Method for Calculating Currency Manipulations

As currently written, S. 3134 relies upon the U.S. Treasury Secretary to identify which countries are manipulating their currencies and also to identify when those countries have stopped their currency manipulations. Unfortunately, Treasury Secretaries, under both Obama and Bush, have incorrectly told Congress, in their biannual reports required by the Omnibus Trade and Competitiveness Act of 1988 that China is not manipulating its currency. A Treasury Department engaged in selling many billions of dollars worth of bonds to the Chinese government cannot be relied upon to make independent determinations in this regard.

In contrast, HR 2378 relies upon objective criteria to determine whether countries are manipulating their currency and the tariff rate. The formulas used, however, have one fault. They include unverifiable currency reserve statistics in their computations. These statistics are voluntarily reported by the mercantilist governments to the International Monetary Fund and to other international organizations, and could be easily fudged.

In line with the scaled tariff proposal, these bills could dispense with subjective determination and unverifiable statistics, and instead assume that any country with over $100 billion of currency reserves and an overall trade surplus is a currency-manipulating country. The extent of each currency manipulator’s manipulations could be calculated as being half of the value of their exports to the United States after subtracting their imports from the United States over the most recently calculable 12 month period. The tariff rate should be set to take in that government’s currency manipulations as U.S. government tariff revenue.

Individual Industry vs. Country-Wide Suits

Both S. 3134 and HR 2378 provide for the Commerce Department to assess the amount that a currency is overvalued when deciding individual industry anti-dumping and countervailing duty suits, leading to too many slow-moving suits which would could clog the Commerce Department’s docket and which would surely be expensive and time consuming for each individual industry to put together. Moreover, if the Commerce Department’s countervailing duty decisions come out piecemeal, the mercantilist countries will be able to fight them with tit-for-tat counter tariffs against American exports, generating strong domestic constituencies that would resist effective action to end currency manipulation.

Currency manipulation alters the prices of all products produced by a country, so the piecemeal approach would not fully address it. In line with the scaled tariff proposal, these bills should provide for a single Commerce Department suit involving all of the products of a given currency manipulating country. The duty against that country’s products would then be an across-the-board tariff.

Adjustable Rate of the Duty

When the Commerce Department determines the across-the-board countervailing duty upon the products of each mercantilist country, it should provide that the duty be automatically adjusted depending upon our changing trade balance with each mercantilist country. The duty would be automatically calculated as the rate designed to take in as tariff revenue half of our trade deficit. As the mercantilists move to remove their barriers to our products, reducing our trade deficit with them, the rate would go down. If they retaliate against our exports, increasing our trade deficit with them, the rate would go up.

The rate of the across-the-board tariff should be automatically readjusted as new quarterly trade data come in. The mercantilist governments would be given a great incentive to reduce their barriers to American products in order to reduce our across-the-board countervailing duty on their products. Even before any Commerce Department rulings, the passage of such a powerful bill would give the mercantilist governments an immediate incentive to take down their barriers to American products in order to reduce the initial countervailing duty.

Conclusion

S. 3134 and HR 2378 are excellent proposals. They are designed to end the currency manipulations which put American producers at a competitive disadvantage not only in their production for domestic markets but also in their production for exports. They are designed to end currency manipulations, thus pulling the United States out of the Great Recession, ending the deindustrialization which is destroying our blue-collar middle class, and ending the trend toward our research and development moving abroad, which is destroying our children’s future.

Just four amendments need to be made to these bills in order to make them more effective, in line with the scaled tariff proposal:

  1. Change Method of Determining Currency Manipulators. Assume in the bill that any country with over $100 billion of currency reserves and an overall trade surplus with the world is defined as a currency manipulating country.
  2. Change Method for Calculating Duty. Calculate the countervailing duty as being half of the value of each currency manipulator’s exports to the United States after subtracting its imports from the United States.
  3. Eliminate Need for Piecemeal Suits. Provide in the bill for a single Commerce Department suit involving all of the products of the currency-manipulating country and that the countervailing duty be an across the board tariff against all of the products of that country.
  4. Adjust Duty Quarterly. Provide that the rate of the duty be recalculated every quarter based upon the most recent trade data

With these changes, S. 3134 and HR 2378 become functionally equivalent to the scaled tariff and would have three advantages:

  1. American producers that compete with imports get relief. American businesses would get relief from the unfair competition of mercantilist-subsidized exports.
  2. American producers that export get relief. The mercantilist governments would take down their barriers to American products in order to reduce our tariff rate upon their products.
  3. American companies could protect their technology. American businesses would be able to produce in the United States and keep their research and development and patents protected in the United States, without losing their access to the mercantilist markets.

With these small changes, a currency exchange rate reform act would take the profit out of currency manipulation, help balance the federal budget, reduce American imports, increase American exports, and resume America’s economic growth.

Disclosure: I own Chinese yuan through CYB