President Trump isn’t the first politician to threaten tariffs against China for currency manipulation. In 2003, Sen. Chuck Schumer (D-N.Y.) introduced legislation calling for a 27.5 percent across‐the‐board tariff to compel the Chinese government to stop subsidizing exports and taxing imports by suppressing the value of its currency.
But for the past two years, Beijing’s been blowing through hundreds of billions of dollars in reserves to prevent the Chinese renminbi from depreciating further, which means there’s no longer any conceivable justification for tariffs. That makes now the perfect time to strike a deal and vanquish this overwrought and highly‐politicized issue for the foreseeable future.
Currency values affect the prices of imports and exports, but currency hawks exaggerate their overall impact. With the proliferation of global supply chains and cross‐border investment, the overwhelming majority of trade flows today are intermediate goods, so the effect of currency values on final prices cut in different directions.
If only 50 percent of the value of a country’s exports is domestic content and labor (and the other 50 percent is foreign value), as is the approximate case with China, the impact of currency values on trade flows is mitigated.
This helps explain why, despite a 38 percent appreciation of the renminbi against the dollar between 2005 and 2013, the bilateral U.S. trade deficit with China didn’t decrease. Rather, it increased by 46 percent.
However, politics abhors sound economics, so questions concerning what to do about foreign currency manipulation have been vexing policymakers for years. Schumer’s 2003 bill, along with similar legislation he subsequently co‐sponsored with Sen. Lindsey Graham(R-S.C.), was supported by domestic auto, steel, and other import‐competing producers, but was roundly rejected as a massive tax on Walmart shoppers and designated illegal by the World Trade Organization to boot.
Since then, other proposals have come and gone and come again, including the idea that currency manipulation should be treated as a subsidy and subject to remedial duties under the U.S. Countervailing Duty law. There appears to be growing support for this approach in Congress. It’s an awful idea, but it’s better than the alternatives.
The idea is awful because the “benefits” conferred by suppressing a currency’s value are available broadly to producers in the “offending” country, which is an attribute that disqualifies the “offense” as a countervailable subsidy under U.S. law.
The U.S. law could be changed, but doing so would expand the definition of a countervailable subsidy (inviting frivolous claims) and put the law out of conformity with the WTO Agreement on Subsidies and Countervailing Measures.
Meanwhile, there’s the issue of practicability. How does one measure the subsidy? Without knowing the true market value of an allegedly manipulated currency, it is impossible to calculate accurate countervailing duties.
A 10 percent countervailing duty implies that the currency is priced below its actual market value by 10 percent or that the manipulation amounts to a 10 percent subsidy for exports. But there is no consensus among economists about how to estimate the market value of a currency.
When Schumer introduced his bill in 2003, economists were generally in agreement that the Chinese currency was undervalued, but they disagreed widely about the magnitude. Economists from the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development, the Federal Reserve, the U.S Treasury, think tanks, and academia were all producing different estimates of undervaluation.
Schumer chose 27.5 percent for his tariff because it was the midpoint in a range of dozens of estimates spanning from 10 percent to 45 percent. The range of estimates meant that esteemed economists took different approaches to estimating the yuan’s true market value.
Considering that those estimates varied by as much as 35 percentage points and that any methodology employed by the U.S. Department of Commerce — in its zeal to protect domestic producers above all else — would certainly differ from one employed by an MIT or IMF economist, countervailing duties would likely worsen any distortions caused by currency manipulation and inflict collateral damage on consumers and import‐using producers.
Yet, despite these shortcomings, there is merit to treating currency manipulation as a countervailable subsidy under U.S. law. First, an industry seeking “relief” under the Countervailing Duty law must demonstrate that it is materially injured by reason of the allegedly subsidized imports.
But as long as there’s no currency manipulation taking place (as is the case now), there is no subsidy to countervail and industries won’t bring cases. Having a protocol in place for dealing with currency manipulation will help depoliticize the issue and reduce the temptation to threaten 45 percent tariffs, as Trump has.
Second, if at some point there is a credible case to make that China — or some other country — is manipulating its currency, duties can be imposed only if that subsidy is demonstrated to be causing injury to the petitioning domestic industry.
Instead of the threat of an across‐the‐board tariff on all imports from China, countervailing duties would be imposed on specific imports of specific products from specific industries. Duties would not be imposed on behalf of industries that do not file cases or that do not demonstrate that they are injured by subsidized imports.
Third, if and when a case is brought and countervailing duties imposed, foreign governments would likely launch a WTO challenge, arguing that currency manipulation is not a countervailable subsidy or that the Commerce Department’s subsidy calculation methodology is problematic.
Yes, the issue of currency manipulation would be back in the news and re‐politicized, but that could be many years down the road. What matters now is setting the issue aside so that it no longer subverts prospects for trade liberalization.