LegiStorm

Summary:

In recent years, Congress has been increasingly concerned that other countries—China, Japan, Taiwan and Korea in particular—are manipulating the value of their national currencies in ways injurious to the U.S. economy. A spate of legislation was introduced in the 109th Congress seeking to pressure foreign countries to revalue their currencies or seeking changes in the international financial system—particularly changes in the International Monetary Fund (IMF)—that would help accomplish that end. Similar bills are likely to be introduced in the 110th Congress. Current law on this topic is defined by the Exchange Rates and International Economic Policy Act of 1988. Among other things, it requires the Secretary of the Treasury to analyze the foreign exchange rate policies of other countries, in consultation with the International Monetary Fund, to see if foreign countries are manipulating the value of their currency for the purpose of gaining unfair trade advantage or preventing effective balance of payments adjustment. When this is found, the Secretary is required to seek negotiations with the offending country multilaterally or bilaterally for the purpose of ending that situation. In recent years, many have thought that China is manipulating its currency for these purposes. The Treasury Secretary has not made a finding to this effect, however, on grounds that China does not meet all the criteria specified in the 1988 Act and that Chinese authorities have given assurances that they will raise the value of their currency. The IMF Articles of Agreement specify, in Article IV, that countries may not manipulate their currency for the purpose of gaining trade advantage or for preventing balance of payments adjustment. The IMF is responsible for exercising "firm surveillance" over countries' exchange rate policies and for assuring their compliance with the Article IV rule. The IMF has no effective tools other than persuasion, however, with which to enforce its oversight responsibility. Previously, most of the IMF's surveillance was done bilaterally through its annual consultations with member countries. In 2006, the Fund instituted a new program of multilateral consultations and it brought together China, Japan, the United States, Saudi Arabia and Euro area representatives to discuss the major financial and trade imbalances currently affecting the world economy. A report and possible recommendations are to be received in early 2007. Congress has sought in various ways to address trade problems which many believe are exacerbated by undervalued foreign currencies. Several bills were introduced in 2005 and 2006 to establish countervailing duties or special tariffs on goods entering the United States from countries with undervalued currencies. These are intended to raise the domestic price of those goods to levels that would prevail if those currencies were valued at their appropriate level. Many of these initiatives might violate international trade rules, however. Advocates argue that the United States must take action to protect itself regardless. Other legislation has sought to require the Secretary of the Treasury to make a finding that China and other countries are currency manipulators. Another group of bills proposed that the United States should pursue reforms in the IMF that would give that international agency more authority to enforce Article IV and to stop countries from manipulating their currency. Many of the sponsors of the bills discussed in this report are reportedly planning to introduce similar bills in the 110th Congress. This report will be updated as events warrant.