Trade correspondent L.C. writes:
In a major new trade policy move, the Commerce Department on May 23rd released a draft proposal to add currency devaluation to its rules on countervailing duties.
US law defines a countervailable subsidy as a financial contribution from a government or public entity that is specific and provides a benefit to a foreign producer or exporter.
The proposal would give the US the power to impose countervailing duties (CVDs) on countries that are alleged to have undervalued their currency relative to the dollar, resulting in a subsidy to their exports. The draft identifies the criteria the Commerce Department would use to determine if countervailing duties should be imposed but would leave it up to the Treasury Department to determine if a currency is indeed undervalued.
Central bank stimulative actions (monetary easing) would not be considered subsidization unless directed by the government to benefit exporters.
Secretary Wilbur Ross released a statement saying, “This change puts foreign exporters on notice that the Department of Commerce can countervail currency subsidies that harm US industries. Foreign nations would no longer be able to use currency policies to the disadvantage of American workers and businesses.”
The idea of treating currency undervaluation as an unfair subsidy has long been popular among trade hawks on Capitol Hill as push-back against China but never enacted.
There are a number of problems with the Commerce Department proposal. First, the proposed rule change would only treat deliberate government action to devalue – and not central bank easing done for macroeconomic reasons – as countervailable. It is not always possible to distinguish deliberate undervaluation from depreciation deriving from market forces.
Second, although the current proposed rule change is directed at China, the tactic could hit other countries if US companies decide to file CVD cases against them.
Third, if US trading partners also adopt this approach, the US itself could be accused of dollar undervaluation and its exports hit by foreign CVDs. It can’t have escaped notice that the US president has openly pressured the Fed to lower interest rates. This would likely depress the dollar, make US exports more competitive — and invite foreign CVD retaliation.
Japan, South Korea, and Germany are among countries that could be vulnerable to US charges of undervaluation and thus new CVDs. They met two of three US criteria for currency cheating in the most recent Treasury Department currency manipulation report. China, India, and Switzerland met one criterion but also remained on Treasury’s Monitoring List. Other countries such as Singapore, Malaysia, Vietnam, and Turkey could be accused of “currency subsidies” in CVD petitions since they’ve all recently been accused of maintaining undervalued currencies.
Fourth, though Commerce’s target with the new proposal is China, it is not evident that Beijing is currently devaluing the yuan. The IMF says the yuan hasn’t been undervalued for years. The dollar may be overvalued, however, according to the IMF this week, while the yuan’s current price is in line with fundamentals.
Fifth, treating undervaluation as a countervailable subsidy would likely violate the WTO Agreement on Subsidies & Countervailing Measures. The Agreement requires that a countervailable subsidy be a “specific subsidy” – one granted to a specific company, industry, or sector – not something available to all commercial enterprises within a country. For example, a national tax cut is not countervailable since it applies economy-wide, but a tax break directed to specific enterprises is countervailable. Clearly, a currency’s exchange rate has an economy-wide effect.
It is possible that the proposed rule change is being raised now as another point of leverage in the talks with China and could be withdrawn if those talks succeed. The Trump Administration, like its predecessors for over two decades, hasn’t labeled any trading partner a currency manipulator. But if China is labeled a currency cheat by the Treasury Department and if Commerce’s proposed new rule takes effect, this would be an invitation to US companies to file for CVDs against Chinese exports on the basis of “currency subsidies.” While at that point all imports from China might be subject to Section 301 tariffs of 25%, CVDs are often much higher than that. Nevertheless, CVDs imposed because of a finding of undervaluation wouldn’t exceed the amount of undervaluation determined by the Treasury.
Meanwhile, the White House has been inserting anti-currency manipulation provisions into other trade agreements as a way to keep pressure on governments not to allow significant depreciation. It included a currency provision in the USMCA and will try to do so in the anticipated US-Japan and US-EU trade agreements. Tokyo has already said it wants to keep currency issues out of trade negotiations; the US disagrees. President Trump is presently in Japan, but the trip is largely a good-will visit to a close ally that just installed a new emperor. Trade issues are being kept on the sidelines until after the July elections to the upper chamber of Japan’s bicameral legislature.
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