Currency Exchange-Rate Misalignment

Fundamental exchange-rate misalignment occurs when a foreign government engages in protracted, large-scale intervention in the exchange markets with the result that its currency is undervalued or overvalued on an inflation-adjusted, trade-weighted basis by at least 5 percent, on average, during a specified 18-month period.  This misalignment distorts international trade by acting (a) as a subsidy that reduces prices on exports from the country undervaluing its currency and (b) as an added tariff on imports into the country.  This mercantilist policy subverts real free trade and adds to massive imbalances that threaten the global system.

It is widely recognized that China has long engaged in currency misalignment.  China’s cumulative trade surplus with the United States since 2001 ($2.2 trillion) should have had the natural economic effect of raising the value of the yuan against the dollar to correct the trade imbalance. But by illegally subsidizing its exports through the undervaluation of its currency by 30 percent or more, China has distorted the gains from trade, created barriers to free and fair trade, harmed U.S. industries, and destroyed millions of U.S. jobs.

The Council actively supports legislation that would provide remedies for the distortions created by currency misalignment.