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.  In October 2011, the U.S. Senate passed Council-supported S.1619, The Currency Exchange Rate Oversight Reform Act, by a 63-35 vote.  This legislation would, among other things:

  •  improve U.S. government oversight of currency exchange rates,

  • clarify that countervailing duty law can be used to address currency undervaluation,

  • clarify that the Department of Commerce may not refuse to investigate a subsidy allegation based on the single fact that a subsidy is available in circumstances in addition to export,

  • establish objective criteria to identify misaligned currencies, and

  • trigger tough consequences for countries identified as having a misaligned currency caused by clear policy actions by the government.

The House has not considered companion legislation to S.1619.  However, the Council supports the Currency Reform for Fair Trade Act, H.R. 639, that would address the problem with similar, but not identical, measures.  Although H.R. 639 enjoys the support of 234 House co-sponsors, the committee of jurisdiction has declined to consider the bill.  Action on the bill in the waning days of the 112th Congress is considered improbable. 

The Council was encouraged that S.1619 was passed by the Senate.  With 234 cosponsors of H.R. 639, the desire of legislators to take corrective action against currency manipulators is apparent.  With this base, we believe that action early in the 113th Congress, beginning in January 2013, is likely.  The Council will continue to support such action.