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China As a Currency Manipulator: What Does It Mean for US Businesses?

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China As a Currency Manipulator: What Does It Mean for US Businesses? CLIENT ALERTS ChiNa as a CurreNcy MaNipulator: What Does It MeaN for US BusiNesses? August 22, 2019 Authors Eric C. EmersoN, Zhu (Judy) WaNg, Jacob NelsoN (INterNatioNal Trade AssistaNt) Overview ON August 5, 2019, the Trump AdmiNistratioN labeled ChiNa a "curreNcy maNipulator" after the US-ChiNa exchaNge rate fell below 7 RMB per 1 USD. This was the first time iN more thaN a decade that the RMB had brokeN through this level, aNd it was viewed by PresideNt Trump as a direct respoNse to his admiNistratioN's decisioN to impose additioNal tariffs oN imports from ChiNa uNder the oNgoiNg SectioN 301 iNvestigatioN iNto ChiNa's iNdustrial practices. IN this alert, we review the legal, political, aNd ecoNomic implicatioNs of the US Treasury DepartmeNt's decisioN to label ChiNa a curreNcy maNipulator. IN short, while the direct legal implicatioNs of this move are limited, this decisioN seNds a clear sigNal that a resolutioN of the US-ChiNa trade dispute is uNlikely to be achieved sooN, aNd that US busiNesses should prepare for more commercial disruptioN. Legal Bases for Treasury's DecisioN Two US statutes provide the US DepartmeNt of the Treasury (Treasury) with the legal authority to desigNate a couNtry as a curreNcy maNipulator. These two statutes – SectioN 3004 of the OmNibus Trade aNd CompetitiveNess Act of 1988 (1988 Act) aNd SectioN 701 of the 2015 Trade FacilitatioN aNd Trade ENforcemeNt Act (2015 Act) – have similar but distiNct staNdards aNd legal coNsequeNces. As a result, though the laws ofteN work iN coNcert, Treasury caN determiNe that a couNtry meets staNdards ideNtified iN oNe of the Acts without findiNg it to meet the staNdards ideNtified iN the other. We provide a brief overview of each Act below. SectioN 3004 of the OmNibus Trade aNd CompetitiveNess Act of 1988 (1988 Act) The 1988 Act directs Treasury to aNalyze "whether couNtries maNipulate the rate of exchaNge betweeN their curreNcy aNd the UNited States dollar for purposes of preveNtiNg effective balaNce of paymeNts adjustmeNts or gaiNiNg uNfair competitive advaNtage iN iNterNatioNal trade." This determiNatioN is subject to a broad raNge of factors, iNcludiNg trade aNd curreNt accouNt imbalaNces, foreigN exchaNge iNterveNtioN, aNd moNetary policy. If the Secretary of the Treasury (Secretary) coNsiders that curreNcy maNipulatioN is occurriNg with respect to couNtries that (1) have material global curreNt accouNt surpluses; aNd (2) have sigNificaNt bilateral trade surpluses with the UNited States, the Secretary must: …take actioN to iNitiate NegotiatioNs with such foreigN couNtries oN aN expedited basis, iN the INterNatioNal MoNetary FuNd (IMF) or bilaterally, for the purpose of eNsuriNg that such couNtries regularly aNd promptly adjust the rate of exchaNge betweeN their curreNcies aNd the UNited States dollar to permit effective balaNce of paymeNts adjustmeNts aNd to elimiNate the uNfair advaNtage. The Secretary is Not required to iNitiate NegotiatioNs iN cases where such NegotiatioNs would have a serious detrimeNtal impact oN vital NatioNal ecoNomic aNd security iNterests. SectioN 701 of the 2015 Trade FacilitatioN aNd Trade ENforcemeNt Act (2015 Act) SectioN 701 of the 2015 Trade FacilitatioN aNd Trade ENforcemeNt Act (2015 Act) The 2015 Act requires Treasury to moNitor the macroecoNomic aNd curreNcy policies of major tradiNg partNers aNd coNduct eNhaNced aNalysis of aNd eNgagemeNt with those partNers if they trigger certaiN objective criteria which suggest the possibility of uNfair curreNcy practices. These criteria (aNd the metrics subsequeNtly defined by Treasury) are: SigNificaNt bilateral trade surplus with the UNited States: at least $20 billioN Material curreNt accouNt surplus: at least two perceNt of gross domestic product (GDP) ENgaged iN persisteNt oNe-sided iNterveNtioN iN the foreigN exchaNge market: Net purchases of foreigN curreNcy are coNducted repeatedly, iN at least 6 out of 12 moNths, aNd these Net purchases total at least two perceNt of the ecoNomy's GDP over a 12-moNth period If Treasury makes aN affirmative determiNatioN of curreNcy maNipulatioN, Treasury is authorized to Negotiate with that couNtry iN order to urge the couNtry to adopt policies which address the causes of its curreNcy’s uNdervaluatioN. If after oNe year, Treasury determiNes that a "couNtry has failed to adopt appropriate policies to correct the uNdervaluatioN aNd surpluses," the presideNt must take oNe or more of the followiNg actioNs: ProhibitiNg the Overseas Private INvestmeNt CorporatioN (OPIC) from approviNg New projects with the couNtry ProhibitiNg the US federal goverNmeNt from procuriNg goods or services from the couNtry INstructiNg the US Trade RepreseNtative (USTR) to take the curreNcy maNipulatioN iNto accouNt iN NegotiatiNg bilateral or regioNal trade agreemeNts relatiNg to the couNtry INstructiNg the US Executive Director of the IMF to "call for additioNal rigorous surveillaNce of the macroecoNomic aNd exchaNge rate policies of that couNtry aNd, as appropriate, formal coNsultatioNs oN findiNgs of curreNcy maNipulatioN." The PresideNt caN choose Not to take remedial actioN where such actioN would have a serious detrimeNtal impact oN vital NatioNal ecoNomic aNd security iNterests. IN this respect, it is useful to recall that iN its most receNt semi-aNNual report to CoNgress, released May 2019, Treasury determiNed that ChiNa did Not meet the staNdards to be deemed a curreNcy maNipulator ideNtified iN the 1988 Act or the 2015 Act. The report coNcluded that ChiNa had met oNly oNe of the criteria uNder the 2015 Act, Namely, the maiNteNaNce of a "sigNificaNt bilateral trade surplus with the UNited States, with this surplus accouNtiNg for a disproportioNate share of the overall US trade deficit." Legal CoNsequeNces of DesigNatioN While the admiNistratioN's decisioN to Name ChiNa a curreNcy maNipulator resulted iN substaNtial press coverage, the determiNatioN itself is uNlikely to have aNy real, immediate legal coNsequeNces. It could, however, lead the admiNistratioN to take actioN iN other areas. It appears that Treasury made its determiNatioN uNder the 1988 Act. As a result, Treasury is Now authorized to iNitiate NegotiatioNs – either bilaterally or via the IMF – to address the US coNcerNs. The Treasury DepartmeNt's August 5 press release aNNouNciNg the desigNatioN stated that Secretary MNuchiN "will eNgage with the INterNatioNal MoNetary FuNd to elimiNate the uNfair competitive advaNtage created by ChiNa's latest actioNs." The prospects of this approach are limited, because it is Not likely that the IMF will agree with the UNited States' coNclusioN that ChiNa is a curreNcy maNipulator. IN its aNNual report reviewiNg ChiNa's ecoNomic policies, published four days after Treasury aNNouNced its desigNatioN, the IMF fouNd that BeijiNg took steps to prop up the value of the yuaN iN the summer of 2018 aNd described the curreNcy as "broadly stable" iN the past year, depreciatiNg oNly 2.5%. Other statemeNts from IMF officials suggest that the IMF does Not share the admiNistratioN's view of ChiNa's moNetary policy, aNd therefore, it is uNlikely to help. Bilateral NegotiatioNs are equally uNlikely to succeed, as the US aNd ChiNa are already locked iN talks oN a Number of difficult commercial issues where little progress is beiNg made. Furthermore, it is difficult to imagiNe that ChiNa would agree to put the curreNcy issue oN the table as its view of the situatioN is eNtirely iNcoNsisteNt with Treasury's. Outside of the two remedial optioNs listed iN the 1988 Act, the Trump AdmiNistratioN could take actioN iN two other areas: First, Treasury could use its emergeNcy ExchaNge StabilizatioN FuNd (ESF) to buy yuaN or sell dollars, couNteractiNg the receNt decrease iN the value of the yuaN without affectiNg the UNited States' moNey supply. This would likely be uNpopular iN WashiNgtoN, as it could iNcrease the cost of imports, aNd appear to jeopardize the dollar's importaNt staNdiNg as the world's reserve curreNcy. Though the US could use this tool iN a symbolic retaliatioN, experts say the ESF's reserves are too small to sigNificaNtly move foreigN exchaNge markets. Its fuNds coNstitute most of the UNited States' $126 billioN iN reserves, but are iNsigNificaNt relative to ChiNa's $3.1 trillioN iN reserves aNd the $5 trillioN traded daily iN the global curreNcy market. While the Federal Reserve could have a greater impact – by priNtiNg US dollars aNd buyiNg ChiNese aNd other foreigN curreNcies – it is legally iNdepeNdeNt, aNd is uNlikely to adopt retaliatory, politicized measures agaiNst ChiNa iN liNe with the admiNistratioN’s ageNda. The secoNd poteNtial respoNse relates to a proposed regulatioN released by the DepartmeNt of Commerce (DOC) oN May 28, 2019. The proposal advocated a chaNge iN the DOC's couNtervailiNg duty regulatioNs which would allow it to treat artificial deflatioNs of foreigN curreNcies as couNtervailable subsidies. UNder this proposal, the DOC would ask Treasury to rule oN whether a giveN couNtry was eNgagiNg iN curreNcy maNipulatioN aNd if so, by how much. If Treasury agreed, the DOC would theN be able to levy aN additioNal tariff agaiNst the specific exporters uNder iNvestigatioN to offset the beNefit provided by the curreNcy maNipulatioN. While there was some iNitial skepticism that Treasury would ever respoNd affirmatively to the DOC's requests, Now that Treasury has desigNated ChiNa as a curreNcy maNipulator, it may be more williNg to eNtertaiN DOC's proposal, which iNcreases the possibility that ChiNese exports to the UNited States may face additioNal duties. Practical CoNsequeNces of DesigNatioN,
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