The Senate yesterday passed S.1619, the Currency Exchange Rate Oversight Reform Act. (Click here for the bill's text.)
Although this bill isn't a slam-bang solution to the problem of foreign currency manipulation (especially by China), it's a big step in the right direction.
This bill hasn't been passed by the House of Representatives, and the House leadership says it won't even be allowed a vote, so it's not going to become law any time soon, but a similar bill did pass the House last year.
As I've noted before, currency manipulation is a problem that can only really happen if the victim refuses to stop it. Eventually, my bet is, a bill like this one, or even stronger, will become law, and America will stop currency manipulation.
Because the legal mechanisms the U.S. government employs to deal with this problem is complex, this legislation is technically involved and leaves considerable wiggle room for our government to do either nothing or not enough. The bill enables a lot of discretionary policy, but it doesn't mandate a whole lot. The good news is that it does mandate more than current law, and it shifts the balance of our laws from a bias in favor of doing nothing to a bias in favor of doing something.
Specifically, the bill does the following, all in ways carefully worded to be compliant with America's WTO obligations:
It improves oversight of exchange rates by the Treasury Department.
Currently, the Treasury Department is required by law to identify nations that manipulate their currencies to gain an export advantage. Unfortunately, although Treasury has accurately identified these nations, it has refused to officially cite them, due to a narrow and perverse interpretation of the concept of "manipulation." The new law eliminates this wiggle room and replaces it with objective criteria for when a currency is manipulated.
As a result, Wall Street's pet agency will no longer be able to protect currency manipulation, which Wall Street likes.
It makes clear that currency manipulation is sufficient grounds for the Commerce Department to impose a countervailing tariff.
The Commerce Department has long has the authority, together with the U.S. International Trade Commission, to impose countervailing duties when it finds that foreign subsidies of products are causing harm to American companies and workers. (WTO rules allow us to do this.) Unfortunately, the law has long been unclear whether currency manipulation counts as a subsidy. The new law says specifically that it does.
The bill also requires the Commerce Department to launch an investigation if an American industry files a properly-documented complaint, to forestall government foot-dragging in such cases.
The bill also eliminates the excuse that a subsidy applies to things other than exports. This has previously been used as an excuse to do nothing; the new law prohibits the Commerce Department from applying this standard.
It mandates consequences when nations are caught manipulating their currencies.
This is where the rubber really hits the road.
First, the Treasury Department will be required to ask foreign nations nicely to stop manipulating. It must seek immediate consultation (Oooooh, I'm scared!) with them. For "priority" manipulators, it must also consult with the International Monetary Fund (IMF) and America's other big trading partners. (I'm slightly more scared.)
Treasury also oppose any changes in IMF rules that would benefit the manipulating country. (This has a bit more teeth.)
Being a currency manipulator will now count against a country for purposes of determining whether it counts as a market or non-market economy for purposes of anti-dumping law, that is, when goods are sold here for less than production cost or their price at home. (Translation: a bigger retaliatory tariff.)
Then, after 90 days, America's responses will harden. Namely:
1. The manipulating country gets cut out of federal procurement. (Unless, that is, it is a member of the WTO Governmental Procurement Agreement, a provision added to keep the bill WTO-compliant.)
2. The U.S. Government's Overseas Private Investment Corporation is forbidden to finance or insure projects in that country.
3. The U.S. government will oppose multilateral bank financing for projects in the country.
The president can waive the 90-day set of consequences on grounds of national security or economic interests. But he must explain to Congress, in writing, why the costs exceed the benefits. Any member of Congress is permitted to introduce a joint resolution of disapproval. The president can veto that resolution, but Congress can override the veto.
This should set up some much-needed Congressional firefights on this issue.
Then after 360 days, America's responses will harden some more...
The U.S. Trade Representative must request that the WTO initiate dispute settlement consultations with the country. This will at least stop the WTO being used as a fig leaf to excuse currency manipulation.
The Treasury Department will be required to consult with the Federal Reserve Board and other central banks about possible remedial intervention in international currency markets.
Obviously, these provisions are "devil is in the details" actions and contain significant amounts of discretion, but there's a new bias injected in favor of doing something rather than nothing.
Finally, the bill establishes a new consultative body on currency manipulation. My hope is that this body will become a center of resistance to currency manipulation.
Small steps like this bill are the hard, boring stuff out of which significant political progress is made. It won't be easy, but clearly the political momentum is in favor of doing something about this problem.