By Nick Larsen*
On June 21, Congress introduced a bill (H.R. 3004) that would require the Treasury Secretary to analyze China's exchange rate policies and report within 60 days on whether these policies violate either the General Agreement on Tariffs and Trade (GATT) or International Monetary Fund (IMF) agreements. The bill also requires that if the Secretary finds that China is engaging in currency manipulation, then within 30 days after the report is sent to Congress, tariffs must be levied against China equal to the percentage of currency manipulation found.
In making the resolution, Congress found that the US trade deficit with China is the largest bilateral trade deficit in the world and that US imports from China have been growing faster than the rate of US exports to that country. China is accumulating foreign currency reserves, mostly US dollars. In 2004, China's reserves increased by more than 40%, reaching a cumulative total of more than US $6 trillion. China has kept its currency pegged at approximately 8.3 RMB to the dollar since 1994 and its large and growing accumulation of foreign currency reserves strongly suggests that the RMB is undervalued against the dollar.
Economists have estimated that the RMB is undervalued against the US dollar by as much as 40%. Import tariffs of the People's Republic of China currently average about 15%. Assuming the recent estimates of Chinese RMB undervaluation against the dollar are correct, the effect of a free and open currency market would be more than twice as large as the effect of eliminating every tariff that the People's Republic of China imposes on United States goods.
For more information, please contact Conan Grames at cgrames@kmclaw.com.
* Nick Larsen is a Summer Associate in Kirton & McConkie's International Law Section.
To view the text of the regulation click here: http://thomas.loc.gov/cgi-bin/query/D?c109:1:./temp/~c109sd4c2K