Experts: Currency Bill Could Now Apply To Several Countries, Not Japan

(Via Inside U.S. Trade)

While the currency legislation that passed the House of Representatives last week primarily targets China’s undervalued currency, the bill could also apply to other currencies, including those of Hong Kong, Taiwan and Indonesia, experts said this week.

However, Japan would not fall currently under the purview of the provisions in the House-passed bill, despite the intervention in currency markets last month by the Japanese Finance Ministry, they said. Even after that intervention, the Japanese currency does not appear misaligned to a great enough extent to fall under the House bill.

Rep. Gary Peters (D-MI) spearheaded a letter that was sent a letter yesterday (Oct. 7) to Japanese Finance Minister Yoshihiko Noda to protest Japan’s currency intervention, which is also a concern for the U.S. automobile industry.

According to the Japanese Finance Ministry website, Japan intervened in the foreign exchange markets in September to the tune of 2.1 billion yen in an effort to weaken the yen, which has the effect of helping Japanese exports by making their goods relatively cheaper. This marked the first time in six years that the government has intervened in currency markets.

One reason why the House-passed bill would not apply to Japan is that its currency is not undervalued to a great enough extent.

Under H.R. 2378, currencies must be undervalued by more than 5 percent in order to be counted as a possible subsidy in countervailing duty (CVD) investigations. The bill would make it impossible for the Commerce Department to reject claims that undervalued currency, as defined by the bill, acts as a countervailable subsidy for imports in trade remedy cases solely because the alleged subsidy is also available to parties other than exporters.

According to calculations by the Fair Currency Coalition, which supports the House bill, Japan’s currency in September was only 0.59 percent undervalued when compared to the Fundamental Equilibrium Exchange Rate (FEER) as calculated by the Peterson Institute.

The FEER method is only one of several ways to calculate currency undervaluation. It is a calculation of the exchange rate that would exist if all countries, including China, stopped intervening in the markets.

According to the September Fair Currency Coalition calculations, other currencies do exceed this five percent threshold, and therefore could be targeted by the House-passed bill. They are the currencies in China, Russia, Thailand, Saudi Arabia, India, the Philippines, South Korea, Indonesia, Taiwan, Hong Kong, Malaysia and Singapore.

While China is the primary target of the House bill because of the size of its economy, the undervaluation of its currency is not the most dramatic. Its currency is undervalued by 18.64 percent compared to the FEER, but the Malaysian ringgit is undervalued by 19.23 percent, the Singapore dollar by 28.36 percent, according to the coalition.

Hong Kong’s currency is undervalued by 18.92 percent, Taiwan’s currency is undervalued by 17.45 percent, and Indonesia’s currency is undervalued by 12.02 percent when compared to the FEER, according to the coalition.

In addition to the five percent threshold, however, H.R. 2378 only applies to countries where the government intervenes in a “protracted” and “large-scale” manner over an 18-month period to devalue its currency. Also for that reason, many countries, including Japan, would likely not fall under the scope of the House bill, according to Gary Hufbauer, a scholar at the Peterson Institute for International Economics.

Looking at foreign exchange reserve data from the International Monetary Fund, Hufbauer concluded that China, Hong Kong, Taiwan and Indonesia could be targeted by the House bill because they also satisfy this second requirement.

China increased its foreign exchange reserves by 29 percent between September 2008 and March 2010. According to the International Monetary Fund, China increased its foreign reserves from $1.9 trillion to $2.5 trillion in that period.

During that same period, Hong Kong increased its reserves by 62 percent, Indonesia by 24 percent, and Taiwan by 26 percent, he said. Such increases could qualify as “protracted” and “large-scale” interventions, Hufbauer said.

That said, Hufbauer cautioned that a more accurate calculation could be derived by looking at foreign exchange reserve increases as compared to gross domestic product (GDP), and foreign exchange reserves compared to annual imports, in order to give a greater sense of the scale of these interventions.

He added that the Commerce Department, if it ever had to determine whether a particular currency fell under the scope of the House-passed bill, would likely steer clear of taking on a currency unless is was undervalued by more than 5 percent. In addition, Commerce would use a basket of measures to determine undervaluation, not just the FEER comparison, he speculated.

In addition to these technical considerations, Hufbauer pointed out that in order for a countervailing duty (CVD) petition to go through in the first place, a petitioner must be able to prove that it has suffered material injury from subsidized imports. This is could be harder to prove for countries other than China, where import volumes are smaller, he signaled.

Critics of China’s currency policy want to see a re-balancing of currencies throughout Asia, but focus on China because it is the largest player when it comes to intervening in currency markets, sources said.

Moreover, one U.S. labor source argued that labor efforts are focused on China because the interventions in currency markets in other Asian countries over the past year represent an “outgrowth of pressures resulting from China’s government policies.”

Similarly, Richard Trumka, the president of the AFL-CIO, said at a meeting with President Obama on Oct. 4 that China is the “main culprit” when it comes to currency intervention, but added that there are “several other Asian countries that are following suit.”

Trumka told Obama at an Oct. 4 meeting of the President’s Economic Recovery Advisory Board that, according to AFL-CIO calculations, the Chinese yuan is about 40 percent undervalued. He said that quick action to help correct that undervaluation “could have a fast payoff in terms of stimulating American jobs, exports and manufacturing.”

In the letter to Noda, which Peters made public on the day the House passed the currency bill, Peters and other signatories argue that past Japanese interventions in currency markets in 2003 and 2004 have “been unfair and harmful to U.S. workers and businesses.”

“The recent Japanese sale of yen and purchase of dollars contradicts the commitments made by the G-20 for this year, when each country agreed to refrain from actions that would prevent markets from re-balancing the gap between countries with unnaturally high deficit and surplus positions,” it adds. – Erik Wasson


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