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REPUBLICAN ADDITIONAL VIEWS ON H.R. 2378, THE “CURRENCY REFORM FOR FAIR TRADE ACT”

September 29, 2010 — Press Releases   

Although some of us support and some of us oppose H.R. 2378, as modified by the Chairman’s amendment in the nature of a substitute, we all share the following views.  First, China’s currency is fundamentally misaligned.  We all agree that China must take prompt action to allow market forces to determine the value of its currency.  Since the Obama Administration took office, the RMB has appreciated by less than 1.5%.  In contrast, from 2005-2008, under the Bush Administration, the RMB appreciated by approximately 20%.  The lack of progress over the last 20 months is unacceptable. 

WTO-Consistency is Essential

We all agree that any legislative action meant to address currency undervaluation must be consistent with our international commitments and the overarching values of the multilateral trading system.[1]  Legislation that is WTO-inconsistent exposes the United States to WTO-sanctioned retaliation and undoubtedly does more harm than good.  Such legislation would set American exporters and American workers up for significant legal retaliation and would inevitably undermine multilateral efforts to address China’s undervalued currency.  We cannot credibly pursue remedies to China’s WTO violations if we are acting inconsistently with our own obligations.

At our hearing on September 16, 2010, Secretary Geithner emphasized the importance of our compliance with WTO rules, explaining that legislation must “be consistent with our international obligations.  We have to be confident that if we take action under it, it will withstand challenge in the WTO.”  He added, “If we took action that was inconsistent, that could be challenged, then China or any other country involved could then, under the WTO, take additional action that would disadvantage other U.S. parties, including people completely unrelated to the underlying case.”

The next day, Ranking Member Camp and Subcommittee on Trade Ranking Member Brady sent a letter to Ambassador Kirk asking him whether H.R. 2378, as originally drafted, is WTO consistent.  We are concerned that we still have not received an answer and that an Administration official was not present during Committee consideration of the bill to opine on its consequences and how it would be applied.

Testimony at our hearing on September 15, 2010, clearly identified pitfalls in the original version of H.R. 2378.  At that hearing, former USTR General Counsel Ira Shapiro expressed serious doubt about the WTO-consistency of the original bill.  Similarly, in a memorandum that was discussed at length at the hearing and included in the hearing record, former WTO Appellate Body Chairman Jim Bacchus warned that legislation amending the countervailing duty law to require Commerce to apply antidumping and countervailing duties would likely run afoul of our WTO obligations.  We all believe that H.R. 2378, in its original form, would have invited WTO-authorized retaliation against U.S. exports.

Chairman’s Substitute Addresses “On Its Face” WTO Violations

H.R. 2378, as modified by the Chairman’s amendment in the nature of a substitute, is substantially different than the bill as introduced and addresses many of the concerns we expressed over the course of the four hearings this Committee held this year on China.  Those of us who support the bill do so only because the Chairman took into account the critical issues that many witnesses and Republican Members raised at our hearings, especially the importance of ensuring that the legislation, on its face, is compliant with our WTO obligations.

At the outset, the Chairman’s amendment removes entirely the antidumping portion of the original bill, which would have required an adjustment to take account of currency undervaluation even though the price in the United States already reflects that undervaluation. 

With respect to countervailing duties, the substitute does not require the Administration to take action that would violate our obligations, unlike the original version of H.R. 2378, which would have mandated that the Department of Commerce automatically adjust countervailing duty calculations to account for a country’s currency policy.  Instead, the substitute leaves the decision to impose countervailing duties entirely in the discretion of the Department of Commerce, as under current law, allowing Commerce to consider many factors in determining whether or not a country’s currency policy satisfies the technical definition of an export subsidy.  It does not presuppose an outcome. 

In fact, contrary to majority staff testimony at the markup and other statements by the majority, we are not convinced that this legislation invalidates Commerce’s reasoning to date, in which Commerce has found that a country’s currency policy does not constitute a countervailable substitute.[2]  Specifically, we do not believe the fact that the alleged subsidy is available to non-exporters is the only reason for Commerce to find that a country’s currency policy does not constitute an export subsidy. 

We also question whether reference to the FSC/ETI decision made by majority staff during the Committee consideration of this legislation to justify a finding that currency undervaluation constitutes a countervailable subsidy is appropriate here.[3]  That case involved a de jure export contingent subsidy – a subsidy that was written directly into the law – that is not evident here.   Under the ETI regime, the law specified that a good was required to be sent overseas to obtain the tax benefit.   The same is not true of an exchange rate regime such as China’s.  Rather, we would expect that the WTO would use a de facto analysis, which, as USTR has previously argued, requires the WTO to evaluate the totality of the circumstances.[4]  Using such an analysis, it is hard to imagine that China’s currency policy would be considered export contingent given that anyone who seeks to exchange currency, whether an exporter, a tourist, an investor, or a Chinese purchaser of imports, benefits. 

Furthermore, we note that the substitute does not amend the definition of “financial contribution,” another element of the three-part test applied to determine whether a subsidy is countervailable.  Accordingly, Commerce will continue to analyze this issue based on current law.   At our hearings, we heard from witnesses who questioned whether China’s currency policy satisfies the definition of “financial contribution” because the exchange rate policy does not effect the government in one of the ways contemplated under current law, which reflects the obligations of the WTO Agreement on Subsidies and Countervailing Measures.[5]  We are not convinced that it does.

Finally, with respect to the definition of “benefit,” the final element in determining countervailability, we believe that the Chairman’s substitute merely restates the analysis that Commerce already applies. 

We all remain deeply concerned about using the countervailing duty law to address China’s currency policy.  However, while we continue to believe it is potentially problematic to link the application of countervailing duty laws to currency undervaluation, the bill does not appear to violate our WTO obligations on its face.  There is reason to believe that Commerce, in carrying out these provisions should the Chairman’s substitute become law, would exercise its discretion with respect to countervailing currency policy as it has been doing, so the risk of an “as applied” violation is substantially reduced.   

We also have some concerns with ambiguities in the legislation.  For example, terms like “significant and persistent global account surpluses” in section 2(c) (lines 21-22 of page 3) should be more precisely defined.  Similarly, the legislation would benefit if there were greater clarity about what data the Department of Commerce should use if IMF data is not available in section 2(d) (line 9 of page 5).  Commerce should limit its data collection to reputable multilateral organizations that have well-developed expertise, like the World Bank, rather than unspecified other “international organizations.”  In addition, we question whether the Department of Commerce is the appropriate Administration agency to determine undervaluation given the expertise at the Department of the Treasury.  We hope that our concerns will be taken into account should this bill move forward in the legislative process.

Nevertheless, for those of us that are supportive of the legislation, we believe that passage of the legislation sends a clear signal to China that Congress’s patience is running out.   

Administration Should Improve Multilateral Efforts, A More Effective Approach

Regardless of whether we support or oppose the legislation, we all strongly agree that it is time for this Administration to produce results.  Congress has waited patiently for too long.  We firmly believe that the reason that we are considering currency legislation at all is because this Administration has not moved aggressively enough to combat China’s currency intervention.  The Administration should promptly develop a more robust plan to aggressively address China’s currency policy in high-level bilateral summits, including the Strategic and Economic Dialogue, and in multilateral summits, including the G-20.

In particular, the Administration must find ways to strengthen and improve its efforts to work with our trading partners to address global imbalances.  We must work with our partners in Europe, Japan, Brazil, India, and other Asian countries to set a clear timeline for action.  We believe that the first step is to elevate the issue of global imbalances – which naturally includes China’s currency policy – and include it as a key deliverable at the November G-20 meetings in Seoul.  The Administration should also work to establish a robust, multilateral process – perhaps through the G20, a G20 sub-group, the IMF, or elsewhere – so that other countries, particularly China’s neighbors in Asia, can bring new points of pressure to bear.

While rebalancing the global economy will take time, the Administration must begin by developing a timetable for action and a clear path for achieving its goals.  In addition, we call on the Administration to issue by the statutory deadline its October report identifying currency manipulators.

Currency Legislation Fails to Resolve More Important Priorities with China

Opinions vary as to whether this legislation will be effective in getting China to revalue its currency to reflect market norms, reduce the trade deficit, and create American jobs.  An undervalued RMB is only one issue that we face in our complicated trading relationship with China.  We all believe that there are more important priorities in our trading relationship, and bigger barriers to U.S. exports than China’s undervalued currency.  We must assure that efforts to address China’s currency misalignment not undermine our ability to address with China more pressing issues like intellectual property rights, indigenous innovation and a host of other non-tariff barriers that are wreaking havoc on American employers, their workers, and our economy.  Those issues impact a far broader base of America’s job creators, who are trying to sell American goods and services to a growing Chinese market.

We are frustrated by China’s continued bad faith and aggressive pursuit of protectionist policies that jeopardize our economic relationship.  China must end its policy of economic nationalism and open its market to American-made goods and services and American investors.  We cannot lose sight of the more fundamental problems with China’s economy that have a greater impact on our trade balance, including the disturbing increase in the economic dominance of state-owned enterprises, the proliferation of non-tariff barriers preventing U.S. companies from exporting to China, and a growth strategy dominated by aggressive export expansion without developing a strong domestic consumption base within China. 

We must persuade China, through every tool at our disposal including our trade laws and our rights under WTO agreements, to address its woefully inadequate protection of intellectual property, eliminate subsidies to Chinese companies, remove harmful “indigenous innovation” policies, end its restraints on exports of raw materials and rare earth minerals, and eliminate the myriad other barriers to U.S. exports.  China must introduce global best practices into its banking sector, mature its financial markets, move towards liberalizing its capital account, and open more comprehensively to foreign direct investment.  It also must do more to ensure that Americans are not injured by goods with dangerous features or harmful ingredients.

While some of us support and some of us oppose this legislation, we all agree that it is time to signal to China and the Obama Administration that enough is enough.  We must work together to develop an action plan that will promptly address China’s undervalued currency, remove other barriers that limit U.S. exports, and create American jobs by establishing new markets for U.S. goods and services.

Majority’s Lack of Trade Agenda is a Lost Opportunity

Finally, we are disappointed that this bill amounts to the sum total of the majority’s trade agenda this Congress: this is the only trade bill that we have moved to the floor this Congress under regular order.

This legislation is no substitute for creating new U.S. jobs by opening markets for U.S. goods and services.  While this legislation addresses an important issue, it will not advance the goal of doubling exports in five years.  We must move expeditiously on the pending free trade agreements, work harder to open new markets to our exports, and address our broader economic issues all over the world and with China, including by restarting the languishing bilateral investment treaty negotiations.

Signed:

Dave Camp

Sam Johnson

Kevin Brady

Eric Cantor

John Linder

Devin Nunes

Pat Tiberi

Ginny Brown-Waite

Geoff Davis

Dave Reichert

Charles Boustany

Dean Heller

Peter Roskam



[1] We note that while the original version of H.R. 2378 and the Chairman’s amendment in the nature of a substitute apply to any country that undervalues its currency, the Committee’s hearings and legislative history make clear that China is the primary country of concern.

[2] See, e.g., Memorandum to Ronald K. Lorentzen Deputy Assistant Secretary for Import Administration regarding Countervailing Duty Investigation: Aluminum Extrusions from the People’s Republic of China, August 30, 2010.

[3] See Appellate Body Report, United States – Tax Treatment for “Foreign Sales Corporations” – Recourse to Article 21.5 of the DSU by the European Communities, WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55.

[4] See Panel Report, Australia – Subsidies Provided to Producers and Exporters of Automotive Leather, WT/DS126/R, adopted 16 June 1999, DSR 1999:III, 951 at paras. 9.50-9.51 (“The United States argues that a contingent-in-fact export subsidy will exist when actual or anticipated exportation is merely one of several potential criteria influencing the bestowal of benefits. Thus, if the totality of the circumstances reveal that these benefits are designed to promote exports, then such benefits fall within the broad definition of Article 3.1(a).”).

[5] See Written Testimony of Ira Shapiro Before the Committee on Ways and Means Hearing on China’s Exchange Rate Policy, September 15, 2010. See also Memorandum from James L. Bacchus and Ira Shapiro to Jim Jarrett, Chairman, International Economic Affairs Policy Group, National Association of Manufacturers, regarding The Consistency with the WTO Obligations of the United States of H.R. 1498, the Hunter-Ryan bill, September 12, 2006.

 

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