The US-China Exchange Rate Stand-Off

            
 
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Case Details:

Case Code : ECON019
Case Length : 18 Pages
Period : 2002-2007
Pub Date : 2007
Teaching Note :Not Available
Organization : -
Industry : -
Countries : China and USA

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"You can not have free trade when your partner is cooking the currency."1

- Donald Manzullo, US Congressman, on March 05, 2007.

"It needs both sides to take the principle of mutual respect to increase understanding and strengthen communication rather than resorting to pressure or threats."2

- Qin Gang, Chinese Foreign Ministry spokesman, on March 29, 2007.

Introduction

On January 31, 2007, the Fair Currency Bill was introduced in the US Congress. The bill was introduced to allow US industry to seek relief from damage caused by "imports that benefit from a subsidy in the form of foreign exchange-rate misalignment."3

Even though the bill was not country-specific, it was primarily directed at China - a major trading partner of the US, and the country with which the US ran a huge trade deficit.

The bill was referred to several committees including the House Ways and Means Committee,4 the House Financial Services Committee, and a sub-committee on Trade.

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Though a majority of the bills that are introduced in the US Congress do not cross the first stage of deliberation and investigation, Senator Charles Schumer, a New York Democrat, and Senator Lindsey Graham, a South Carolina Republican - two leading supporters of the bill and bitter critics of China's currency policy - expected the Congress to pass the bill "veto proof"5 by the end of the year. The senators were sure that the final bill, that would be carefully crafted to abide by WTO6 rules,7 would force China to raise the value of the Yuan against the US Dollar.

The bill was representative of the US stand that China's currency was grossly undervalued. The US government attributed the large trade deficit with China to the Chinese government's manipulation of its currency, which made Chinese exports "artificially attractive", thus giving it an unfair trade advantage. The US cited Article IV of International Monetary Fund's (IMF)8 Articles of agreement that stated that countries should "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments (BOP)9 adjustment or to gain an unfair competitive advantage over other members."10 The US press too had been largely critical of China's currency policy.

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1] "Ruan, Hunter up the Volume in a Bid to Buoy their Fair Currency Act," www. amm.com, March 05, 2007.

2]  "China Defiant on Currency Issue," www.cnnmoney.com, March 29, 2007.

3]  "Fair Currency Act of 2007 'Short' Summary," www.ssci.org.

4]  House committee charged with writing tax legislation and bills affecting Social Security, Medicare, and other entitlement programs.

5]  A bill is said to be veto-proof when two-thirds of the members in the House of Representatives (i.e. 290 members out of 435) and in the Senate (i.e. 67 members out of 100) are in favor of the bill becoming an act. In such a situation, the President would be unable to exercise his veto.

6]  The World Trade Organization (WTO) is an international organization that deals with rules for international trade through negotiations among its member governments. It also helps settle disputes between members based on an agreed legal foundation.

7]  "Senators Pledge China Currency Bill," www.cnnmoney.com, March 28, 2007.

8]  The International Monetary Fund (IMF) is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested.

9]  The balance of payments (BOP) measures the payments that flow between any individual country and all other countries. It is used to summarize all international economic transactions for that country during a specific time period, usually a year. The BOP is determined by the country's exports and imports of goods, services, and financial capital, as well as financial transfers. It reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

10]  Jonathan E.Sanford, "China's Currency: Brief Overview of U.S. Options," www.fpc.state.gov, November 29, 2005.

 

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