The Currency Exchange Rate Oversight Reform Act of 2007, which was introduced on June 13 by Senators Baucus, Grassley, Schumer and Graham, calls for a more muscular approach to identifying and remedying sustained currency misalignments.
The proposed legislation would eliminate the current thresholds for currency manipulation, under which Treasury has consistently failed to designate China despite its whopping $1.4 trillion in foreign exchange reserves. Instead, the legislation would establish a priority designation based on evidence of fundamental misalignment in cases where the “misalignment is clearly caused by a foreign government’s economic policies”. It mandates an escalating set of measures for priority designated countries, starting with an immediate requirement that Treasury oppose changes in International Monetary Fund (IMF) rules benefiting a designated country, mandating the consideration of currency undervaluation in dumping calculations after 180 days, and after 360 days mandating that USTR initiate dispute resolution proceedings in the World Trade Organization (WTO) and that Treasury consult with the Federal Reserve Board and other central banks to consider remedial intervention in currency markets. It also mandates that Treasury consult with a new congressional advisory body throughout the process. More details about the proposed legislation can be found online at: http://www.senate.gov/~finance/.
Following on the heels of Hunter-Ruan and Dodd-Shelby, the biggest takeaway from the Baucus-Grassley-Schumer-Graham bill is that Congress has run out of patience with China and wants to see the administration, the IMF, and the WTO deliver results after years of inaction. Compared with some of the measures that have been proposed in previous legislation, this bill is relatively surgical and relies primarily on the existing framework of international rules and institutions.
The message to China is clear: participation in global markets is not a one-way menu; you cannot reap the rewards without taking on responsibilities, even when these carry risks. The question now is whether the WTO and the especially the IMF are up to the task of grappling with China’s undervalued yuan. So far, the answer has been a clear no.