Chinese Currency Manipulation and the WTO

If passed, the House bill, “Currency Reform for Fair Trade Act” (H.R. 2378) has all the markings of a major trade battle before the WTO. At bottom, the law requires the United States administrative agencies to treat currency manipulation as a subsidy that would be subject to countervailing duties equal to the benefit to exporters conferred by the manipulation.

The International Economic Law and Policy blog has the best coverage of the issue. (See here, here, here, here, and here). Professors Robert Staiger and Alan Sykes have the most sophisticated analysis of the economic and trade implications of currency manipulation.

The critical legal questions are whether (1) currency manipulation constitutes a benefit; (2) the subsidy is contingent on export; and (3) the subsidy is specific to an industry or enterprise. The last two, in particular, will be difficult to establish.

Politicos are following the case closely, and most trade lawyers are betting that the bill will not pass in the Senate and/or will not be signed by President Obama.

I’m not so sure. The China currency crisis reminds me of President Clinton’s controversial decision to sign the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 (“Helms-Burton”). If you will recall, that bill was passed in March of an election year with an eye on Florida voters. Of course, the EU immediately challenged the action before the WTO, and absent a U.S. invocation of the Article XXI security exception, it most assuredly would have won. In the meantime, in the 1996 presidential election Clinton won 35% of the Cuban-American vote in Florida, a 15-percentage point improvement over his 1992 showing. In January 1997, just two months after the 1996 presidential elections were over, Clinton waived the most onerous parts of Helms-Burton. Three months thereafter, in April 1997, the EU and the United States reached a settlement, with the EU’s WTO complaint lapsing in exchange for President Clinton’s commitment to amend Helms-Burton.

Thus, I would not put it past Congress or President Obama to pursue controversial trade legislation that enhances their political standing with disgruntled voters in an election year during a down economy. The bill passed in the House by an overwhelming margin (97 percent of House Democrats voted in favor) and Senators Schumer and Brown have vowed to push for passage in the Senate during the lame duck session beginning on November 15. As reported here, “The overwhelming vote in the House appears to make Senate passage likely, perhaps by a veto-proof majority.”

As for the merits of a WTO case, I seriously doubt that the United States could succeed if the only questions were about currency manipulation as an export subsidy. But it’s not just about subsidies. Article XV:4 of GATT 1947 provides that “Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement.” As Staiger and Sykes argue, “[a] powerful argument can be made that any exchange action that frustrates these market access commitments would qualify as a potential violation under Article XV.” (p. 29). It’s a provision of the WTO that has never been adjudicated, and much like the security exception in the context of the Helms-Burton dispute, it is sufficiently ambiguous that it might dissuade China from aggressively pursuing a WTO case. Strategic ambiguity is something China may wish to maintain when it comes to the WTO-consistency of currency manipulation.

Watch for more saber rattling the rest of 2010 and a compromise solution between the United States and China in 2011.