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Senate passes law scrutinizing trade with China

December 8th, 2011

The Currency Exchange Rate Oversight Reform Act of 2011 passed the United States Senate with a vote of 79-19 early this October.

This bipartisan legislation will now move on to the U.S. House of Representatives, and if passed, it will go to President Obama.

Although this legislation does not specifically mention China as a potential violator, officials on both sides of this discussion trust that China is the prime target for this reform.

Those in favor of this legislation believe China to be guilty of currency manipulation, which is simply the purposeful intervention of a government to alter the value of their currency.

This can either be in increasing or decreasing the value of one nation’s currency in comparison to that of another country.

For the case against China, this manipulation – if factually correct – has the effect of generating an artificial value of the yuan and impacts trade by making Chinese exports much more desirable to the U.S., and U.S. exports to China much less desirable; therefore contributing to a greater U.S.-China trade deficit.

Supporting this sentiment, Paul Krugman, a professor of economics and international affairs at Princeton University said in a New York Times column, “We can and should take action against countries that are keeping their currencies undervalued, and thereby standing in the way of a much-needed decline in our trade deficit. That, above all, means China. And none of the arguments against holding China accountable can stand serious scrutiny.”

The proponents of this legislation advocate that this reform legislation will place greater consequences for countries, like China, who they accuse of artificially valuing the yuan.

This depreciation of the yuan, they argue, is creating job loss and an unfair trade deficit in the United States and that this reform will help to provide the U.S. with the necessary legal provisions required to counter currency misalignment, and in effect counter massive job loss and the trade deficits.

Opposed to the legislation, John Soper, of John Carroll’s economics department, said, “Given that 79 senators voted for this, it’s equal stupidity on both sides. They are pandering to the no-nothings in society who are unhappy with unemployment and with an unemployment rate above 9 percent for two years, people start to do really crazy things and congressmen, and senators, are simply reflecting what their constituents want.”

Although this legislation is bipartisan and passed with a safe majority in the Senate, some still have reservations about the possible repercussions of this legislation. China is the United States’ fastest growing export market, and many fear that this reform act is sending a message that will begin a trade war with China.

For instance, Soper said, “If this goes through, the first thing the Chinese will do is pass similar foolish regulations.  Tit for tat. Retaliation is the first response after the shot over this bow and who will that help?  We [the U.S.] are a signatory in the World Trade Organization, and these types of restrictions put us in violation of the WTO.”

This concern over a potential WTO violation is echoed by those in the Cato Institute who indicate that treating currencies that have been artificially undervalued as an actionable subsidy will in all likelihood fail to comply with the rules of the WTO.

It is clear that this legislation calls into question a greater gamut of concerns than simply jobs and trade deficits.

The U.S. relationship with China will be affected if President Obama does sign this legislation into law; yet at this point it is still up to the House to decide if the benefits outweigh the potential costs of reform and if the justification provided in the legislation is applicable to China’s alleged offenses.