From: / Will Leahy, Manager, China Policy
Jocelyn Chan, Associate Director, China
To: / Asia Task Force, China AmChams
I) Update on Senate and House Currency Bills
Informed sources have indicated that the currency bill negotiated by Senators Schumer, Graham, Baucus, and Grassley will be introduced soon- likely within the next two weeks.
Those close to the negotiations have described many of the recent media reports regarding the content of the bill as highly speculative, and have confirmed that the bill will not mandate Treasury Department intervention, nor will it label currency intervention as an unfair subsidy.
Legislation treating currency intervention as a subsidy and giving the Commerce Department authority to offset undervalued currencies through countervailing duties has been introduced in the House (H.R. 782) by Reps. Duncan Hunter (R-CA) and Tim Ryan (D-PA), and in the Senate (S. 796) by Jim Bunning (R-KY) and Debbie Stabenow (D-MI).
The WTO-consistency of such legislation has been drawn in to question since its introduction in prior Congresses. Opponents of the approach point to the fact that the WTO Agreement on Subsidies and Countervailing Measures requires that a subsidy provide a “financial contribution” from the government to a firm, and argue that China’s currency policy likely does not meet the “financial contribution” criteria given that it does not involve the transfer of anything of value from the government to firms.
Recent reports indicate that a legislative alternative has been proposed in which an exchange rate adjustment is factored in to the calculation of antidumping duties. Current methodology relies on Customs-reported exchange rates that reflect intervention by China and others in the currency markets. Advocates of the newly-proposed approach have argued that it does not violate WTO restraints on the use of dumping laws as the WTO rules call for a “fair comparison” of home country and export prices, and a distorted exchange rate cannot be said to lead to a fair comparison.
Senate staff involved in the Schumer-Graham-Baucus-Grassley negotiations have reportedly also been briefed on this antidumping approach.
In addition, there is apparently discussion in the House to combine legislation which would allow countervailing duties to be applied to nonmarket economies—H.R. 1229, sponsored by Reps. Artur Davis (D-AL) and Phil English (R-PA)—with currency legislation, in order to create a broader China bill.
II) House Financial Services Committee Hearing
The House Committee on Financial Services held a full committee hearing yesterday on “U.S. Interests in Reform of China’s Financial Services Sector.” Committee Chairman Barney Frank (D-MA) presided.
The following witnesses testified:
  • The Honorable Donald L. Evans, Chief Executive Officer, The Financial Services Forum
  • Mr. Norman R. Sorensen, President & CEO, Principal International, Inc., The American Council of Life Insurers
  • Mr. Michael Decker, Senior Managing Director, Research and Public Policy, The Securities Industry and Financial Markets Association
  • Dr. Eswar Prasad, Tolani Senior Professor of Trade Policy at Cornell University, and former head of the IMF's China Division
  • Mr. Grant D. Aldonas, William M. Scholl Chair in International Business, Center for Strategic and International Studies
Full testimony can be found on the Committee’s web site.
The hearing focused predominantly on efforts to expand U.S. access to China’s financial services market, but also included discussions of the U.S.-China trade imbalance, as well as China’s currency policies.
During the course of the question and answer session, several witnesses strongly encouraged the Members of Congress, and in particular the House Financial Services Committee, to support the efforts of the Bush Administration in assuring greater market access for U.S. financial services companies.
In closing the session, Rep. Frank acknowledged the need for Congress to play a more proactive role in advocating for the further opening of China’s financial services sector. Frank said that he will consider introducing a resolution affirming his Committee’s desire to contribute productively to ongoing U.S.-China dialogue on the issue.
III) Paulson Speech on China
At a June 5th speech at the Heritage Foundation, Treasury Secretary Hank Paulson spoke on the future of the U.S.-China economic relationship following the second session of the Strategic Economic Dialogue (SED).
Paulson reiterated many of the themes he has emphasized throughout his tenure at Treasury, highlighting the need for China to pursue economic reforms at a pace that satisfies U.S. complaints regarding:
  • the bilateral trade imbalance,
  • the value of the RMB,
  • and the need for China to increase domestic consumption
Secretary Paulson’s full remarks can be found on the Treasury Department web site.
When asked about mounting efforts in Congress to introduce and pass legislation addressing China’s exchange rate manipulation, Paulson emphasized the need to handle the issue multilaterally, though the G7 and IMF. He did not mention a timeline for Treasury Department issuance of its semi-annual exchange rate report. If the report fails to classify China as an exchange rate manipulator, it will likely strengthen calls in Congress for unilateral legislation on the issue.
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