The Senate took aim Thursday at what supporters call “egregious and prevalent” currency manipulation by foreign countries. But economists say such manipulation is no longer prevalent and that the longtime poster child of currency manipulation — China — has gradually stopped doing it.
Nonetheless, most Senate Democrats and Republicans supported a bill that would punish countries — particularly China — that they say manipulate their currencies to make their exports cheaper and gain unfair trade advantages. The measure would force the Commerce Department to investigate allegations of manipulation and determine offsetting import duties.
On a 78-to-20 vote, the Senate passed a broad bill dealing with how customs officials will enforce global trade provisions that included the tough language, written by Sen. Charles E. Schumer (D-N.Y.), on currency. More than 30 Republicans, including Majority Leader Mitch McConnell (R-Ky.) and Finance Committee Chairman Orrin G. Hatch (R-Utah), joined all 45 members of the Democratic caucus in supporting the legislation.
Earlier, on a 97-to-1 vote, the Senate approved renewal of a trade program to benefit African nations. Both bills were conditions Democrats demanded to move on to the contentious legislation to give the president fast-track powers to complete other trade deals.
Before the vote on the currency legislation, the Obama administration reiterated its opposition. The Office of Management and Budget said the currency language would “undermine enforcement of anti-dumping” laws.
At a press conference later at Camp David, President Obama said he had talked to Schumer about “how we could work on language that does not end up having a blowback effect on how we maintain our own monetary policy.”
Economists say that over the past several years, China’s currency has risen to a fair value, no longer providing Chinese exporters with a leg up on U.S. businesses. Treasury Secretary Jack Lew said in testimony last month that since mid-2010 the effective value of China’s renminbi has climbed 30 percent.
“The whole effort seems to be fighting the last war,” said David Dollar, a senior fellow at the Brookings Institution . “There is not really any case right now to say that China is manipulating its exchange rate. It has appreciated a lot over the past few years and now appears to be at fair value.”
Even over the past few months, as the value of the dollar surged, the value of the renminbi, or yuan, has stayed almost unchanged against the dollar.
“It seems like a very stale issue,” said Ed Yardeni, president of the investment advisory firm Yardeni Research. “Now to take it up when there is much less evidence of currency manipulation and as we’re seeing China’s exports flattening out kind of raises some questions about what’s the point.”
The International Monetary Fund is expected to declare that China’s currency has reached fair value when the fund conducts its annual review there this month. “Since last year, we have seen . . . a very significant appreciation of the renminbi,” Markus Rodlauer, deputy director of the IMF’s Asia and Pacific department, said during the fund’s spring meetings.
Given that the Chinese currency was “moderately undervalued” last year, Rodlauer said, “we are now reaching a point where we are close to it no longer being undervalued.”
That is not the view of the Senate Finance Committee or Schumer, a senior member of the panel and the designated Democratic leader in 2017 after Minority Leader Harry M. Reid (D-Nev.) retires.
“It’s long past due for the United States government to take on the world’s worst currency manipulators and level the playing field for American workers and companies,” Schumer said in a statement. He said the Commerce Department until now had “refused to investigate” currency manipulation charges and had left “foreign producers, including those in China, with the upper hand.”
Schumer cited a report by the Peterson Institute for International Economics as saying that currency manipulation has cost the United States 5 million jobs. That was the top of the range in the December 2012 report, written by C. Fred Bergsten and Joseph E. Gagnon; the low end of the range was 1 million jobs.
But other economists — including many at the Peterson Institute — take a different view.
Nick Lardy, a Peterson economist specializing in China, says that in 2014 China’s trade surplus dropped to 2.2 percent of gross domestic product, a level considered an indicator of fair exchange rates. At their peak in 2007, China’s exports amounted to 10 percent of GDP, he said.
Daniel Rosen, a partner at the Rhodium Group, a New York-based research firm focused on China, said China’s trade deficit was lower than it might have been because its exports of manufactured goods were offset by deficits in services, including everything from financial services to Chinese tourists traveling and spending money abroad.
“There are real reasons to be concerned about China’s trade patterns today,” Rosen said. “China’s merchandise trade surplus is at an extremely high level, and if it were not for an unusual services trade deficit, which some observers think is distorted, China’s overall trade and current account balances would be attracting loud complaints.”
Supporters of the amendment point to continuing large Chinese trade deficits this year, but Rosen said that is mainly the result of lower oil prices, which have slashed China’s import bills. China’s exports have declined modestly.
The Obama administration has repeatedly opposed inserting currency provisions into a trade bill. In testimony before the House Ways and Means Committee on April 22, Lew said that such a move would be “counterproductive” and that “we would expect other countries to pursue retaliatory measures.”
Will China change course on currency interventions in the future? Perhaps not, say China experts.
Devaluing the currency could thwart China’s current economic goals. After years of having an export-led economy, China has been seeking to bolster domestic consumption; a strong currency promotes that. In addition, the Economist noted in an article, Chinese domestic companies have $1 trillion in foreign debt; a devaluation would make it much harder for those companies to repay their obligations.
China also harbors ambitions of making the renminbi a more important global currency. For that to happen, the currency must be stable.
Lardy said the Chinese government is mulling when to lift long-standing restrictions on individuals and companies who would like to swap their savings in renminbi for foreign currency and investments abroad. Greater freedom to do so could trigger capital flight and a sudden depreciation in China’s currency.
“A lot of people should be careful what they wish for,” Lardy said.
Paul Kane contributed to this report.