In June, we issued a client alert reporting on a Notice of Proposed Rulemaking that would allow the U.S. Department of Commerce (“Commerce”), under certain circumstances, to declare “currency manipulation” by a foreign sovereign to be a form of economic subsidy that could be sanctioned under the U.S. Tariff Act of 1930 and regulations created thereunder. Even if the rule were to become final, such sanctions could not apply unless the U.S. Department of the Treasury (“Treasury”) designated a foreign sovereign a currency manipulator, which had not happened since 1994.
However, on August 5, 2019, Treasury announced that Treasury Secretary Steven Mnuchin, with the support of President Trump, had determined that China is a currency manipulator. The announcement came just hours after China allowed the RMB-USD exchange rate to fall below 7 to 1 for the first time in almost 10 years.
According to the announcement, the determination is based on Section 3004 of the Omnibus Trade and Competitiveness Act of 1988 (“Section 3004”), which requires the Secretary of the Treasury (the “Secretary”) to analyze the exchange-rate policies of U.S. trading partners and consider whether such countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance-of-payments adjustments or gaining unfair competitive advantage in international trade.
Under Section 3004, if the Secretary considers that currency manipulation is occurring with respect to any country that has (i) a material global current account surplus; and (ii) a significant bilateral trade surplus with the United States, the Secretary should generally take action to initiate negotiations with that foreign country on an expedited basis, either in the International Monetary Fund (“IMF”) or bilaterally, to ensure that country adjusts the rate of exchange between its currency and the U.S. dollar as needed to permit effective balance-of-payments adjustments and to eliminate any unfair competitive advantage.
Treasury typically conducts an annual global review and publishes a comprehensive report on currency manipulation each spring. This year’s report, issued on May 28, determined that China did not meet the standards (contained in Section 3004) to be deemed a currency manipulator. The report found that, while China had a significant bilateral trade surplus with the United States (satisfying clause (ii) above), it did not have a material global current account surplus (as required under clause (i) above).
Remedies under Section 3004 are currently limited to the invocation of bilateral negotiations or negotiations mediated by the IMF. The IMF conducted its own annual consultation with China on its leading economic and monetary indicators, and, in a report released on August 9, 2019, IMF Executive Directors commented that greater exchange-rate flexibility and deeper and better functioning foreign-exchange markets would help the financial system prepare for greater capital-flow volatility, and that more transparency in exchange-rate policy, including disclosure of FX interventions, would also be beneficial. However, the IMF staff who prepared the report cited estimates indicating that the People’s Bank of China had made few foreign-exchange interventions during the reporting period, and the IMF Executive Directors did not call out China for manipulating its currency. The IMF has declined to assist Treasury in negotiating the currency-manipulation issue with the People’s Bank of China at this time.
As discussed in our earlier client alert, Commerce is considering imposing countervailing duties on imports from countries deemed to be artificially undervaluing their currencies. As of this writing, Commerce has not issued a Notice of Final Rulemaking, and there is no official indication of when that could happen. The public comment period for the Notice of Proposed Rulemaking closed on June 27, 2019, with 47 comments from the public on file, 26 of which clearly favored the Commerce proposal and 17 of which clearly disfavored it. Generally, U.S. manufacturing trade groups support the proposal, while U.S. retail trade groups oppose it. A significant number of other commenters submitted letters discouraging the application of countervailing duties in the context of the macroeconomic dynamics of foreign-exchange policy. The authors of these letters argued, among other issues, that: (1) attempting to apply countervailing duties to currency manipulation would be extremely technical and complicated from the perspective of economic analysis; (2) it would require close coordination between Treasury and Commerce, which would add another layer of administrative complication; and (3) it would likely have a minor effect on the overall countervailing duty assessment and would therefore be overly labor intensive and expensive to administer relative to the potential benefits. Other comments pointed out that currency-exchange markets finance not only current-account but capital-account transactions, and, in fact, the volume of capital-account transactions far outweighs trade and other current-account transactions. Still other comments pointed out that attempting to levy countervailing duties in response to currency manipulation would be susceptible to challenge at the World Trade Organization. Others suggested that the problem is not that other currencies are undervalued vis-à-vis the U.S. dollar but rather that the U.S. dollar is overvalued vis-à-vis other currencies, and manipulation to devalue foreign currencies is in fact not commonplace.
In sum, based on the information available, it is not possible to predict whether Commerce might set aside the idea of applying countervailing duties to imports from countries with perceived undervalued currencies. KWM will continue to follow the situation and will update this client alert with any further developments.
If you have questions, please contact Aaron Wolfson at [email protected] or Meg Utterback at [email protected].