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Trade Enforcement Case, Currency Manipulation Bills Signal Coming TPP Battle

Thursday, February 12, 2015
Sandler, Travis & Rosenberg Trade Report

In yet another sign that the Trans-Pacific Partnership among a dozen Asia-Pacific nations could be finalized this year, both the Obama administration and the U.S. Congress took steps this week to lay the groundwork for congressional approval of legislation implementing that agreement. The White House announced a World Trade Organization case against China aimed at bolstering its credentials on trade enforcement, while bills introduced in both the House and Senate target the practice of currency manipulation by trading partners that some say could undermine the benefits of TPP.

China Export Subsidies. The Office of the U.S. Trade Representative announced Feb. 11 the filing of a WTO case against what appears to be a broad Chinese export subsidy program. USTR Mike Froman characterized the new case as an effort to “level the playing field” for “important American industries from coast to coast” but also made clear that it is part of the Obama administration’s effort to prepare the way for congressional approval of the TPP, which could be concluded within the next few months.

USTR alleges that under the program at issue China provides free and discounted services through “common service platforms” as well as cash grants and other incentives to enterprises that meet export performance criteria and are located in 179 demonstration bases throughout China. Each of these bases is composed of enterprises from one of seven sectors: (1) textiles, apparel and footwear; (2) advanced materials and metals (including specialty steel, titanium and aluminum products); (3) light industry; (4) specialty chemicals; (5) medical products; (6) hardware and building materials; and (7) agriculture. China maintains and operates this program through more than 150 central and sub-central government measures throughout the country. The U.S. believes this program violates the express prohibition on export subsidies in WTO rules.

This case grew out of a previous WTO challenge to what appeared to be prohibited export subsidies provided to domestic auto and auto parts manufacturers pursuant to China’s “National Auto and Auto Parts Export Base” program. USTR notes that after requesting consultations with China on those subsidies it further developed information and concern that China had created the demonstration bases program to provide export subsidies to many other industries.

Currency Manipulation. The Currency Undervaluation Investigation Act (S. 433) would require the Commerce Department to investigate whether currency undervaluation by a government provides a countervailable subsidy if a U.S. industry requests an investigation and provides proper documentation. The text of the Currency Reform for Fair Trade Act (H.R. 820) in the House has not yet been made public but is reported to contain only a few minor variations from the Senate measure. A fact sheet on the House bill states that it (a) establishes a definition of “fundamentally undervalued currency” that requires protracted, large-scale intervention in foreign exchange markets and an exchange rate that is undervalued by at least five percent, among other things, and (b) clarifies that a benefit is conferred when the currency of an allegedly subsidizing country is exchanged for foreign currency obtained from export transactions. Both the House and Senate measures would prohibit the DOC from refusing to find that there is an export subsidy if the subsidy is not limited exclusively to circumstances of export (i.e., when non-exporters may also benefit).

According to a joint press release from the co-sponsors of S. 433, the Peterson Institute estimates that interventions in currency markets by foreign governments have cost U.S. workers as many as five million jobs over the last decade by making it more difficult for U.S. exporters to compete in other countries and by subsidizing their exports. Further, the Economic Policy Institute found that ending currency manipulation could reduce the U.S. trade deficit by as much as $500 billion within three years, increase GDP by as much as $720 billion, and create as many as 5.8 million U.S. jobs, all while reducing the federal budget deficit by as much as $266 billion. Sen. Chuck Schumer, D-N.Y., asserted that enactment of “a tough currency bill” like this one is therefore necessary for Congress “to even consider passing a free trade agreement with Asian countries.”

Nicole Bivens Collinson, president of international trade and government relations for Sandler, Travis & Rosenberg, P.A., said prospects for congressional approval of currency manipulation legislation could be better this year despite the fact that the White House opposes it. Currency bills introduced in previous years were primarily supported by Democrats, Collinson noted, and what little Republican backing the bills had was subsequently batted down by leadership. This time, however, the bills have support from both Republicans and Democrats, and in the Senate six of the ten co-sponsors of S. 433 are members of the Finance Committee that oversees trade policy. In addition, Collinson said, considering the growing momentum on trade issues driven in large part by the impending conclusion of the TPP negotiations, a currency manipulation bill could be used as leverage to secure additional votes in favor of trade promotion authority.

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