Commerce Dept. Refuses to Investigate Chinese Currency Policies: Good News, Bad News

Today's big trade news is that the U.S. Department of Commerce has formally refused to initiate an investigation of whether China's currency policies provide illegal (i.e., "countervailable") subsidies to Chinese exporters of aluminum and (in a separate case) coated paper.  Although this decision was pretty much expected after last week's, err, rather timely announcement that DOC was implementing a myriad of new policies that would tend to increase duties against China and other "non-market economies," today's currency announcement is still a good and welcome development.

But let's not pop the champagne corks just yet, ok?

Now, before we get to all that, let's start with a little background on the cases, courtesy of Reuters (lots more here, if you're interested):

The U.S. Commerce Department, in a decision that could provoke congressional action, said on Tuesday it did not see strong enough legal grounds to investigate if China's currency practices subsidize its exports.

It made the decision in separate trade cases involving imports of coated paper and aluminum "extrusions" from China.

In both cases, U.S. petitioners argued China effectively subsidized exports by keeping its currency at an artificially low value to the dollar and asked the department to impose countervailing duties in response....

Many U.S. manufacturers and lawmakers believe China's currency is undervalued by as much as 40 percent, which they say gives Chinese companies an unfair trade advantage....

The United Steelworkers union and aluminum extrusion producers in nine states asked the Commerce Department in April to impose countervailing duties over China's yuan as part of a broader case alleging a long list of government subsidies and unfair pricing practices.

Since then, agency officials had been mulling whether they had strong legal grounds to launch a formal investigation into the charge China effectively subsidizes its exports by keeping its currency undervalued against the dollar.

Under both U.S. and WTO law, a subsidy is defined as a financial contribution from the government which provides a benefit to a specific industry.

In the aluminum case and a separate one involving coated paper, U.S. petitioners have argued the benefits that come from the Chinese government controlling its currency are specific to Chinese exporters since they account for about 70 percent of the country's foreign exchange transactions.

And here's the key part of DOC's announcement:

[T]he Department of Commerce announced that two allegations before it that China’s currency practices constitute an unfair subsidy under U.S. countervailing duty law failed to meet the requirements for the initiation of an investigation. The currency allegations under review were made in the context of both the aluminum extrusions case as well as a CVD investigation of coated paper from China.

“Today’s currency decision was based on a careful evaluation of the specific legal arguments and evidence put before the department, in relation to the standards for the initiation of an investigation under the CVD law,” Deputy Assistant Secretary for Import Administration Ronald K. Lorentzen said. “In these two cases, the Department has determined not to investigate whether the alleged undervaluation of China’s currency, the RMB or yuan, is a countervailable subsidy, because the allegations made by domestic producers do not meet the statutory standard for initiating an investigation under the requirement that benefits provided under China’s unified foreign exchange regime be specific to the enterprise or industries being investigated.”

The DOC source documents are available here, here and here.  I'll try to avoid getting into the weeds too much here, but the agency rejected the petitioners' subsidy allegation because they failed to prove that the China's currency policy was either a prohibited export subsidy or a domestic subsidy that was specific to a particular company, industry or group of companies or industries.  On the latter point, DOC importantly found that:

China’s currency regime is broadly available across the Chinese economy to all firms that exchange foreign currency and thus does not single out any enterprise, industry or group thereof. Indeed, the exchange system of China is “unified,” meaning that there is only one “price” for every user. Given that all enterprises and individuals in China that convert allegedly overvalued foreign currencies into RMB are recipients of the alleged subsidy, and in light of the findings in previous cases noted above, Petitioners have not sufficiently supported their claim that the undervaluation of the RMB is specific to any enterprise, industry, or group thereof.

This, of course, makes a lot of sense and follows WTO rules, but you never know what zany legal argument might just work in these investigations, so it's still good to read in the Federal Register.  Also interestingly, DOC punts on whether petitioners proved that a "financial contribution" exists - another major point of contention - but I guess we'll have to leave that issue for another time.

Finally, and as if to eliminate any doubt that last week's industry/union-friendly decision to "tweak" several policies with respect to US trade remedies law and non-market economies was a down payment on today's news, the very next paragraph of the press release provides the "hey-unions-don't-get-too-mad-remember-last-week" conclusion:

In addition to today’s decisions, Commerce last week announced a package of 14 measures – especially focused on unfair import practices by non-market economies – that will strengthen trade enforcement and help keep U.S companies competitive. These steps support President Obama’s National Export Initiative (NEI), which aims to double exports in the next five years and support the creation of several million new jobs. The proposed changes came in response to U.S. Commerce Secretary Gary Locke’s call to survey the agency’s current trade remedy practices in order to determine how the department could improve the effectiveness of its existing enforcement tools.

That's about as subtle as Lady Gaga, I'd say.

Now let's hit the (pretty obvious) good news.  DOC's announcement is a victory for--

• American families and import-consuming companies.  Treating china's currency policy as a countervailable subsidy basically would have made every Chinese import "illegally subsidized" by the amount that RMB is found to be undervalued by DOC (maybe 40% or higher).  This would allow domestic producers and/or their unions to petition the government for the imposition of an essentially "automatic" 40% duty on any Chinese product and, if the US government agreed after a CVD investigation, that product - anything from Chinese steel and solar panels to food and clothing - would become that much more expensive in the US market.  Ouch.  Moreover, the mere threat of increased CVD cases against Chinese products - something this would almost certainly bring about - would likely have a chilling effect on Chinese exporters, as they pull back from the US market in order to shield themselves from future litigation and (maybe) duties.  Double ouch.

• American exporters.  Of course, no one would expect the Chinese government to take a change this important lying down.  And, if last year's Section 421 investigation against Chinese tires is any indication, the first group hit would be US exporters.  Now, I was always skeptical about export-led economic growth in the US, but this certainly wouldn't help matters.

• Free traders and US trade policy in general.  In the face of sagging poll numbers and intense pressure from some domestic corporations and labor unions, the Obama administration has (for the moment, at least) decided not to open an enormous can of worms and begin attacking China's currency policies through the blunt and easily-manipulated tool of the US countervailing duty (CVD) law.  Good for them.

Unfortunately, today's news is not all wine and roses, as there are still several reasons to be irked about the admininstration's latest moves.  First and foremost, there's still a long way to go in the Great China Currency Debate of 2010.  DOC's decision can be appealed, or the agency could change its mind at a later date (the standard for such a change is very low).  But more importantly, Congress - and its many China-bashing members - still gets a say on the issue, as the aforementioned Reuters article makes clear:

Senator Charles Schumer, a New York Democrat, who has been pushing for action on China's currency in the Senate, criticized the Commerce Department's "incomplete" decision.

"Once again, even when the opportunity is thrust into its hands, the administration has refused to take action," Schumer said.

The House of Representative Ways and Means Committee will hold a hearing Sept. 15 on the concern and is expected to hear testimony from lawmakers and groups supporting legislation to address the situation.

Schumer's up for re-election this November, so we all know that the big guy's gonna have a field day with DOC's news and demagogue the issue until election day (at least).  And with Ways and Means Chair Sander Levin (D-MI) venting about today's DOC decision, as well as the RMB's lack of movement over the summer, this controversial issue is far from settled on Capitol Hill.  Oh, and let's please not forget that the Treasury Department's semi-annual negotiating toolreport on foreign currency practices is due again in mid-October, so even the administration has another bite at the protectionist apple this year.

Second, today's decision is also not a sign that President Obama has suddenly become a staunch free trader because the move (apparently) came at a price - those 14 new "non-market economy" policies announced last week.  A real free trader wouldn't have needed to make such a "bargain," but I'm not even sure that a this was a best-that-can-be-expected outcome.  Considering that the currency-CVD issue is fraught with legal, political and foreign policy peril, one must question whether those 14 new policies - which will very likely lead to more and higher duties on Chinese imports and almost certainly won't appease anti-traders - were really a fair price to pay for DOC's currency decision.  As I mentioned above, the cost of an affirmative DOC decision was going to be pretty darn high in terms of corporate and foreign backlash and would have led to a litany of litigation in US courts and at the WTO.  (I've already pointed out how strong some of the WTO arguments against currency/CVD action are, and the Chief Judge of the US Court of International Trade - which would handle any appeal of DOC's decision - has just recently reiterated her immense displeasure with DOC's handling of the whole "China CVD" issue.  Furthermore, just carrying out the new policy might have been an unworkable nightmare for the agency.)  And Congress might still take the bull by the horns and force the issue this fall.

Thus, DOC's "big compromise" was really a decision to trade (i) a very public and very political battle over an dog of a legal issue that could've started a major trade conflict with China and might still be handled by a protectionist Congress for (ii) a myriad of less-publicized-but-still-pretty-effective anti-China measures.  Meanwhile, the administration can appear to be even-handed and even kinda pro-trade - something that might help a little with that pesky anti-business label that the President can't seem to shake.  In that light, the tradeoff's not nearly as cut-and-dry as it would first appear.

Now, I don't mean to imply that today's currency decision isn't a bigger deal than last week's "non-market economy" policy announcement.  It certainly is bigger, and it's heartening to see DOC do the right thing here, even if it took some, ahem, "tough choices" to make that happen.

But let's not tear a rotator cuff patting the administration on the back, ok?