(From The Washington Post, September 1, 2010, available at: http://www.washingtonpost.com/wpdyn/content/article/2010/08/31/AR2010083106226.html
It is indeed a difficult position for U.S. government in this situation to response appropriate measures against the China’s currency policy. If the Yuan is undervalued against the dollar, there are likely to be both benefits and costs to the U.S. economy. In one hand, it would mean that various goods imported from China than they would be if the Yuan were market determined. This lowers prices for U.S consumers especially for lower middle class Americans. This also benefits U.S. firms that use imported parts in their production. By using lower price parts in their production makes such firms more competitive. On the other hand, the costs would be that lower priced goods from China may hurt U.S. industries that compete with those products, reducing their production and employment. In addition to that, an undervalued China’s currency makes U.S. exports to China more expensive that cause the reduction of the level of U.S. exports to China and the job opportunities for U.S workers in those sectors. However in the long run, trade can effect only the employment composition, but not its overall level. Thus, urging China to appreciate its currency would likely only benefit some U.S. economic sectors but cost others.
What would the U.S do to deal with the situation? There are a number of options for U.S. to put more pressure on China to make further reforms to its currency exchange rate policy. One of them is by using the WTO’s Dispute Settlement mechanism. Some critics have alleged that China’s currency policy violates a few of WTO rules namely Article XV of the GATT agreement dealing with exchange agreements, the WTO Agreements on Subsidies and Countervailing Measures, and/or Article XXIII of GATT dealing with nullification or impairment of the benefits of a trade agreement. Therefore, U.S. could file a case before the WTO’s Dispute Settlement Body against China’s currency peg.
The advantage of using the WTO to solve this issue is that it involves a multilateral, rather than unilateral approach. However, there is of course no guarantee that the WTO would rule in favor of the U.S. In that case, U.S. might want to impose unilateral trade sanctions under Section 301 of the 1974 Trade Act, amended, a provision in U.S. trade law that gives the U.S. Trade Representative (USTR) authority to respond to foreign trade barriers, including violations of U.S. rights under the trade agreement, and unreasonable or discriminatory practices that burden or restrict U.S. commerce. In the case of U.S. imposes Section 301, China might file a WTO case against the United States, and again, this might put U.S. in difficult position to prove whether the China currency policy indeed violates abovementioned WTO rules.
Another option that is provided under U.S. trade remedy laws relating to special provisions that were part of China’s accession to the WTO. Under the WTO accession agreement, China agreed to, among others, accept of a 12-year safeguard mechanism in cases where a surge in Chinese exports cause or threaten to cause market disruption to domestic producers (China- specific safeguard). In this case, U.S. could invoke safeguard provisions under Sections 421-423 of its 1974 Trade Act, as amended, to impose restrictions on imported Chinese products that have increased in such quantities that have caused, or threaten to cause, market disruption to U.S. domestic producers. This option would be used to provide temporary relief for U.S. domestic firms that have been negatively affected by a surge of Chinese exports to the United Sates.
By Daniar R. Natakusumah
Source:
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