The Exchange Rates and International Economic Policy Coordination Act of 1988 ("The 1988 Act") mandates the US Secretary of Treasury to give twice-yearly a report to Congress on foreign exchange rate policies of foreign nations that trade with the US and mandates that the US Treasury Department identify any country which is a currency manipulator.
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The release of this report should answer the questions raised when White House spokesman Robert Gibbs said shortly after President Obama’s inauguration that the new administration would determine "in the spring" whether China is a currency manipulator. The last report issued under "The 1988 Act" was in December 10, 2008. At that time, the Bush administration spoke gently: "Treasury continues to use every opportunity to impress upon Chinese authorities the importance and urgency of exchange rate reform." The release of a new Obama administration report should be less gentle.
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Will President Obama stand by his endorsement of the Fair Currency Act when he was a senator? Are American policy makers walking into Mission Impossible quicksand? How can the Obama administration expect the Chinese to keep buying US Treasury bonds and not have right to stabilize the currency market which could be a Waterloo for China if it allowed free floating policies?
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Under President Bush, China was never labeled a "currency manipulator." The Republican strategy was designed to give US Secretary of Treasury Hank Paulson quiet time to negotiate this issue with the Chinese through the Strategic Economic Dialogue platform. However, the dynamics in Congress are different now due to pressures from the economic slowdown. This "quiet" diplomacy technique has been thrown out the window and is no longer swept under the rug quietly. This conclusion is based on US Treasury Secretary Geithner’s dead-centered attack against China’s exchange rates during his confirmation hearing.
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Although Fair Currency Act endorsed by Senator Obama bill did not pass, it represented protectionist sentiment as it was designed to impose duties on products from a nonmarket economy country that have been provided a subsidy. Included in the definition of subsidy was exchange-rate undervaluation. Obama’s proposed act was to amend the Trade Act of 1974 and specifically target China. The proposed act was to amend "The 1988 Act" so that the Secretary of Treasury would initiate bilateral corrective negotiations with countries with misaligned currencies.
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For example, top Democrats from the House Ways and Means Committee have in the past few days signed a letter to Obama, urging him to file a case at the World Trade Organization (WTO) against China over currency policy. The letter was released one day before the US Trade Representative’s office released its annual reports on foreign trade barriers. This report said "China will need to further institutionalize market-oriented reforms and eliminate mechanisms that allow government officials to intervene in the Chinese economy in a manner that is inconsistent with market principles."
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In the past, they protested to Republican George Bush but were ignored. Will President Obama and Secretary Geithner through the mandates of "The 1988 Act" become more vocal than President Bush? Based on Geithner’s calling China a "currency manipulator," the tables in Washington now favor Congressional leaders who are responding to votersâ€?pressure caused by the economic slowdown who want a heads-on, adversarial confrontation with China? Â
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The US Treasury’s mandated report will face the following conflicting forces.
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When US Secretary of State Clinton made her first foreign trip to China, she abandoned former US Secretary of Treasury Paulson’s focus on exchange rate policy as his cornerstone of the Strategic Economic Dialogues. Upon return to Washington, she sounded like a Wall Street bond salesperson when she said she tried to convince China "to keep buying US Treasury bonds" as their fears over the safety of US bonds were ill advised.
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If the Obama administration encourages the Chinese government to keep rolling their dollars into US Treasury bonds, then how can the Chinese do this without stabilizing the exchange rates? In other words, if China let the exchange rate float to whatever the market will bear, it could face a blood bath with its dollar holdings. So can China and the US both obtain their primary objectives?
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China wants stability in the exchange rates to protect its investments. The US wants to money to keep flowing in. If the administration does pursue an adversarial confrontation with China over "manipulation," can it realistically expect an uninterrupted flow of funds into US Treasury bonds? Or will China migrate towards alternative reserve instruments?
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Geithner’s written testimony said clearly that: "The new economic team will forge an integrated strategy on how best to achieve currency realignment in the current economic environment. "
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The economic slowdown has stimulated voters and pressure groups to call on Congress to protect their jobs and abandon laissez-faire capitalism as the optimum method to drive prosperity. China is on the cutting edge of this debate as the growth in foreign exchange reserves is interpreted as mercantilism which encourages exports and discourages imports through the use of tariffs, subsidies and lower exchange rates which make exports cheaper on world markets.
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The report mandated by "The 1988 Act" forces the Obama administration away from a diplomatic position. If the administration becomes officially non neutral, will it confirm an adversarial policy shift that was initiated during US Secretary Geithner’s Senate affirmation hearings signaled in January?
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There are additional Congressional leaders to those signatures on the House and Ways Committee Democrat days-old letter to President Obama., advocating punitive measures against China. The Senate Banking Committee Chairman, Chris Dobb has reacted vocally to past reports mandated by "The 1988 Act." He feels the exchange rate policies of China are hurting American workers. Dobb calls on tougher action from the International Monetary Fund (IMF).
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Both Senator Dobb (Democrat) and Senator Shelby (Republican), Ranking member of the Senate Banking Committee have introduced a Currency Reform and Financial Markets Act to address China’s intervention in the exchange rate market to keep the Yuan undervalued and therefore contribute to the loss of millions of American manufacturing jobs and record-high U.S. trade deficits.
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Senator Charles Schumer (New York) and Senator Lindsey Graham (from South Carolina, hurt by textile imports) have long promised to bring up a China currency bill if China does not revalue the Yuan. These two senators pursued a bill to apply a tariff to all Chinese imports. They joined with Senators Max Baucus, Chairman of the US Senate Committee on Finance and Senator Chuck Grassley on a bill that passed the Finance Committee 20-1 but never got to the floor for action. Their proposal to place a 27.5 percent tariff on all Chinese imports until China floats its currency within six months of enactment was fought by retail and consumer groups that wanted to keep the cost of imported goods as low as possible.
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The same blocking interfered with Senator Jim Bunning from Kentucky who has said: "We don’t need a report to tell us that China needs to get with the program and live up to its obligations under the WTO and I would expect better from the Treasury Department in holding China’s feet to the fire."
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Will President Obama stand by his endorsement when he was a senator of the Fair Currency Act? How can the Obama administration expect the Chinese to keep buying US Treasury bonds and not have right to stabilize the currency market which could be a Waterloo for China if it allowed free market forces to operate? The answers to these questions should be answered imminently.
(Thomas Wilkins, CFA, is Chief Executive Manager of Joseph Jekyll Advisers LLC.ï¼?/span>