The dispute over Chinese exchange rate policy within the United States has generated a series of legislative proposals to restrict the discretion of the US Treasury Department in determining currency manipulation and to reform the department's accountability to the Congress.

This study reviews the Treasury's reports to the Congress on exchange rate policy introduced by the 1988 trade act and Congress's treatment of them. It finds that the accountability process has often not worked well in practice: The coverage of the reports has sometimes been incomplete and not provided a sufficient basis for congressional oversight. Nor has Congress always performed its own role well, holding hearings on less than half of the reports and overlooking important substantive issues.

Several recommendations can improve guidance to the Treasury, standards for assessment, and congressional oversight. These include (1) refining the criteria used to determine currency manipulation and writing them into law; (2) explicitly harnessing US decisions on manipulation to the IMF's rules on exchange rates; (3) clarifying the general objectives of US exchange rate policy; (4) reaffirming the mandate to seek international macroeconomic and currency cooperation; and (5) institutionalizing multicommittee oversight of exchange rate policy by Congress.

As they develop legislation targeting manipulation, furthermore, legislators should not lose sight of the broader purposes of the 1988 act relating to the effective valuation of the dollar, the current account, and their ramifications for the US economy overall.

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Paperback: 140 pages
Publisher: Peterson Institute for International Economics; 1 edition (June 12, 2008)
Language: English
ISBN-10: 0881324191
ISBN-13: 978-0881324198

C. Randall Henning, a visiting fellow at the Peterson Institute, serves on the faculty of the School of International Service, American University. Henning specializes in the politics and institutions of international economic relations, international and comparative political economy, and regional integration. His research work focuses on international monetary policy, European monetary integration, macroeconomic policy coordination, finance G-7 and G-8 summit cooperation, and regional cooperation in East Asia.

Henning is the author of East Asian Financial Cooperation (2002), The Exchange Stabilization Fund: Slush Money or War Chest? (1999), Cooperating with Europe's Monetary Union (1997), and Currencies and Politics in the United States, Germany, and Japan (1994).

INTRODUCTION

Exchange rate policy has become a particularly important issue for the US Congress in recent years. The issue’s return to political prominence, a periodic feature of US international economic policies, has in this instance been driven largely by objections to China’s exchange rate policy.

Competition from China has placed economic pressure on US producers, who have complained to members of Congress that the Chinese currency, the renminbi, is substantially undervalued. Meanwhile, the US Treasury Department has refused to cite China in its semiannual reports to Congress as a country that “manipulates” its currency, despite unprecedented amounts of foreign exchange intervention by Chinese authorities to restrain their currency’s appreciation.

The Secretary of the Treasury, Henry M. Paulson, Jr. prefers a diplomatic approach to China in the form of the Strategic Economic Dialogue. Frustrated by what they perceive to be the modest results of these discussions, several members of Congress have proposed legislation that, if adopted, would reform the process by which Treasury identifies and responds to currency manipulation and could impose trade restrictions to compensate for undervaluation.

The stakes are raised by the applicability of such provisions to countries beyond China whose economic strategies have also included substantial undervaluation of their currencies.

The relationship between Congress and the executive, in particular the Treasury Department, lies at the heart of the US response to China’s economic policies and the broader challenge of international adjustment.

The Exchange Rates and International Economic Policy Coordination Act of 1988, an important component of the large omnibus trade act that year, partly defined this relationship with respect to exchange rates. ...

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