Imagine it's Jan. 21, 2013, the day after Mitt Romney's inauguration. He arrives at the Oval Office for his first full day as president, and makes good on a major campaign promise: He signs an executive order declaring China a currency manipulator.
What happens next? Not a whole lot. In fact, Romney's act of bravado, should he win the election, could wind up disappointing supporters who voted for him because they expected him to come down hard on China.
The law authorizing the currency manipulation label, the Omnibus Trade and Competitiveness Act of 1988, calls on the U.S. Treasury secretary to analyze the exchange-rate policies of foreign countries, in consultation with the International Monetary Fund. The act says the secretary should consider whether a country is artificially setting its exchange rates. If it is, the secretary then must determine if a country is preventing "effective balance of payments adjustments" or is gaining an "unfair competitive advantage in international trade."
That's part one. If such manipulation is conducted by a country with a large current-account surplus with the U.S., the law then directs the Treasury secretary to "initiate negotiations" on an expedited basis, either through the IMF or directly, "for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange between their currencies and the United States dollar to permit effective balance of payments adjustments and to eliminate the unfair advantage."
There is no doubt that China would meet the tests in the law. The U.S. ran a $295.4 billion trade deficit with China last year, an 8.2 percent increase above the 2010 level. Allowing the yuan to appreciate would make Chinese goods more expensive for U.S. consumers, reducing U.S. imports of Chinese merchandise. But how would the Treasury secretary "ensure" China adjusts its currency accordingly, when China holds almost $1 trillion in U.S. government debt? The answer: It could not.
What little leverage the U.S. has over China will disappear if Romney approves the manipulator moniker, an act that China will interpret as an attack. This helps explain why, under President Barack Obama, the U.S. has refrained from doing so. Instead, Obama and Treasury Secretary Timothy Geithner have opted to negotiate, mostly behind the scenes, with China. The strategy appears to be working. Since Obama took office, the yuan has appreciated about 11 percent against the dollar.
Congress gave the Treasury an easy out. The trade act says the secretary isn't required to conduct exchange-rate negotiations if such talks "would have a serious detrimental impact on vital national economic and security interests." In that case, all the secretary must do is inform the chairman and the ranking members of the House Financial Services Committee and the Senate Banking Committee. And presumably they'll use issue reports and hold hearings, and possibly adopt yet more legislation Take that, China.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)
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