House Passes Currency Legislation; Whoop-Dee-Freakin-Doo

Only moments before being forced to adjourn for its mid-term election recess, the US House of Representatives today overwhelmingly passed angry-sounding legislation targeting "unfair" currency practices by certain unnamed countries (yes, I'm looking right at you, Chinese Government).  Sigh.  I've already gone over at ridiculous length why any unilateral action against China's currency policies is a really dumb idea, and Cato's Dan Griswold today gives us a good summary of many of those reasons (citing, as always, oodles of good research by his team):

• A stronger Chinese currency will not put a major dent in our large bilateral trade deficit with China, certainly not any time in the near future. 

• The bilateral deficit with China and America’s overall trade deficit is not a drag on growth or a barrier to manufacturing exports and output. 

• U.S. manufacturing has not been decimated by trade. In fact it has been expanding as American producers move up the value chain to more sophisticated, high-tech products. 

• Provoking a needless trade spat with China will jeopardize the healthy export success American companies have enjoyed in China’s fast-growing market.

AEI's Phil Levy helpfully (and humorously) adds that the CBO scoring of this big legislation is, well, less than exciting:

The House bill itself has gone through changes to make it fit with global trade rules. Those changes affect key provisions like whether Commerce must do something, or whether Commerce may do something.  How can one parse all this to see what it means? The Congressional Budget Office can!  That’s their job—to look at impenetrable or improbable pieces of legislation, take them seriously, and cost them out impartially. That’s what they just did on the China bill.  They were not asked to figure out how many American jobs it would produce; they were asked about revenue and cost effects, but those should give us a clue.

How much money would these new tariffs deliver in the next year (fiscal 2011)? CBO says: $0.

So much for an effective and speedy remedy to the recession.

Perhaps it was expecting too much to have a complicated procedural change kick in so soon. What about the year after that, fiscal 2012? CBO says: $5 million.

A little perspective may be helpful here. In 2009, U.S. imports of goods from China were $297 billion. So we’re talking about an average tariff rate change of 0.0017 percent. That’s expected to triple in fiscal 2013, to $15 million in revenue, perhaps 0.005 percent.

Finally, the latest news out of the Senate is that consideration of, and a vote on, any currency legislation in that chamber is increasingly unlikely, even in a post-election "lame duck" session.  So if the bill won't help (and might hurt) the US economy, and it won't help the budget, and it's almost certainly going to die in the Senate, then why'd the House overwhelmingly pass the darn thing?

Three guesses (if you need a hint, just check my blog post from yesterday).  Or as Griswold eloquently put it:

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

Zing!  But hey, just for the sake of argument, let's assume that (i) the Senate comes back from the mid-term elections and just decides to go all damn-the-torpedoes-crazy and pass this bill; and (ii) President Obama signs the thing because he's overdue on some zany AFL-CIO payback.  Would this just-passed legislation, if it became law, cause a "trade war," like many people seem to think?

Quick answer: Nope.

Now, don't get me wrong, I think this whole episode is about as distasteful and embarrassing as they come (and considering we're talking about the US Congress here, that's saying a LOT).  And I'm particularly disappointed that President Obama has once again voted "present" on an important trade issue by not  preempting the House vote with a veto threat (and thus signalling the stupidity of aggressive unilateral chest-thumping).  But none of that changes the fact that, if it became law, this particular legislation probably won't have a big effect on things, at least in the near term.  I've already given several media interviews on this subject today (I'm so famous, I know), so here's the Cliff Notes version of what I told the journalists:

Assuming the bill becomes law as written, a large spike in CVD petitions against China is highly unlikely in the near term.  Instead, only a small number of “test case” petitions would likely be filed initially in order to determine how the Department of Commerce intends to exercise its initiation authority under the revised legal standard.  It's important to remember that the revised bill does not force the Department to initiate a CVD investigation based on alleged currency undervaluation. It only narrows the Department's discretion to refuse to initiate based on an allegation of export contingency and describes how the Department must calculate the subsidy benefit.  In short, if the administration wanted to not initiate a CVD investigation of alleged currency undervaluation, the door's still open for Commerce to do so, but only a little.  (And it's also important to remember that the US courts are highly deferential to technical administrative decisions like that.)

Should DOC decide to initiate CVD investigations in those test cases and then go on to find significant levels of subsidization, several more petitions would likely follow. However, even if DOC signals a broad and aggressive desire to go down this road, the number of new petitions will still be limited by (1) practical considerations surrounding the time and expense of filing a CVD petition; (2) the requirement of proving "material injury" at the International Trade Commission before the imposition of remedial tariffs (and that's typically the more difficult part of any AD/CVD investigation); and (3) the requirement that the petition be supported by a significant proportion of a domestic industry that manufactures a "like" product.  On the other hand, the new law would likely encourage industries with existing CVD orders on Chinese goods to request administrative reviews and submit new subsidy allegations to increase countervailing duties under those orders.

Or as I put it to the Wall Street Journal: "The change in language... gives the administration 'a way to say no' to U.S. industries and could signal to China that Washington isn't looking to declare a trade war over currency practices."  Now, it would intensify market uncertainty for Chinese exporters (and US consumers of Chinese goods), so it's not totally benign, but the bill's not the giant anti-China club that its supporters - and much of its opposition - claim it to be.

So be angry at (most of) Congress, folks.  They certainly deserve it for proving once again what misleading, self-interested jerks they are.  And be miffed with President Obama for once again putting politics over good policy.  And be embarrassed about the dismal state of American trade policy.

But cool it on the "trade war" talk, ok?

(Especially considering the undeniable fact that the Senate probably won't even touch the darn thing after the elections because all that great political motivation to be a raving protectionist will have just disappeared.)