What Happens After You Label a Country a Currency Manipulator?

In Tuesday night’s presidential debate, Republican nominee Mitt Romney repeated his pledge to get tough on China’s currency policies. "[T]he president has a regular opportunity to label them as a currency manipulator but refuses to do so," he said. "On day one, I will label China a currency manipulator, which will allow me as president to be able to put in place, if necessary, tariffs where I believe that they are taking unfair advantage of our manufacturers." There is widespread agreement in Washington that Chinese currency policies are harmful to the U.S. economy. Some economists have estimated that they could be costing the United States as many as one million jobs. But what would actually happen if Romney made such a declaration?

Technically, not a whole lot. Under legislation passed in 1988, the secretary of the Treasury is required to "analyze on an annual basis the exchange rate policies of foreign countries … and consider whether countries manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade."

If the Treasury finds that manipulation is taken place, the law requires them to "take action to initiate negotiations … for the purpose of ensuring that such countries regularly and promptly adjust the rate of exchange." As a number of experts have pointed out, the United States and China already are in negotiations over China’s exchange rate, so it’s not clear what the label would actually change.

Treasury has labeled three countries as currency manipulators in the past: Japan in 1988, Taiwan in 1988 and again in 1992, and China from 1992 until 1994. According to a report by the Government Accountability Office, all three countries made "substantial reforms to their foreign exchange regimes" after the negotiations, and were removed from the list after their "currencies appreciated and external trade balances declined significantly." However, the U.S. trade deficit with China — a much larger trading partner than the other countries — has increased every year since 1988. Evidently, the labeling in the early 1990s didn’t do the trick.

Treasury’s 2012 report noted that "underlying factors that distort China’s economy and constrain global demand growth remain" but gave China some credit for "gradually allowing necessary external adjustments to take place" in its exchange rate. According to the report, the RMB has appreciated by 8 percent since 2010, when Beijing moved it off its peg to the dollar. Treasury would like to see it increase more, but for the time being, doesn’t feel the manipulator label is appropriate.

Contrary to Romney’s suggestion, the law doesn’t actually give the president authority to immediately impose punitive tariffs on manipulators, and the Economic Policy Institute has suggested that such a move would violate U.S. commitments under the World Trade Organization, which require that trade spates be worked out through the organization’s the dispute settlement mechanism — potentially a years-long process.

Romney’s move might carry more firepower if Congress were to pass the Currency Exchange Rate Oversight Reform Act of 2011, a bill that would deem currency manipulation a form of subsidy and require the Commerce Department to consider what tariffs could be issued in the response. Perhaps ironically for Romney, the bill, which has already passed overwhelmingly in the Senate, was sponsored by Ohio Democrat Sherrod Brown — one of the Senate’s most liberal members — but faces opposition in the House from Republican leaders John Boehner and Eric Cantor.

Of course, just because the legal ramifications of the manipulator label are unclear doesn’t mean the political consequences wouldn’t be major. Romney’s comments last night were enough to prompt threats of a currency war in China’s state media. Such a move on "day one" of the Romney administration would certainly send a message — but more of a symbolic than a legal one.