New US yuan act fails to clear crucial WTO trade-law hurdle
Chinese officials are up in arms following US politicians' latest attempt to punish Beijing for its currency policy.
They can calm down. The Currency Exchange Rate Oversight Reform Act of 2011 passed by the US Senate two weeks ago is not only economically misguided, it suffers from a fatal legal flaw, according to the World Trade Organisation's (WTO) former top appeal judge.
If enacted, the new law would require the US government to slap countervailing duties on imports from countries that deliberately undervalue their currencies to secure themselves an unfair trade advantage.
China is not mentioned, but it is the obvious target. The bill's supporters believe that under international trade laws, China's persistent interventions in the foreign exchange market to hold down the value of the yuan amount to an illegal subsidy for its exporters. That subsidy, they say, has cost countless American workers their jobs and entitles the US to impose punitive trade tariffs on imports from China.
James Bacchus disagrees. And with a resume that includes two years as special assistant to the US Trade Representative, four years in the US Congress and two terms as chairman of the WTO's appeal court, he is well placed to know what he's talking about.
Bacchus points out that although economists might argue that Beijing's currency policy provides an unfair advantage to China's exporters, it fails the legal smell test of what is or is not a subsidy.
The WTO's Agreement on Subsidies and Countervailing Measures is quite clear in its definition of what constitutes an illegal subsidy - a definition, by the way, that was insisted upon by US trade negotiators.
Firstly, there must be a financial contribution from a government body. Secondly, that contribution must provide an advantage in the marketplace. And thirdly, that advantage must be limited to a specific industry or industries.
Bacchus argues that China's undervaluation of the yuan clearly fails to meet this definition of a subsidy. There is no financial contribution from a government body, and if there is an advantage it benefits all industries rather than specific beneficiaries.
He dismisses out of hand the argument that the purchases of foreign currency made by the People's Bank of China in the course of its interventions can be considered an illegal financial contribution from the Chinese government.
Bacchus points out that the WTO agreement is quite specific in its wording. A financial contribution must consist either of a direct payment of funds, foregone tax revenues or the provision by the government of goods and services other than general infrastructure.
However you look at it, he says, China's currency interventions simply don't meet this definition.
'My former colleagues on the WTO's Appellate Body might come to a different conclusion,' he says, 'But I doubt it.'
As a result, Bacchus argues that the WTO's top court would almost certainly uphold any Chinese appeal against punitive tariffs on its exports imposed by the US under the new legislation.
That would entitle China to slap countervailing duties on US imports - duties that would definitely threaten US jobs.
Yesterday's Monitor column headlined 'HK banks' mainland exposure may not be as risky as feared' quoted at length from a special report from Fitch Ratings which warned that Hong Kong banks could face 'negative ratings actions' because of the rapid growth of their lending to mainland companies.
Fitch has asked me to point out that although its report cited Bank of East Asia's exposure to the mainland as an example of the potential risks being run by Hong Kong banks, BEA is not among the 10 Hong Kong banks for which the agency currently provides a credit rating, and therefore is in no danger of a Fitch downgrade.
There, I hope that clears that one up. I apologise for any confusion that may have been caused.