	Background

In recent years, Congress has been increasingly concerned that other countries—China, Japan, Taiwan and Korea in particular—are manipulating the value of their national currencies in ways injurious to the U.S. economy. A spate of legislation was introduced in the 109 th Congress seeking to pressure foreign countries to revalue their currencies or seeking changes in the international financial system—particularly changes in the International Monetary Fund (IMF)—that would help accomplish that end. This is not a new issue. It also directs the Secretary of the Treasury to analyze the foreign exchange rate policies of foreign countries, in consultation with the IMF, to determine whether they are manipulating the exchange rate between their currency and the US dollar for the purpose of preventing effective adjustment or gaining unfair trade advantage. When this is found, the Secretary must undertake negotiations in the IMF or bilaterally for the purpose of eliminating this situation. The IMF charter gives the international agency no effective tools, however, to help it enforce its oversight responsibilities or its judgment whether countries are meeting their Article IV responsibilities. Previously, most of the IMF's surveillance over countries' exchange policies occurred during the Fund's annual bilateral discussions with its member countries about their domestic and international economic policies. These discussions are mandated by Article IV and called "Article IV consultations." A report to the IMF Executive Board is planned for early 2007. At least 15 other bills were introduced in the 109 th Congress which sought to indicate specific ways the United States might pursue that objective. Several would authorize the imposition of countervailing duties or special tariffs on goods imported from countries with undervalued currencies unless those currencies have risen to a level at or near their appropriate fair market rate. Others would change the reporting requirement in the 1988 Exchange Rates Act in ways that would make it more likely that the Treasury Department would find that countries are manipulating their currencies. They sought, in effect, to "level the playing field" by raising the price of those goods sold in the United States by an amount equal to the presumed undervaluation of the country's currency. Many of these initiatives would contravene international trade rules or WTO guidelines. Other legislation also addressed these issues. On the Senate side, S. 377 , introduced by Senator Lieberman, would have required the President to begin multilateral and bilateral negotiations with the countries which engage most egregiously in currency manipulation, to report to Congress on the extent of the problem, and to institute proceedings under the provisions of the Trade Act of 1974 dealing with countervailing duties, dumping and market disruption if those countries do not stop manipulating the value of their currency within 90 days. To make such a determination under the 1988 Act, the Secretary would be required to find that (1) China was manipulating its exchange rate for the purpose of gaining an unfair trade advantage or preventing effective balance of payments adjustment and (2) it had a material global current account surplus and significant bilateral trade surplus with the United States. No specific countries are mentioned and the provisions of the bill would apply to all countries which are found by the IMF to be manipulating the value of their currency to the detriment of the United States and other countries. These consultations should seek ways of remedying, in a transparent manner, situations where countries' interventions in currency markets have results that are contrary to the Articles of Agreement of the IMF and have negative effects on the currencies of other countries and on the world economy.
In recent years, Congress has been increasingly concerned that other countries—China, Japan, Taiwan and Korea in particular—are manipulating the value of their national currencies in ways injurious to the U.S. economy. A spate of legislation was introduced in the 109th Congress seeking to pressure foreign countries to revalue their currencies or seeking changes in the international financial system—particularly changes in the International Monetary Fund (IMF)—that would help accomplish that end. Similar bills are likely to be introduced in the 110th Congress.
Current law on this topic is defined by the Exchange Rates and International Economic Policy Act of 1988. Among other things, it requires the Secretary of the Treasury to analyze the foreign exchange rate policies of other countries, in consultation with the International Monetary Fund, to see if foreign countries are manipulating the value of their currency for the purpose of gaining unfair trade advantage or preventing effective balance of payments adjustment. When this is found, the Secretary is required to seek negotiations with the offending country multilaterally or bilaterally for the purpose of ending that situation. In recent years, many have thought that China is manipulating its currency for these purposes. The Treasury Secretary has not made a finding to this effect, however, on grounds that China does not meet all the criteria specified in the 1988 Act and that Chinese authorities have given assurances that they will raise the value of their currency.
The IMF Articles of Agreement specify, in Article IV, that countries may not manipulate their currency for the purpose of gaining trade advantage or for preventing balance of payments adjustment. The IMF is responsible for exercising "firm surveillance" over countries' exchange rate policies and for assuring their compliance with the Article IV rule. The IMF has no effective tools other than persuasion, however, with which to enforce its oversight responsibility. Previously, most of the IMF's surveillance was done bilaterally through its annual consultations with member countries. In 2006, the Fund instituted a new program of multilateral consultations and it brought together China, Japan, the United States, Saudi Arabia and Euro area representatives to discuss the major financial and trade imbalances currently affecting the world economy. A report and possible recommendations are to be received in early 2007.
Congress has sought in various ways to address trade problems which many believe are exacerbated by undervalued foreign currencies. Several bills were introduced in 2005 and 2006 to establish countervailing duties or special tariffs on goods entering the United States from countries with undervalued currencies. These are intended to raise the domestic price of those goods to levels that would prevail if those currencies were valued at their appropriate level. Many of these initiatives might violate international trade rules, however. Advocates argue that the United States must take action to protect itself regardless. Other legislation has sought to require the Secretary of the Treasury to make a finding that China and other countries are currency manipulators. Another group of bills proposed that the United States should pursue reforms in the IMF that would give that international agency more authority to enforce Article IV and to stop countries from manipulating their currency. Many of the sponsors of the bills discussed in this report are reportedly planning to introduce similar bills in the 110th Congress. This report will be updated as events warrant.