The House Ways and Means Committee is holding a hearing today and tomorrow on China's exchange rate policy. There are a bunch of witness statements available, and you can watch it all live. Here's a short excerpt from John Magnus' testimony, focusing on the export contingency part:
In China’s case, there is a direct transaction between the government and the exporter who has brought home dollars. The exchange occurs at a government window. That transaction -- indeed, any swap of one thing and another, between a company and a government -- is a financial contribution. If the economists are to be believed, and the administered exchange rate is wrong in the direction of meaningful undervaluation of the RMB compared to what market forces would produce, then that financial contribution confers a benefit. That means you have a subsidy. And that subsidy is plainly export contingent, as most of it goes to companies that can only get it by exporting. Indeed, this subsidy falls in the innermost core of the export-contingent category, on which no one I know of disagrees, in that it gives a producer a compelling reason to prefer selling a marginal unit of output abroad rather than at home.
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The Import Administration seems to have no trouble spotting a subsidy (financial contribution conferring a benefit) here, but is apparently in some doubt about whether that subsidy is export-contingent or otherwise specific. This would be laughable if the error’s consequences were not so serious. It is true that tourists and investors get the same unified exchange rate as Chinese exporters, and thus get the subsidy too. That does not prevent the subsidy from being export-contingent, as we learned not long ago in the WTO litigation over the Extra-Territorial Income (ETI) measure which temporarily succeeded to the Foreign Sales Corporation (FSC) provisions in U.S. tax law. As in that case, exporters are a discrete class of beneficiaries, and their access to the subsidy depends entirely on exporting. Beyond denying particular U.S. industries the full measure of CVD relief (or at least the full CVD investigation) they deserve, the agency’s error has broader implications. If the crabbed notion of export contingency espoused by the Import Administration here wins any sort of broad acceptance, then the “prohibited” category of subsidies -- the one part of the multilateral anti-subsidy regime that has worked reasonably well over the years -- will be reduced to something very much like a nullity. An incalculable amount of U.S. political capital, expended over decades, will have been wasted. A specific example: if the Import Administration is right in what it is saying about export contingency in this matter, then the USTR lawyers are wrong in what they are saying about export contingency in the current Airbus litigation. The tie between subsidy receipt and exportation is even clearer in the China currency case than in the case of royalty-based launch aid.
He notes that the measure here "falls in the innermost core of the export-contingent category, on which no one I know of disagrees, in that it gives a producer a compelling reason to prefer selling a marginal unit of output abroad rather than at home." I have two questions about this: Does anyone disagree that this is what the measure does? And does anyone disagree that there is a violation in these circumstances?
He also makes reference to the Aircraft litigation. It will be interesting to see where the export subsidy standard ends up after both cases are finished, and what the implications are for the currency undervaluation issue.
