Recent Calls in the EU To Address Chinese Currency Undervaluation

An important element of the piece by Sander Tordoir and Brad Setser that I talked about in my last post was their argument that the EU should address Chinese currency undervaluation. As they put it:

China benefits from an undervalued exchange rate. A country running large current account surpluses would normally see its currency appreciate as it repatriates the foreign exchange earnings into domestic currency. In turn, this would curb Chinese exports and increase demand for imports. Instead, China’s currency fell as China’s central bank cut rates to offset the property downturn and guided the currency down (Chart 4a). Once pressure from the rising trade surplus meant the renminbi would rise, Chinese state banks – likely under the guidance from the central bank – bought dollars, at times heavily, to resist the currency’s appreciation (Chart 4b). The IMF estimates the renminbi may now be undervalued by 16 per cent.

Along the same lines, Brad and Shahin Vallée had a piece in Foreign Affairs on "How China’s Currency Manipulation Is Warping the World Economy." And the Economist tells us that "China’s currency is undervalued by between 15% and 30%, making its exports cheaper."

This view has been getting some traction with government officials. EU Parliament International Trade Committee Chair Bernd Lange recently made the following argument:

... the undervaluation of the Chinese currency must be addressed. The fixed exchange rate has resulted in an undervaluation of between 20 and 40%, which, alongside other unfair measures, also gives China a significant competitive advantage. The EU must find a way to address this. First and foremost, of course, is dialogue with Chinese partners. However, there can also be joint actions with other countries, particularly Japan and Korea, which are also severely affected by the undervaluation. As a last resort, the EU could consider imposing countervailing duties.

And Finbarr Bermingham of the South China Morning Post reports that "German Chancellor Friedrich Merz signalled a major shift in Berlin’s economic relations with Beijing on Friday, saying the Chinese currency was undervalued by 30 per cent, well above the International Monetary Fund’s estimate of 'about 16 per cent'." He also notes that "Merz pointed to the Plaza Accords as an example of how such matters could be addressed."

In considering how the EU should handle this, I thought it was worth mentioning that Chinese currency undervaluation was a big topic in the U.S. about 15-20 years ago, and there were lots of IELP blog posts about it. The "currency disputes" tag for the blog is here (with the earliest post back in December 2007!), listing all of the posts on this topic, but let me highlight some of the key ones:

• A number of experts weighing in on the consistency of China's currency policy with WTO rules. 
• Excerpts from a House Ways and Means Committee hearing on the China currency issue (additional details here).
• Excerpts from a CRS report on the WTO legal issues involved.
• Two posts about GATT Article XV:4.

So, for any Europeans trying to figure out what to do on the issue of currency undervaluation, it may be worth taking a look at previous thinking on how WTO rules might apply.

As far as I can tell, though, the European discussions do not involve the possibility of WTO complaints. This seems strange because the EU and China are both parties to the MPIA, so WTO dispute settlement still functions as between them. And the EU has been willing to bring complaints on other issues against China in recent years. Why not consider a complaint on currency undervaluation?

To be clear, the possible WTO complaints in this area all come with a good deal of uncertainty. The provisions are a bit vague on key points and the outcome of a dispute based on China's currency practices is unclear. Nevertheless, it seems to me that WTO obligations in this area should be part of the conversation.

If the approach taken is going to be something other than a WTO complaint, however, based on the statements above from government officials, it sounds as though there are several options under consideration: Dialogues, joints actions, and countervailing duties.

With dialogues, the question I would ask here is: How often do these approaches work to change a country's practices? There's a long history of these efforts, and I'm not sure how successful they have been, on currency or other policies. Would the circumstances here allow China to quietly make changes to the practices that are at issue? I don't have a good sense of this. Merz mentioned the Plaza Accord, and perhaps this could be one version of the outcome of a dialogue.

In addition, Lange talked about "joint actions" with other countries, but I'm not sure what those actions would involve. Maybe this is the better Plaza Accord example?

And then on countervailing duties, as with dialogues, it is worth considering whether this is likely to lead to changes in government practices. I'm not sure CVDs have a great track record in this regard. It's also worth considering how much effort would have to go into defending the CVDs in litigation. It's an open question whether CVDs as a response to an undervalued currency are allowed under either WTO law or EU law, and the EU would likely to have to put in a good deal of effort defending its actions in both WTO dispute settlement and EU courts.