The misaligned currency bill, or the "Currency Exchange Rate Oversight Reform [bill] of 2011,” passed by the Senate on October 11 (63-35) has drawn both praises and criticism. Some on the hill view the bill as a good political gesture in sending China a message. However, Republican Senator Jeff Sessions of Alabama, who co-sponsored the bill, states that other members view the act as, "Good politics, but [not] good policy.” President Obama expressed a disinterest in signing a bill that would be without weight and merely a gesture for domestic political gains. Business Week, Oct. 17th – Click Here for full story.
China has expressed a direct disinterest as well. China's Ministry of Foreign Affairs spokesperson Ma Zhaoxu criticized the bill as "doing good to nobody, and it will bring nothing but harm." He went on to say, "The passing of the act, under the pretext of so-called 'currency imbalance,' is a protectionist measure in nature, which severely violates the WTO rules." China implied that the bill would not help alleviate America's inherent economic problems. China's spokesperson went on to say, "Not only will it fail to solve the economic and employment problems in the U.S., but it will severely obstruct China-U.S. economic relations and trade." China emphasizes the stressed trade relationship created by the bill will have broad economic implications and may ultimately backfire the global economy's recent pickup. CNN MONEY, Oct 12th – Click Here for full story.
Both sides of the aisle are faced with a cross-party problem: Does the U.S. want to unilaterally protect "fair trade” and seemingly bite the hand that feeds us or does the U.S. want to idly stand as jobs fail to be created because employers have a disadvantage against the Chinese?
U.S. manufacturers and other industries argue they are losing contracts to China because China is undervaluing its currency by 20 percent. U.S. Family businesses are not invulnerable. In 2009, Automation Tool & Die Inc, a family owned business near Cleveland Ohio lost a $1 million contract to manufacture seat frames for long haul trucks to a Chinese competitor. Owners and Brothers, Bill and Randy Bennett said the Chinese competitor underbid them by 20 percent and they lost the bid because of that difference. Business Week, Oct. 17th – Click Here for full story.
Some economists conclude that a forced realignment will be detrimental to the service and retail industries. Most of America's retail and service industries are dependent on the cheap goods available from China. The increase in business's bottom line will ultimately raise the prices to the consumer which in will slow down consumption and more broadly, slow down the hiccupping economy.
It's a tough choice, and the bill hints at the problematic solutions of the 1930's series of protectionist bills that plunged America further into the depression.
But, these arguments are getting ahead of themselves. The bill is not offering a direct solution (or attack) on the misaligned currencies, but rather a vehicle for which the government can determine misaligned currencies and their solutions. The solutions express the use of an open economic forum and are not limited to short sighted tariffs and other detrimental devices.
The bill itself tries to straddle the two spectrums in offering the use of the International forums. The bill states that the Secretary of the Treasury shall semiannually analyze the ‘real' effective exchange rates of foreign currencies to determine if they are ‘misaligned' through exchange manipulation or the over imbalance of foreign reserves/assets. The Secretary, firstly seeks the International Monetary Funds' advice with respect to the matter, and secondly seeks multinational appropriate policies, and thirdly produces a report to congress who determines the domestic footing. There are also subsequent Waivers may be implemented if the manipulating country is "in the vital economic interest of the United States.” See the Full Bill Here – S. 1619
The debate has become heated over the last few months, but Family Business should look into how the bill will effect themselves. The Bill does not imply that America will automatically implement tariffs if the Chinese Yuan is determined to be misaligned. The relationship is too complex for such a short sighted ‘solution', and America, as it is now, will implement a multilayered and multinational approach. The Bill will probably be used to merely determine the misaligned currencies whose subsequent solutions are cohesively addressed both on the International Stage and Capitol Hill. Family Businesses, large and small, should continue to research and be aware of U.S. policies towards China as it affects their success.