A New Option
There is one, directly monetary, measure that the United States should contemplate taking against China: direct purchases of renminbi to counter China’s direct purchases of dollars. It is absurd, especially from a US national perspective but also from the standpoint of global financial stability, that other countries set the exchange rate of the dollar. This is a consequence of the international role of the dollar, one of several of which lead me to question whether that role remains in the national interest of the United States.
In principle there could be little objection to such “countervailing currency intervention” against manipulation by another country that was keeping ...view middle of the document...
Hence the United States would have to identify proxy assets and buy them instead. Candidates would include nondeliverable forward (NDF) contracts for renminbi and renminbi-denominated securities in Hong Kong. The magnitude of such interventions by the United States would be limited by the size of the relevant markets and thus to far less than the daily purchases of dollars by the Chinese authorities. But such an initiative by the United States would clearly indicate the seriousness of its concern over the misalignment of the renminbi, provide an unmistakable and indeed dramatic signal to the markets themselves, and add further to the pressure on China to cooperate.
There is nothing in US law or the IMF Articles of Agreement that would prohibit the United States from undertaking such “countervailing currency intervention” today. However, the Congress might want to consider amending the relevant portion (Section 3004) of the Omnibus Trade and Competitiveness Act of 1988 to authorize Treasury to conduct countervailing currency intervention operations whenever it determines that a country is manipulating its exchange rate to gain an unfair competitive advantage. Such an authority would greatly strengthen the hand of the Treasury in conducting the negotiations to remedy an unfair currency practice as called for under the Act. A version of the idea is included in S.1254 and S.3134, proposed by Senators Schumer and Graham.
The exchange rate is of course an inherently international issue because it involves at least the two countries between whose currencies it provides a price. Hence the use of countervailing currency intervention by the United States, or by any other country, should be subject to review by the IMF. Any country that believed it was being unfairly challenged by such a policy should be able to appeal to the Fund, and the countervailing country should be required to desist if its justification for the action was found to be inconsistent with the objectives and rules of that institution. This would parallel the treatment of countervailing duties by the WTO, described above, under which target countries can win disapproval of the countervailing action if they can demonstrate that their alleged subsidies are in fact not actionable under the rules of the institution.
The United States would be in a strong position to defend itself against any such protest from China, however. The IMF Guidelines for Exchange Rate Policies call on member countries to “take into account in their intervention policies...