Under pressure from lawmakers who blame the huge trade deficit with China for millions of lost U.S. manufacturing jobs, the Commerce Department is considering whether to investigate charges that China subsidizes its exports by maintaining an undervalued currency.
The move would further inflame trade relations with China, but might head off legislation in Congress led by Senator Charles Schumer that would essentially require the Commerce Department to make the policy change.
If Commerce Department officials decided to launch such a probe, it would apply first to two specific cases already before the department involving coated paper and certain aluminum products.
However, other cases could quickly follow, and China would almost certainly challenge the action at the World Trade Organization.
There is a high risk the United States would lose the politically-charged case, even though it could pursue the policy for a few years while the issue is fought out.
"Under traditional analysis, (the WTO) probably would not find it to be a subsidy. But again, that doesn't mean the traditional analysis is correct," said Walter Spak, a trade attorney at White & Case.
The U.S. action could also open a "Pandora's box" of new duties on its own exports to other countries, experts say.
U.S. Commerce Department spokeswoman Parita Shah refused to say how soon the department could make a decision.
"We are conducting a thorough analysis of the complex and novel allegations in question before making a determination about whether to initiate an investigation," Shah said.
Many Western economists believe China's currency is undervalued by as much as 25 percent to 40 percent against the U.S. dollar, giving its exports a big price advantage.
Until recently, the Commerce Department routinely turned down all industry requests to investigate charges that China's "undervalued" currency acts as a subsidy.
However, three months ago with pressure mounting from Congress, it agreed to review whether it had statutory authority to launch such a probe.
"Specificity" is Key
Under both U.S. and WTO law, a subsidy is defined as a financial contribution from the government that provides a benefit to a specific sector or group of companies, Spak said.
One argument made in favor of using U.S. countervailing duties against China's currency policy is that 70 percent of exchange rate transactions in China are done by exporters, which supporters say meets the "specificity" test.
If the Commerce Department accepts that position, it will be making a major policy change since the traditional view is that a country's currency policy doesn't specifically affect any one part of its economy.
"But there's nothing written in stone anywhere. Commerce may feel it has the discretion to define these, or look at these requirements in a different way," Spak said.
Still, if Commerce were to slap duties against China's exchange rate, it could have a hard time persuading a WTO dispute settlement panel it made the right call.
The U.S. Trade Representative's office would not comment on whether it considered treating China's exchange rate as a subsidy to be legal under WTO rules.
Chris Padilla, who was commerce under secretary for international trade under former President George W. Bush, said he thought specificity was the least of three obstacles to applying countervailing duties against China's exchange rate.
A more difficult issue was actually calculating how much China's currency was undervalued against the dollar, since expert opinions on that vary widely, he said.
Padilla said he worried how financial markets would react if the Commerce Department said "the renminbi is undervalued by x.x percent," referring to the very detailed estimates the department makes in countervailing duty cases.
The other
