News and Analysis • Volume 11 • Number 6 • October 2007
US Congress to Tackle Farm Bill and Yuan Exchange Rate
The US Senate is expected to start debate on a new farm bill in the third week of October. Congressional consideration of controversial pending legislation on China’s currency is also on the cards in the coming weeks.
While the final details of the new farm bill to be submitted to the Senate Agriculture Committee by its chair Tom Harkin were not known at press time, it was already clear that the legislation would differ from that adopted by the House of Representatives in July.
For instance, it was expected that the Senate version would propose to lower the US$1 million income cap for individual farmers eligible for subsidies approved by the House. Confidential draft legislation, circulated for comment by Senator Harkin in August, would have limited direct and counter-cyclical payments to individuals in a given crop year to US$50,000, and capped marketing loan gains and loan deficiency payments at US$150,000. The Houseapproved bill grants US$65,000 for direct payments and US$65,000 for counter-cyclical payments, while marketing loan gains are unlimited. In all, the Senate bill would probably reduce direct payments to farmers by US$1-2 billion, Mr Harkin said on 3 October.
Like the House-approved legislation, the Senate farm bill is expected to include the administration’s proposal that counter-cyclical payments should be based on revenue rather than price, but only as an option that farmers could choose. In a 24 September teleconference, acting agriculture secretary Chuck Conner described revenue-based countercyclical payments as ‘the absolute best disaster help’ that can be given to farmers since they would respond to situations where a “producer may have had a very, very high price and unfortunately no crop to sell under that price.” He also warned that direct payments tied to production might not be considered as Green Box support at the WTO. “This would be a very, very unfortunate path for the new farm bill to take,” he said.
Senator Harkin reportedly opposes the permanent disaster relief programme adopted by the House. He may, however, have to accept it since the measure is included in the Finance Committee’s funding package, which would also provide more support for his high-priority areas, i.e. conservation, rural development and renewable energy programmes.
The new Senate farm bill is expected to propose an overhaul of US food aid in order to make it more effective (the Government Accountability Office found this spring that overhead now counts for 65 percent of US emergency food aid). According to Reuters, the bill would set aside US$600 million a year for longer-term programmes designed to bolster agriculture and health in fragile countries, rather than just responding after crises have hit. Even more controversially, it would also establish a four-year pilot programme worth US$100 million for buying US food aid from overseas, deviating from long-standing procurement rules that require domestic crops. US farmers and shippers adamantly oppose using the agriculture budget for such purchases.
Congress and Administration at Odds over China Legislation
Congressional action is also expected in late 2007 or early 2008 on two bi-partisan bills on currency policy reform. The Senate Finance Committee has already approved (by 20-1) bill S. 1607, introduced by Senator Max Baucus with 11 co-sponsors, including presidential candidates Hillary Clinton and Barack Obama. A competing bill (S. 1677) by Senator Christopher Dodd and 10 other sponsors has passed in the Committee on Banking, Housing and Urban Affairs. Neither, however, has yet been debated by the Senate as a whole. Nor has similar legislation been introduced in the House of Representatives.
The primary goal of both bills is to oblige the US government to take action against the yuan’s low exchange rate for the dollar. Bill S. 1677 instructs the Secretary of the Treasury to find that country is manipulating its currency if it has (i) a material global current account surplus; (ii) significant bilateral trade surpluses with the United States; and (iii) engaged in prolonged one-way intervention in the currency markets. The legislation proposed by Senator Baucus concerns action against countries designated by the Treasury as having a ‘fundamentally misaligned’ currency based on the criterium of “a significant and sustained undervaluation of the prevailing real effective exchange rate.” The bill would require the administration to take the currency misalignment into account when calculating anti-dumping duties, as well as prohibit the federal government from procuring products or services from such countries.
Both bills would require the US government to consult with the country concerned. Should those consultations, and subsequent negotiations under IMF auspices, not produce a change in its exchange rate policy, the US Trade Representative would have the legal obligation to initiate dispute settlement proceedings at the WTO.
The Bush administration has so far resisted popular pressure to make China revalue the yuan through legislation or litigation. In September, treasury secretary Henry Paulson warned that business leaders he had consulted on the pending bills had expressed serious concern over the dangers of taking “unilateral punitive action that could lead to a trade war or that would be unsettling to the markets.” Senator Charles Schumer, a sponsor of the Baucus bill, retorted that it was “Alice in Wonderland logic to say that when the Chinese manipulate their currency, it helps our exports.”
The US has also taken issue with China’s export restrictions on raw materials used to produce steel, computer chips and other consumer goods. The US alleges that such measures amount to ‘price manipulation’ since they ensure that domestic manufacturers have an oversupply of cheap commodities, and thus a huge edge over foreign competitors. The US made these remarks ‘for the record’ during a September WTO review of China’s implementation of its accession commitments, rather than as a prelude to a new WTO dispute, a US trade official said.