Can the United States Impose Trade Sanctions on China for Currency Manipulation

Abstract

Anti-China critics argue that the People’s Republic of China (PRC or China) engages in a long-standing and intentional pattern of currency manipulation that artificially devalues the Chinese currency, the Renminbi (RMB or “people’s currency”) versus the U.S. dollar. The devaluation of the RMB makes Chinese goods less expensive to the U.S. consumer as consumers need to exchange fewer dollars for the same amount of RMB used to purchase Chinese goods. The devaluation of the Chinese currency means that China exports more inexpensive goods to the United States and the United States exports fewer to China. This pattern leads to an increase in the U.S. trade deficit with China, which has already reached a massive $365.7 billion in 2015, by the far the largest U.S. trade deficit with any individual trading partner. A trade deficit of this size has many negative consequences for the United States, such as closed factories, lost jobs, and stagnant wages. China’s currency manipulation is another instance, according to the anti-China critics, of how China conducts international trade to the detriment of the United States. One anti-China critic, a prominent politician running for high political office in 2016, promises to impose punitive tariffs of 45% on all Chinese imports to offset the effects of China’s currency manipulation. Should such a measure become enacted, it would cause shock waves around the world and could possibly plunge the world into a costly trade war between the United States and China with ramifications for every corner of the globe. This article examines the main arguments that China’s currency manipulation justifies the U.S. imposition of trade sanctions. A detailed legal analysis reveals that China’s currency manipulation violates no legal obligations under the WTO. As a result, the United States cannot lawfully impose trade sanctions on China consistent with the WTO. To continue make this argument when it is not legally viable is risky and even dangerous. It is now time to move beyond such inflammatory arguments that do not present a viable legal remedy against China. The article then argues that a different set of strategies is needed to deal with China’s sharp tactics in international trade as exemplified in the United States’ recent strategy in creating mega-free trade agreements such as the Trans-Pacific Partnership.