On September 29, 2010, the U.S. House of Representatives passed the Currency Reform for Fair Trade Act by a vote of 348 to 79, indicating strong bipartisan support for the measure. The Currency Reform Act, if implemented, would amend the Tariff Act of 1930 to clarify that the U.S. Department of Commerce (“Commerce”) can apply a tariff (countervailing duty) to offset subsidies in the form of currency undervaluation on products imported into the U.S. from countries with fundamentally undervalued currency.

Earlier this year, both the House Committee on Ways and Means and the Senate Finance Committee held hearings regarding the U.S.-China Trade imbalance and urged Commerce to carefully consider applying countervailing duties on imports from China to offset subsidies from China’s undervalued currency, the renminbi (“RMB”). Expert testimony before these committees established that China’s undervalued currency makes China’s exports to the U.S. cheaper and makes U.S. exports to China more expensive, than if China allowed its currency to trade freely. Moreover, some experts also believe RMB undervaluation contributes to the overall U.S. trade deficit. In August, however, Commerce declined to investigate these subsidies in two cases involving imports of coated paper and aluminum extrusions from China. Commerce reasoned that because Chinese currency subsidies were provided to parties like tourists, who are not Chinese exporters, then the subsidy is not “contingent upon exportation” as required by one prong of the Tariff Act. The Currency Reform Act addresses Commerce’s position that China’s currency regime does not meet the legal requirements for an investigation of a subsidy under the Tariff Act. Specifically, the House Committee Report indicates that Commerce used a more restrictive definition of “contingent upon exportation” than legally required. The legislation provides that “In the case of a subsidy relating to a fundamentally undervalued currency, the fact that the subsidy may also be provided in circumstances not involving export shall not, for that reason alone, mean that the subsidy cannot be considered contingent upon export performance.”

As of this writing, the legislation has been referred to the Senate but it is unclear whether the measure will be voted on during the lame duck session. It is also unclear whether President Obama ultimately would sign the legislation. If implemented, however, the Currency Reform Act likely will increase trade investigations filed by U.S. manufacturers seeking tariffs on Chinese imports and could result in increased tariffs on these imports.