With mounting evidence that undervalued foreign currencies drive the U.S. trade deficit, a bipartisan group of U.S. senators has introduced the Currency Exchange Rate Oversight Reform Act of 2013. Reviving a 2011 bill that was approved by the Senate but never brought to a vote in the House of Representatives, the Act equates undervalued currency exchange rates with subsidies and mandates countervailing measures against responsible states. Senator Casey (D-PA) hailed it as an effort "to level the playing field" for U.S. manufacturers.

Though framed in general terms, the Act's sights are undoubtedly set on China, the leading competitor for American exports. In 2012, the U.S. trade deficit with China reached $315 billion, a record that many manufacturers attribute to manipulation of the Chinese yuan and resulting competitive advantage for Chinese exporters. By lowering the cost of imported products and raising that of exports, undervalued foreign currencies such as the yuan are blamed for the loss of up to 5.7 million U.S. manufacturing jobs over the last 15 years.

The Act sets out a number of reforms aimed at reversing this trend, of which four are particularly noteworthy. First, it would require the Treasury Department to identify undervalued currencies on a regular basis. In doing so, the Treasury Department's more subjective existing standard of currency "manipulation" would be replaced by two categories based on an objective "misalignment" standard: "fundamentally misaligned currencies" and "fundamentally misaligned currencies for priority action."

Second, upon substantiated complaint by a U.S. manufacturer, the Commerce Department would be obligated to investigate whether currency undervaluation by a foreign government constitutes an actionable subsidy.

Third, where "fundamentally misaligned currencies" result from deliberate policies and are thus designated "for priority action," the Administration would be required to reflect their undervaluation in dumping calculations for imports from the responsible country and consider currency issues in determining "market economy" status. Further, the U.S. Government would be prohibited from procuring goods manufactured in that country.

Fourth, in the event that these measures failed to prompt realignment of the exchange rate, the Act would mandate WTO dispute settlement consultations with the responsible WTO Member and to consider remedial intervention in currency markets.

Though the likelihood for passage through the Senate remain good, the Act's prospects appear dimmer in the House. If it becomes law, the issue of equating currency misalignment with an actionable subsidy under the Agreement on Subsidies and Countervailing Measures likely would be challenged at the WTO.