Introducing "Grassley-Baucus": Forget Schumer-Graham. This New U.S. Legislation Has Already Spawned a Strange New Renaissance of IMF Reform Proposals. Can Protectionism Be Cured?

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The crude protectionist method of the Schumer-Graham bill that called for a 27.5 percent tariff on Chinese imports has been replaced by the comprehensive globalization approach of the Grassley-Baucus bill, named after the bipartisan leadership of the Senate Finance Committee, Chuck Grassley (R-Iowa) and Max Baucus (D-Montana). Two hours alter Senators Grassley and Baucus announced their bill on March 28, Senators Chuck Schumer (D-NY) and Lindsey Graham (R-SC) responded by shelving their bill for the time being. This episode may yet come to symbolize how easy it can be to turn raw protectionist sentiment into enthusiastic support for greater economic globalization--if it is done right.

Grassley-Baucus ("The United States Trade Enhancement Act of 2006," or S. 2467) opens the way for a fundamental reform of the International Monetary Fund. It provides the first elements of a legislative framework that would turn the IMF into a facilitator for market solutions and, in this way, into a tool for the accelerated globalization of the world economy. The fact that this is proposed by the bipartisan leadership of the Finance Committee of the U.S. Senate should get the attention of America's trading partners--and that doesn't mean only the Chinese. The fact that its announcement was made right before the spring meeting of the IMF suggests that it was meant to get the attention of these trading partners: IMF reform was the agreed agenda of the Fund's spring meeting.

The important stuff happens in Title II, Sections 204, 205,206, and 207 of the Grassley Baucus bill.

First, the bill repeals the Plaza Accord-era legislation that controls U.S. exchange rate policy (Subtitle A of Title III of the Omnibus Trade and Competitiveness Act of 1988). This was the law that mandated the orderly depreciation of the U.S. dollar, coordinated central bank interventions in the foreign exchange market, and offered provisions for identifying "currency manipulators." The familiar legal props for international economic coordination of the 1980s and 1990s are repealed. What is put in their place is the U.S. version of IMF reform.

Second, a seven-person committee of private sector financial and economic experts will work with the Secretary of the Treasury and the Chairman of the Federal Reserve to submit to Congress a report every six months that will determine which countries, if any, have a "'fundamentally misaligned" currency; will identify the macroeconomic and other causes of the "fundamental misalignment" (including monetary and financial conditions, capital controls, levels of investment, trade restrictions, and export dependence for growth); and will propose remedies that the offending country or countries need to take to remove these causes.

Third, following submission of the report to Congress, the Secretary of the Treasury will try to engage the offending country bilaterally and also to enlist the IMF and other multinationals to pressure such governments to adopt the kinds of economic policies that will eliminate the fundamental misalignment.

Finally, if the offending country fails to conform under such multilateral pressure, the U.S. representative at the IMF will oppose any new financing for any project in that country. Moreover, the United States will demand that the Managing Director of the IMF advise the offending country that it may be found in violation of its obligations under Article IV of the IMF Articles of Agreement, and report the matter to the IMF Executive Board for further action.

Evidently, the Grassley-Baucus bill envisages an IMF reform that will transform the Fund into an agency that deals with the problem of "fundamental misalignment" of currencies. Without such a reform of the IMR the bill would be meaningless. There are, however, rival versions of IMF reform proposals.

At one end of the spectrum is the reform vision associated with C. Fred Bergsten and the Institute of International Economics, which calls for the creation of a "New Steering Committee for the World Economy" to replace the "illegitimate" G-7--currently the failed, de facto steering committee of the world economy. …