Tuesday, September 28, 2010

The U.S. takes another step towards an all-out trade war with China

Legislation pressing China to raise the value of its currency is set for a vote in the U.S. House next week, as Republicans joined Democrats in expressing frustration that the yuan is appreciating too slowly.

"We cannot wait any longer to level the playing field for U.S. businesses and protect American manufacturing jobs," Democratic Leader Steny Hoyer of Maryland said yesterday after the Ways and Means Committee sent the bill to the full House.

The committee adopted the measure by voice vote after the panel's top Republican, Dave Camp of Michigan, voted with Democrats to back the bill. The full House will vote Sept. 29, said committee Chairman Sander Levin of Michigan, a Democrat.

The measure would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency. President Barack Obama's administration hasn't taken a position on the bill, said Natalie Wyeth, a Treasury Department spokeswoman. A Chinese central bank press official, who prefers not to be identified in accordance with the agency's rule, declined to comment in Beijing today.

The U.S. trade deficit with China widened to $145 billion in the first seven months of this year, from $123 billion for the same period in 2009. The expanding deficit, unemployment lingering at almost 10 percent and polls showing Democrats' seats at risk heading into the election added support for the bill, which has been discussed since 2005.

Flexible Rate

The yuan has strengthened about 2 percent against the dollar since June 19, when China's central bank said it would pursue a more flexible exchange rate. That rate of gain is "inadequate," Treasury Secretary Timothy F. Geithner told the panel last week. Pressure from lawmakers is helping the administration make the case to China to raise the value of the yuan, he said.

Lawmakers such as Camp say they are also frustrated with barriers China has raised to American imports and the piracy of copyrighted American movies, music, and software.

The currency dispute "is a proxy for the state of the overall U.S.-China commercial relationship," William Reinsch, president of the Washington-based National Foreign Trade Council, said Sept. 23 on Bloomberg Television. "I don't think it will have that big of an impact on the American economy."

China Operations

Lawmakers fended off warnings from lobbyists representing companies such as Caterpillar Inc., Wal-Mart Stores Inc., and Citigroup Inc., who said the measure may lead to retaliation against U.S. companies operating in China and curb exports to the country. China may retaliate if the House passes the legislation, said Reinsch, who represents multinational companies such as Caterpillar.

"This could damage our efforts to 'sell American' and compete successfully in the growing China market," Representative Kevin Brady, a Texas Republican who heads the Ways and Means Committee trade panel, said before the vote.

Forcing China to raise the value of its currency may create 500,000 jobs in the U.S., most in manufacturing at above-average wages, according to C. Fred Bergsten, director of the Peterson Institute for International Economics in Washington. China's currency, which is undervalued by as much as 25 percent, is the most important trade issue facing the U.S., he said in testimony last week.

Obama Meeting

Obama pressed China's Premier Wen Jiabao in a two-hour meeting at the United Nations Sept. 23 to increase the yuan's value. Wen said this week that a 20 percent increase in the currency would cause severe job losses and trigger social instability in China.

"We cannot imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs," he said in New York on Sept. 22.

"We want to see that any legislation is consistent with our international obligations and consistent with the World Trade Organization and is in our interests," Jeff Bader, Obama's director for Asian affairs, said Sept. 23. He didn't say if this bill meets those tests.

Levin said yesterday the measure was redrawn to be consistent with WTO rules. It would let U.S. makers of products petition the Commerce Department for countervailing duties on Chinese products to compensate for the "subsidy" of a weak currency, according to documents released by the committee.

WTO Rules

The Commerce Department rejected such an argument in cases filed by paper and aluminum makers last month, saying that a weak currency isn't a subsidy to a specific industry, as required under WTO rules. The legislation when introduced by Representative Tim Ryan, an Ohio Democrat, would have required that the Commerce Department find that a weak currency is a subsidy. Revisions crafted by Levin removed that language and instead set out provisions intended to make such a finding more likely.

It's that change that won Camp's backing. "It does not presuppose an outcome," he said.

Forty-four Republicans had already signed on as sponsors of the original bill, and with Camp's support, lobbyists said they expect additional Republicans to vote with Democrats next week. That could help spur the Senate to take it up before lawmakers leave Washington to campaign for election, said Lloyd Wood, spokesman for the group of unions and manufacturers fighting for the bill.

"The bigger the vote in the House, the more pressure it puts on the Senate," Wood said.

Lobbyists for groups representing Wal-Mart and Citigroup faulted the panel for approving the measure.

"Provoking tension with our trading partners doesn't come without costs, and we should choose our battles carefully," Stephanie Lester, vice president of the Retail Industry Leaders Association, which represents Wal-Mart, said in a statement. "It makes little sense to enact harmful policies that will spark a bilateral conflict over currency with one of our largest trading partners and fastest growing markets for American exports."

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