China Says U.S. Bill Risks Trade War

Proposed legislation would impose penalties on countries with undervalued currencies.

China said that the U.S. risks triggering a “trade war” with legislation being considered by the Senate to punish the Asian nation for a currency that lawmakers say is undervalued.

The People’s Bank of China said it “regrets” a Senate vote yesterday to consider the bill and the Foreign Ministry said the measure would violate World Trade Organization rules, in statements on their websites today.

Any slide into protectionism and trade battles risks escalating drags on a global economic recovery already weighed down by the collapsed U.S. housing market and Europe’s sovereign-debt crisis. Global stocks have started October by extending a third-quarter slump that was the biggest since the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc.

“The timing of such an incident is unfortunate with the current global environment,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch who previously worked at the World Bank. “If there is a trade war, it’s no good for anybody.”

The MSCI Asia Pacific Index of stocks declined 1.7 percent as of 12:06 p.m. in Tokyo, weighed down by Europe’s woes. The yuan closed at 6.3859 per dollar on Sept. 30 before this week’s national holiday in China. The currency has strengthened about 7.3 percent since June 2010, when the government dropped a policy from the global financial crisis of keeping the yuan about level with the dollar.

Senate Vote
Passage of the legislation “may lead to a trade war that we don’t want to see,” the Chinese central bank said, adding that the measure wouldn’t solve U.S. “problems” of insufficient savings, a trade deficit and an elevated jobless rate. It also said the measure could “seriously affect the ongoing currency-mechanism reform in China.”

The 79-19 vote yesterday allows the Senate to begin considering the bill introduced by Democrat Sherrod Brown of Ohio and Charles Schumer of New York with 19 co-sponsors, including Republicans Lindsey Graham of South Carolina and Jeff Sessions of Alabama.

The legislation, opposed by business groups such as the U.S. Chamber of Commerce that say it may cause a trade dispute, may stall in the Republican-controlled House. Speaker John Boehner of Ohio and Majority Leader Eric Cantor of Virginia both voted against a similar measure that passed the House last year.

‘Sending a Message’
“Tonight is sending a message to China,” Schumer said following the vote. “The only time China moves is when they feel someone might do something to force their hand.”

Schumer, who has proposed similar measures over the past six years, has failed so far to get an up-or-down Senate vote on such a bill. Supporters say it has a better chance of passing the Senate this time because China, the world’s second-biggest economy after the U.S., has become a target for lawmakers frustrated by the widening trade deficit with that nation and domestic unemployment stuck at 9.1 percent.

“What needs to stop is China cheating when it comes to trade,” Graham said following the vote. Their policies “are killing the ability of U.S. manufacturers to compete in the world market.”

The bill would require the Treasury Department to produce a report twice each year identifying currencies that are significantly undervalued. Governments that are undervaluing their currencies and don’t take corrective action would face penalties including increased dumping duties, a ban on federal procurement in the U.S. and ineligibility to receive financing form the Overseas Private Investment Corporation.

‘Signal to China’
“The strong, bipartisan vote should send a signal to China, as well as to the White House and House Republicans, that voters are demanding action to defend American jobs and a level playing field for U.S. businesses,” Scott Paul, the executive director of the Alliance for American Manufacturing, said in a statement.

The Obama administration considers China’s currency “substantially undervalued” and is reviewing the legislation, White House press secretary Jay Carney said on Sept. 28.

China’s trade imbalance with the U.S. is not due to the value of the yuan, the PBOC said. The real exchange rate has “significantly appreciated and moved near to a balanced level,” the central bank said, adding that flexibility in the currency will contine to increase in an “active, gradual and controllable manner.”

‘More Harm’
More than 50 U.S. business groups, including the Chamber of Commerce, the Financial Services Roundtable and the National Retail Federation, sent a letter to Senate leaders on Sept. 21 urging them not to act on Schumer’s bill. The remedies would probably result in retaliatory action by China, hurting U.S. businesses, and duties would only shift production and jobs to other low-cost manufacturing countries rather than the U.S., the groups said.

China “would clearly have a negative reception to our imports to China,” John Frisbie, the president of the U.S.-China Business Council, said yesterday on Bloomberg Television. “This bill would do more harm than good.”

Bilateral and multilateral discussions with China would benefit U.S. jobs more than tariffs, he said. Other developing nations with low wages, such as Vietnam, would be the only winners if the Senate legislation were to become law, he said.

The bill’s supporters say China has been too slow to change. China’s currency policies have cost more than 2.8 million U.S. jobs since 2001, and the yuan’s undervaluation gives Chinese companies an unfair advantage against U.S. manufacturers, Schumer said at a news conference on Sept. 22.

Buying Dollars
The yuan has appreciated 5.2 percent against the U.S. dollar in the past year and 24 percent in the past five years, the steepest advance among 25 emerging-market currencies tracked by Bloomberg. China limits currency conversions for investment purposes and buys dollars to slow the yuan’s advance and preserve the competitiveness of China’s exports.

Debate over the yuan’s exchange rate has been politicized and the legislation may hurt China’s economic relationship with the U.S., Wang Baodong, a spokesman for the Chinese embassy in Washington, said yesterday.

“We’re very much concerned with the Senate move as we do not believe legislation is the appropriate mechanism by which to address the currency issue,” he said. “The economics of China and the United States are closely linked and the success of one relies greatly on the economic health of the other.”

Bloomberg News

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