House set to pass bill aimed at China’s yuan

By Reuters
Posted Sep. 29, 2010 at 1:43 p.m.

The House was set to pass legislation Wednesday to put pressure on China to let its currency rise faster, fanning the flames of a long-running dispute over trade and jobs.

The bill, expected to get heavy support from Democrats but a mixed reaction from Republicans, treats China’s exchange rate as a subsidy. That would open the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.

But the measure, which could play well with voters in the U.S. congressional election on Nov. 2, must win Senate approval and be signed into law by President Barack Obama — by no means a sure bet.

The Obama administration has not taken a stance on the bill and may hope just the threat spurs more movement from China.

Before the House vote, China’s central bank reaffirmed its pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate.

U.S. lawmakers have long brandished the sword of trade retaliation for what they see as China’s deliberate policy of undervaluing the yuan to give its exports an unfair advantage in global markets. But they have never sent the president any legislation to be signed into law.

“We have a major problem and action is necessary,” said Sander Levin, the Democratic chairman of the House Ways and Means Committee.

Obama and Chinese Premier Wen Jiabao talked about China’s currency and huge trade surplus with the United States on the sidelines of the U.N. General Assembly last week.

“The reason that I’m pushing China about their currency is because their currency is undervalued,” Obama said Wednesday.

Despite the yuan’s modest gains against the dollar since Beijing allowed more flexibility in mid-June, International Monetary Fund economists estimate the yuan is 5-27 percent undervalued.


As the House vote neared, Republican Representative David Dreier complained that Democrats had ignored pending free trade pacts with South Korea, Panama and Colombia that would do more to help the U.S. economy.

But Representative Donald Manzullo, an Illinois Republican from a heavy manufacturing district, said the bill would help stop “predatory” Chinese pricing that has cost American jobs.

Slow growth in most advanced economies leaves them more reliant on exports, raising concerns that countries will intentionally weaken their currencies to gain an edge.

Japan intervened this month to weaken the yen for the first time in six years and a couple of emerging economies followed.

Brazil’s finance minister warned this week of a global ”currency war.” The Brazilian currency, the real, hit its highest mark since December on Wednesday, threatening exports.

The U.S. dollar has shed 11 percent against a basket of currencies since early June as the Federal Reserve considers printing more money to prop up a sluggish economic recovery.

China’s ambassador to the World Trade Organization, Sun Zhenyu, criticized U.S. policy for weakening the dollar despite its key role in the global financial system.

“We are very much concerned about how the U.S. would take practical and responsible measures to prevent the dollar glut and maintain the stability of the currency,” Sun said.

The House move is certain to further roil relations with Beijing, which resents the criticism and says the decision about the speed of currency reforms is its alone.

China also says its big trade surplus with United States is due to Americans saving too little and no longer making the goods China sells.

While the White House has not taken a position on the bill, House Majority Leader Steny Hoyer said lawmakers worked with the administration to make sure the legislation did not violate WTO rules.

The outlook for Senate approval is uncertain but supporters are pushing for a vote when lawmakers return from the Nov. 2 election.

After holding the yuan steady against the dollar through the financial crisis, Beijing began to allow for an upward drift against the dollar on June 19.

Since then it has risen to its highest level against the dollar in more than five years but, at just over 2 percent, the gain is far short of what U.S. lawmakers want.

Treasury Secretary Timothy Geithner told Congress two weeks ago the United States would work with Group of 20 nations to push China for faster appreciation but several U.S. allies expressed reluctance to join the effort.

G20 leaders are set to meet in Seoul on Nov. 10-11. That would give U.S. senators time to gauge any further moves from China before deciding what to do with the legislation.


The House bill allows the Commerce Department to treat ”fundamentally undervalued currencies” as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset China’s price advantage.

That is expected to encourage steel, paper and other import-sensitive U.S. industries to file more cases seeking relief. The United States now has countervailing or anti-dumping duties on less than 3 percent of its imports from China, which totaled $296 billion in 2009.

With the U.S. unemployment rate at a painfully high 9.6 percent, many lawmakers — especially from hard-hit industrial states — have an incentive to take a tough line on China.

Some economists said they understood the politics of the debate but questioned whether the bill would bring back American jobs or prod China to move faster on currency reform.

“What drives trade is consumption and savings, not other things like currency. We consume a lot. The Chinese save a lot. We’re going to run a trade imbalance with them,” said Derek Scissors of the Heritage Foundation.

With millions of Chinese employed in low-margin export firms that Beijing has said will not survive a revaluation, ”China’s quest for social stability trumps whatever market discipline would suggest,” said Paul J. Markowski of Global Strategies-Analysis Group/MES Advisers.

China and the United States have a complex and difficult — but vital — diplomatic relationship, not least in dealing with nuclear threats from Iran and North Korea.

In recent months, Washington and Beijing have also sparred over Chinese government procurement policies, Internet censorship, U.S. arms sales to Taiwan and U.S. sympathy for the Dalai Lama, the exiled Tibetan spiritual leader.

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