- Associated Press - Thursday, September 30, 2010

BEIJING | Beijing warned Washington Thursday that economic ties might be damaged after American lawmakers escalated the conflict over China’s currency controls, inching the two economic giants closer to a trade war.

The Commerce Ministry said a measure approved Wednesday by Congress to allow Washington to penalize governments that manipulate exchange rates violated free-trade rules.

It gave no indication whether Beijing might retaliate, though it has imposed anti-dumping duties in recent months on imports of U.S. chicken, steel and nylon.

After years of friction, the bill is the first vote by American lawmakers for measures to respond to complaints Beijing keeps its yuan — also known as the renminbi — undervalued, giving China’s exporters an unfair price advantage and costing U.S. jobs.

Passage by a 348-79 margin in the House of Representatives came ahead of November elections in which the economy and 9.6 percent unemployment are key voter concerns.

“This is a step toward a trade war,” said economist Dariusz Kowalczyk at Credit Agricole CIB in Hong Kong. “It’s just one step, but it increases the odds.”

Pressures over trade are mounting as the global recovery falters. Washington, Beijing and other governments have pledged to avoid protectionism that might hamper a revival of growth, but U.S. and Chinese authorities have imposed anti-dumping and other duties on a range of each other’s goods, including poultry, steel pipes and tires.

“Exercising protectionism against China under the excuse of the renminbi exchange rate will only severely damage Chinese-U.S. trade and economic ties,” Foreign Ministry spokeswoman Jiang Yu said at a news briefing.

In a separate statement, Commerce Ministry spokesman Yao Jian said, “You cannot say the renminbi exchange rate is undervalued because of the U.S. trade deficit with China and impose such protectionist measures based on this.”

There was no immediate reaction from financial markets, where traders were focused on fading U.S. growth and European street protests over austerity measures.

The U.S. bill would not impose automatic penalties but would expand the definition of improper subsidies to include currency manipulation to gain a trade advantage. The U.S. Commerce Department would decide whether to sanction China or another government.

The measure requires Senate approval. Action there is not expected until after November elections, when analysts say pressure to pass the measure is likely to diminish.

Years of U.S. impatience with China’s currency policies flared anew in recent weeks after China promised in June to allow more exchange-rate flexibility but allowed the yuan to rise only about 2 percent since then.

The Chinese central bank said this week it will increase the role of market forces in setting the exchange rate but announced no major changes that might defuse American anger.

Premier Wen Jiabao, China’s top economic official, promised to allow a stronger yuan in talks this month with President Obama. But in a speech in New York ahead of that meeting, Mr. Wen rejected a rapid rise, saying that would drive many Chinese companies out of business and destroy jobs.

“If this measure passes, it will have a big impact on global trade,” said Ding Zhijie, director of the finance school at Beijing’s University of International Business and Economics. “The United States can label you according to its own standards and impose anti-subsidy remedies.”

Beijing might face more pressure at a Nov. 11 meeting with the United States and other Group of 20 major economies in Seoul. The friction is likely to get rougher if many major economies remain anemic, as projected.

Brazil’s finance minister said this week that some countries are trying to boost growth by weakening exchange rates and controlling capital flows. He warned that might lead to a “global currency war.”

“As the global recovery slows, countries with large current account surpluses will likely come under pressure from countries with large fiscal deficits and high unemployment rates,” Goldman Sachs economists said Thursday in a report.

The China currency debate has split the U.S. business community. Exporters say they are hurt by underpriced Chinese goods, but companies that operate in or export from China worry that they might suffer from U.S. sanctions or Chinese retaliation.

The American Chamber of Commerce in China, which represents 1,200 companies, appealed to the Senate on Thursday to kill the currency bill. The group said it was unlikely to produce significant U.S. job growth and might harm American exporters.

“Blaming China won’t help the U.S. economy, but this legislation may cost American jobs,” said Chamber Chairman John D. Watkins Jr. “We call on the U.S. Senate to thoroughly review the proposed legislation, and we hope it does not move forward in the legislative process.”

Beijing is likely to allow the yuan to rise faster against the dollar before the November elections to defuse pressure for the Senate to approve sanctions, said Mr. Kowalczyk.

“They do not want a trade war because they are beneficiaries of the trade surplus,” he said. “For China, it’s crucial to placate the U.S. critics. But they cannot placate them the way those critics want to be placated, meaning by allowing a strong appreciation, because this would be too harmful for their exports and growth.”



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