China said the U.S. risks triggering a trade war through legislation before the Senate that would punish the Asian nation for what lawmakers say is the undervaluation of its currency, the yuan.
The People’s Bank of China said it “regrets” the Senate vote yesterday to consider the bill, and the Foreign Ministry said the measure would violate World Trade Organization rules, in statements today on their websites. The bill is aimed at letting American businesses seek duties on Chinese imports to make up for the weak currency.
The 79-19 vote allows the Senate to begin considering the bill introduced by Democrat Sherrod Brown of Ohio and Charles Schumer of New York with co-sponsors including Republicans Lindsey Graham of South Carolina and Jeff Sessions of Alabama. The legislation is opposed by business groups, such as the U.S. Chamber of Commerce, that say it may cause a trade dispute.
“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.”
Opponents say they worry that protectionism and trade conflicts may stall a global economic recovery already weighed down by the slumping U.S. housing market and Europe’s sovereign-debt crisis. Global stocks began October by extending a third-quarter slump that was the biggest since the 2008 collapse of Lehman Brothers Holdings Inc.
Passage of the legislation “may lead to a trade war that we don’t want to see,” the Chinese central bank said, saying the measure wouldn’t solve U.S. issues 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.”
Schumer, who has proposed similar measures over the past six years, failed previously 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.
“We have been in a trade war for a decade,” Brown said following yesterday’s vote. “It’s long overdue.”
House Speaker John Boehner criticized the legislation today, saying it is “well beyond what Congress ought to be doing.” While Boehner, an Ohio Republican, said he understands the concern over China’s currency, he said, “I am not sure this is the way to fix it.”
The administration of President Barack Obama is reviewing the legislation, White House press secretary Jay Carney told reporters aboard Air Force One today.
“We share the concern of members about the valuation of the Chinese currency and the need to appreciate the value of the Chinese currency,” Carney said. “We also are concerned that any action that might be taken would be effective and consistent with our international obligations.”
Representative Sander Levin, a Michigan Democrat, said the House version had 225 supporters and urged Boehner to let members vote. Leadership “should not get in the way” of efforts to produce U.S. jobs.
“It’s about rules,” Levin told reporters. “China isn’t playing by the rules when they rig their currency.”
The Senate “is sending a message to China,” Schumer said following the vote yesterday. “The only time China moves is when they feel someone might do something to force their hand.”
In addition to allowing U.S. companies to seek tariffs on Chinese imports, U.S. exporters would benefit from an appreciation in the yuan because it would make American goods less expensive relative to Chinese goods.
“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 mandate that the Treasury Department identify misaligned currencies, rather than finding that a currency was manipulated, as is currently required. 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.
“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. isn’t due to the value of the yuan, China’s bank 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 continue to increase in an “active, gradual and controllable manner.”
The yuan will appreciate by 4 percent to 5 percent against the U.S. dollar this year, Li Daokui, an adviser to the China central bank, said today at a conference in Santiago.
More than 50 U.S. business groups, including the Chamber of Commerce, the Financial Services Roundtable and the National Retail Federation, write 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. The Financial Services Forum sent Obama a letter today urging him to oppose the legislation.
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.
Bloomberg LP, the parent company of Bloomberg News, is a member of the U.S.-China Business Council.
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.
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.
The bill is S. 1619.