The U.S. Senate passed a bill aimed at punishing China for keeping the yuan undervalued, triggering a backlash from Chinese officials who said the measure risks damaging trade relations and undermining the global recovery.
The Senate voted 63-35 for the legislation, which would let U.S. companies seek duties to compensate for “misaligned” currencies. House Speaker John Boehner said today he has “grave concerns” with the bill, casting doubt on whether it will become law. China protested in government statements.
Failure to allow faster gains in the yuan against the dollar has impeded a shift in demand toward emerging markets that would bolster the global economy, according to Federal Reserve Chairman Ben S. Bernanke. The yuan has appreciated 10 percent, adjusted for inflation, since mid-2010, a pace that’s too slow, Treasury Secretary Timothy F. Geithner said yesterday.
Facing a weak economic recovery, “the U.S. and China need to work together” said Shen Jianguang, a Hong Kong-based analyst at Mizuho Securities Asia Ltd. who has worked for the International Monetary Fund and the European Central Bank. “Raising the currency bill at this point is inappropriate.”
Boehner, the U.S. Chamber of Commerce and other Washington opponents have said the bill could be counterproductive.
‘Trade War’ Risk
The action “poses a very severe risk of a trade war and unintended consequences that could come as a result,” Boehner said today at a news conference in Washington.
The House Ways and Means Committee plans a hearing this month on U.S.-China relations, such as the currency issue, Representative Dave Camp, a Michigan Republican and committee chairman, said today in Washington.
Senator Charles Schumer, a New York Democrat, who proposed similar measures on China’s currency over the past six years, said today that the House may yet take up a currency bill.
“I don’t think they’ll pass our bill,” Schumer said at an event in Washington. “I think they’re going to pass something. They’re going to have to, over the next several months.”
China’s central bank and commerce and foreign ministries issued statements today restating the nation’s opposition.
“This proposal in the name of so-called currency misalignment is protectionism and a serious violation of World Trade Organization rules, and won’t be able to resolve America’s own economic and employment problems,” Ma Zhaoxu, a spokesman for China’s foreign ministry, said in a statement. The central bank cited risks to bilateral trade and the global recovery in a separate statement.
The issue flared at a debate by Republican presidential candidates in New Hampshire yesterday. Former Massachusetts Governor Mitt Romney said “when people have pursued unfair trade practices, you have to have a president that will take action.” He added that he would label China as a currency manipulator on “day one” as president.
The yuan rose 0.26 percent to close at 6.3585 per dollar in Shanghai today, after falling as much as 0.3 percent, according to the China Foreign Exchange Trade System.
The legislation would let U.S. companies seek duties on Chinese goods to offset an undervalued yuan. It mandates that the Treasury Department identify misaligned currencies, instead of deciding whether an exchange rate was manipulated, as is now required. Governments that undervalue 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 from the Overseas Private Investment Corporation.
“We are very supportive of the objectives of that bill, which is to try to make sure there’s a level playing field around the world, that countries can’t keep their currencies weak at the expense of American exporters,” Geithner said yesterday on Bloomberg Television. “We have been pushing very, very hard to get China to move.”
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. The legislation is opposed by business groups, such as the Chamber of Commerce, that say it may cause a trade dispute.
The policy “may be good for this company or that company, but it is not good for America,” Republican Senator Jeff Sessions of Alabama said on the floor before the vote. “It’s got to stop.”
The Ways and Means Committee, which controls trade legislation in the House, scheduled a hearing to discuss “a number of issues” with China, Camp said. “We have a complex relationship, an important relationship with China and more than just the China currency issue,” he said today.
Camp voted for a similar measure last year backed by Representative Sander Levin of Michigan, the top Democrat on the committee. Boehner, an Ohio Republican, and House Majority Leader Eric Cantor of Virginia voted against Levin’s bill.
“I understand that people are concerned about the value of China’s currency,” Boehner said today. “Frankly I’m concerned about it as well.”
Boenher called on President Barack Obama to make his position clear on whether he supports the bill.
Obama said at a news conference last week that while “China has been very aggressive in gaming the trading system to its advantage and to the disadvantage of other countries, particularly the United States,” he wants to avoid laws that “are symbolic, knowing that they’re probably not going to be upheld by the World Trade Organization.”
Levin has said that the House version of the legislation had 225 supporters and urged Boehner to let members vote.
“It’s clear to me momentum is very much increasing,” he told reporters yesterday before the vote. “The pressure will mount here in the House to act.”
Representative Mark Critz, a Pennsylvania Democrat who backs Levin’s bill, sought in July to force a vote against the wishes of Republican leaders. He rounded up more than 173 House members, mostly Democrats, to sign a petition that would bring the measure to the floor. It needs at least 218 signatures, a majority, to succeed.
The yuan has appreciated about 4.9 percent against the dollar in the past year and 24 percent in the past five, the steepest advance after Colombia’s peso 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 the country’s exports.
Even if the bill becomes a law, it could take years for it to have a substantive effect in the U.S., said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington. Between filing complaints and investigations, companies wouldn’t get any immediate relief, he said.
“I would think it would take years before you saw any sort of microeconomic effect,” he said.
The bill is S. 1619.