By  on July 25, 2007

WASHINGTON — The U.S. government came another step closer Tuesday to taking punitive action against China unless the economic powerhouse reforms its currency, the yuan, and its trade policies.

Senators sent out a fresh draft of a bill that targets countries, notably China, that undervalue their currencies, calling on them to take specific steps to reform their policies or ultimately face U.S. and World Trade Organization penalties. The Senate Finance Committee is set to consider amendments to the bill and vote on it Thursday.

Global commerce and its impact on the U.S. economy are playing a significant role in the 2008 presidential race and the ongoing political battle between the Democratic-controlled Congress and the Bush administration. The Senate charges President Bush's diplomatic attempts to get China to reform its currency and trade policies have failed.

The legislative action comes at a time of a record trade deficit with China, which stood at $232.5 billion in 2006, that has weakened the U.S. dollar and sent a ripple effect throughout the fashion industry, particularly hitting hard American designers importing European fabrics and textiles.

Still, designer brands and apparel importers are generally leery of the government intervening in China's currency policies.

"I think it's always ill-conceived," said Bud Konheim, president and chief executive officer of Nicole Miller. "The government has an uncanny way of screwing things up, while business people have a way of working things out. It's much better to let the market forces deal with [the trade deficit and weakened dollar]. Supposedly, the yuan is artificially priced, but so far it is working, so leave it alone."

U.S. textile producers, however, claim they cannot compete with Chinese imports they charge are undervalued by up to 40 percent. They say government relief is needed to curb the flow of Chinese imports.

It is against this backdrop that the Senate Finance Committee will take the first legislative action of the year on Thursday against China and other countries that undervalue their currencies and ultimately hurt U.S. manufacturers. While the key Senate panel is expected to pass the bill, its fate in Congress is uncertain because of jurisdictional disputes and several competing bills.The Senate is one of the toughest hurdles for any China-related bills because its rules require more than a majority to pass any major piece of legislation. Senate leaders need 60 votes to cut off debate and end filibusters to pass bills, while the House needs a simple majority.

The White House will not take a position on a bill until Congress acts, but a punitive bill could draw a veto threat from President Bush. Treasury Secretary Henry Paulson Jr. has called on China to take more decisive steps to change its currency policies but he has declined to label the country a currency manipulator and opted to pursue a "strategic diplomatic dialogue" with Chinese officials to prod reform.

China, in turn, has revalued its currency by about 8 percent in the past two years. Paulson and other experts argue that there are many underlying factors to the U.S. trade deficit.

"A Chinese appreciation, even a large one, is not going to be the silver bullet," in addressing the U.S. current account deficit, said Nicholas Lardy, a senior fellow at the Peterson Institute for International Economics. "If you want to make a dent in this, you have to get both China and Japan to move [on currency appreciation] and you've got to take fiscal action [in the U.S.] to reduce the savings investment imbalance, but Congress would rather point the finger abroad than look at [multiple] solutions to the problem."

The legislation before the Senate panel was unveiled in June by Sens. Max Baucus (D., Mont.), Chuck Grassley (R., Iowa), Lindsey Graham (R., S.C.) and Charles Schumer (D., N.Y.) after Paulson stopped short of accusing China of currency manipulation.

Although the senators' bill does not target China specifically, it is intended to force revaluation of the yuan and impose new consequences for inaction. The measure would direct the Treasury to redefine currency manipulation, establish new rules requiring the agency to identify "fundamentally misaligned" currencies to Congress biannually and could potentially result in U.S. and WTO penalties if bilateral negotiations fail.

Apparel importers are concerned about the potential for new antidumping cases against products they bring in from China based solely on claims of undervalued currencies even if dumping is not found."When you consider that 80 percent of all products exported from China to the U.S. are consumer products, it really exposes retailers to a tremendous amount of risk," said Erik Autor, vice president and international trade counsel at the National Retail Federation.

Julia Hughes, senior vice president of international trade at the U.S. Association of Importers of Textiles and Apparel, said companies are worried that senators will try to "toughen" the bill in committee or on the floor of the House and Senate to broaden trade remedies that domestic manufacturers could use against countries that undervalue their currency.

Sens. Jim Bunning (R., Ky.) and Debbie Stabenow (D., Mich.) have a bill that would give U.S. firms injured by undervalued currencies the ability to file petitions for countervailing duties for subsidized imports.

Many in the U.S. textile industry are hanging their hopes on Congress expanding trade remedy laws to fight against undervalued currencies and subsidized imports they say have led to the loss of hundreds of thousands of U.S. jobs.

"The trade remedy aspects in these bills need to be strengthened," said a spokesman for the American Manufacturing Trade Action Coalition, adding textile producers want to see the bill expanded to include the ability to file countervailing duty cases against subsidized imports from China.

"Just filing a [countervailing duty] case would create enormous amounts of uncertainty for importers and the retail community, and my guess is it would put enormous pressure on China to come to the U.S. and say let's do some type of incremental solution to this currency problem," the AMTAC spokesman said.

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