By  on October 5, 2011

WASHINGTON — A showdown is brewing in Washington over legislation targeting China’s undervalued currency — and a possible trade war if the U.S. takes any action.

Tuesday became high noon in the dustup as Washington politicos and the chairman of the Federal Reserve all weighed in with opposing views while the People’s Bank of China raised the specter of a trade war, warning the U.S. government to refrain from intervening in their currency policies.

The Chinese central bank expressed its “deep regret” about the China currency legislation currently in the Senate, saying it may “seriously affect China’s currency reform and could result in a trade war between the two economies,” in a statement posted on the government-controlled Xinhua Web site.

Such a move “seriously violates rules of the World Trade Organization and obstructs China-U.S. trade ties,” said a Foreign Ministry spokesman, adding that the yuan has appreciated 7 percent against the dollar since June 2010, when China’s Central bank announced exchange rate flexibility and tied it to a basket of currencies. “China will continue to institute a managed floating exchange rate system,” he said.

But Federal Reserve Board chairman Ben Bernanke told a Senate committee that China’s currency policies are damaging the global economic recovery and its attempts to keep the value of the yuan low put pressure on emerging economies.

“Right now, our concern is that Chinese currency policy is blocking what might be a more normal recovery process in the global economy,” Bernanke told lawmakers. “It is to some extent hurting the recovery.”

These comments came against the background of the Senate clearing an important procedural hurdle Monday night to consider legislation that could lead to punitive tariffs on imports from China. The Senate voted 79-19 to push the legislation forward, which observers predict will lead to passage of the bill in the Senate later this week.

The legislation enjoys strong bipartisan support in the Senate. Its central component would direct the Commerce Department to treat undervalued currency as an illegal export subsidy under U.S. trade laws, which could lead to punitive tariffs on imports from China and other countries. It would make it easier for specific industries to petition Commerce for relief under claims that a misaligned currency is an illegal export subsidy. The legislation would also require the Treasury Department to identify countries that “fundamentally misalign” their currencies and take action if they fail to correct the misalignment in a specified period of time. Under current law, the Treasury must identify countries that “manipulate” their currency for purposes of gaining an unfair trade advantage and show intent.

Lawmakers have been agitating for legislation to crack down on China’s undervalued currency for six years, arguing it makes Chinese exports cheaper and puts U.S.-produced goods at a competitive disadvantage. Senate Majority Leader Harry Reid (D., Nev.) has vowed to move the currency legislation to a final vote in the Senate, but its prospects now appear dim in the House.

The Senate vote Monday stirred opposition from House Speaker John Boehner and ambivalence from the White House. Boehner delivered what could be a severe blow to the legislation by expressing misgivings about the bill.

“I think it’s pretty dangerous to be moving legislation through the United States Congress forcing someone to deal with the value of their currency,” Boehner said at a news conference. “While I’ve got concerns about how the Chinese have dealt with their currency, I’m not sure this is the way to fix it.”

Boehner said he believes such action goes “well beyond what the Congress ought to be doing.”

President Obama has not taken a position on the bill, although the administration has consistently declined to cite China for currency manipulation in a Treasury report or take punitive action, opting instead to exert diplomatic pressure to prod the Chinese to let the value of the currency appreciate.

White House Press Secretary Jay Carney told reporters on Air Force one Tuesday that the administration is reviewing the Senate bill.

“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.”

Phillip Swagel, professor of international economic policy at the University of Maryland, said Boehner could actually be helping Obama with his stance, assuming he actually opposes the bill.

“If he just kept quiet, it would make life difficult for the President, who would have to oppose his own party, but Speaker Boehner has come out and said this is a bad idea, suggesting it is not going forward so President Obama does not have to on his own come out and say he opposes the Senate bill,” Swagel said. “It’s striking to me, the silence from the administration. It must be a very awkward position for them and ultimately they must understand the downside of this legislation.”

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