By and  on March 14, 2010

The U.S. and China are gearing up for a new battle over China’s currency policy in advance of a key Treasury Department report next month and Congressional midterm elections in November.

On Monday, 130 House lawmakers sent a bipartisan letter to Treasury Secretary Timothy Geithner and Commerce Secretary Gary Locke urging the cabinet officials to take action against China’s currency policy, which they claim hurts U.S. manufacturers by undervaluing exports and making them cheaper, putting U.S. companies at a competitive disadvantage.

The lawmakers’ call for action followed remarks from Chinese Premier Wen Jiabao last weekend in which he defended his country’s trade and currency policies.

China’s currency policies have long been a target of U.S. lawmakers, who have attacked an undervalued Chinese yuan with several proposed legislative measures, ranging from imposing punitive tariffs on Chinese imports to making currency manipulation a subsidy and actionable under U.S. trade remedy laws.

Momentum for passing the legislation slowed after China delinked its currency to the dollar in 2005 and allowed it to rise by 20 percent through 2008. But the yuan has been frozen for over a year as the global economy grappled with a recession that is slowly easing, which could provide momentum for action this year.

With a key Treasury report due by April 15 and looming midterm Congressional elections that will put the entire House up for election and one-third of the Senate, lawmakers are turning up the heat again on China and the Obama administration, putting partial blame on China for the high U.S. unemployment rate and record trade deficit.

“China’s currency manipulation essentially subsidizes Chinese exports and imposes tariffs on foreign imports,” said Rep. Mike Michaud (D., Maine), who is co-chair of the House Trade Working Group. “If the administration fails to act on this issue it will hold back our economic recovery, and hurt the ability of American small businesses and manufacturers to increase their production, keep their doors open and create jobs.”

Lawmakers reiterated their request that the Commerce Department apply U.S. countervailing duty law to currency manipulation and also asked the Treasury Department to cite China for currency manipulation in its biannual report. If the Treasury deems China a currency manipulator, the U.S. could take China to the World Trade Organization and press for punitive tariffs if China refuses to let its currency appreciate.

President Obama, who backed off heated campaign rhetoric against China during his first year in office, pressed the Asian nation in a speech on Thursday to move “to a more market-oriented exchange rate” to help in the “global rebalancing effort.”

Relations between the U.S. and China have become strained in recent weeks over broader issues such as U.S. arms sales to Taiwan, Obama’s meeting with the exiled Tibetan spiritual leader the Dalai Lama and China’s reluctance to join in sanctions against Iran.

Wen, speaking Sunday to reporters in his once-a-year news conference, blamed recent steps by the Obama administration for the tensions.

“These moves have violated China’s sovereignty and territorial integrity,” said Wen. “The responsibility does not lie with the Chinese side but with the United States.”

Wen, whose news conference wrapped up China’s 10-day annual meeting of the National People’s Congress, spent much of the two hours answering questions about economics and trade and defending China’s currency policies. He said China’s stability has helped shepherd global recovery from the financial meltdown.

“We have made strong efforts to keep the exchange rate at a stable level,” said Wen. “This has played a role in the global recovery.”

Seemingly referring to the U.S., he said, “I understand that some countries want to increase their exports,” noting 60 percent of China’s exports are made by foreign-invested or partnered companies.

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