By and  on September 24, 2010

WASHINGTON — President Obama has put China’s currency policies front and center.

Obama and Chinese Premier Wen Jiabao had their longest and most “intensive” discussion about the issue on the sidelines of the United Nations General Assembly meeting in New York on Thursday, the White House said, as tensions between the two nations escalated on the eve of a vote in the U.S. Congress on a punitive bill targeting China’s currency.

The leaders’ bilateral meeting came after a week of tough talk that prompted concerns in the business community about a new trade fight over China’s allegedly undervalued currency. Critics say the yuan is undervalued by as much as 40 percent, putting U.S. products at a competitive disadvantage to China’s cheaper exports.

Against the backdrop of pressure by Congress, Obama and Wen publicly struck a more conciliatory stance on Thursday, but Obama privately expressed his disappointment to Wen on the pace of the yuan’s appreciation, according to a senior White House official, possibly looking to raise an issue for Democrats in the upcoming Congressional elections.

“The President reiterated that we have welcomed the Chinese announcement last June that they were going to pursue a more flexible exchange-rate policy and that they were going to tie their [yuan] to a basket of currencies,” the official told reporters during the daily White House press briefing. “They know that we were disappointed that there had not been much movement since then, that this had consequences for the global economy and for the U.S. economy and we look to see more…significant revaluation in the months to come.”

He said the President “made clear that we are expecting to see more action, more significant movement,” adding that Obama also warned Wen the U.S. will take actions against the Chinese if they don’t let the yuan appreciate. He cited the World Trade Organization as one possible venue for punitive action.

House Ways & Means Committee chairman Sander Levin (D., Mich.) has scheduled a markup on legislation for today that would allow the Commerce Department to treat currency manipulation as an illegal export subsidy and make it actionable under U.S. trade remedy laws by imposing punitive tariffs on imports. House Speaker Nancy Pelosi (D., Calif.) vowed her support of the bill Wednesday night, saying: “It is time for Congress to pass legislation that will give the administration leverage in its bilateral and multilateral negotiations with the Chinese government.”

The committee is expected to pass the legislation today, and Pelosi’s endorsement could pave the way for a full House vote as early as next week. But the prospects for currency legislation are less certain in the Senate, since both chambers will recess soon for the midterm elections.

Gary Hufbauer, senior fellow at the Peter G. Peterson Institute for International Economics, said that if enacted the legislation will be a “pretty big gauntlet” and make trade a centerpiece in the U.S.-Sino relationship, over foreign policy. The U.S. had a trade deficit of $226.9 billion with China in 2009, with apparel, computers and electronic products as major categories. But China also owns $846 billion in U.S. debt as of July, which has been seen as a key reason why the U.S. has tread lightly so far on the issue.

Importers are concerned about the heightened rhetoric between the two leaders and the bill before the committee today.

“[The legislation] would make the value of bringing a countervailing duty case much higher than it was previously,” said Nate Herman, vice president for international trade at the American Apparel & Footwear Association. “It will make it easier for these cases [brought by domestic industries] to make it to the investigation stage.”

David Spooner, an attorney with Squire Sanders and a former trade official for the Bush administration, said he doesn’t believe the bill before the committee today will spark a trade war in the short term, but it could lead to retaliation if enacted.

He said one of the biggest concerns of apparel and footwear companies is that China will unveil a major revaluation of 20 percent, for example, overnight and dramatically increase prices on the products that U.S. firms make there for export back to the U.S.

Stephanie Lester, vice president of international trade at the Retail Industry Leaders Association, said, “The majority of the business community does not think that currency legislation will be helpful. It would create more pain than gains.”

Domestic textile organizations support Congressional efforts to address China’s alleged currency undervaluation.

“The bill will finally give U.S. companies that have been damaged by China’s undervaluation a chance to prove within the unfair trading practices system whether that is the case or not,” said Auggie Tantillo, executive director of the American Manufacturing Trade Action Coalition. “That’s all we’re asking for, our day in court to demonstrate that China’s currency practices are displacing our workers and putting our companies out of business.”

Tantillo said that pushing China to operate as a “reasonable and honest trading partner” will not trigger a trade war because the Chinese are well aware of how closely tied the two countries are economically and that they have too much to lose.

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