GENEVA — Trade diplomats said it’s highly unlikely that the World Trade Organization will step in to act on the growing concern over the trade-distorting effects of China’s allegedly undervalued currency.

The yuan is pegged to the dollar at a rate of 8.28 yuan, a multiple that many economists argue undervalues the Chinese currency by about 40 percent. The issue has become a hot one for apparel and textile makers and importers, since China is the U.S.’s leading supplier of those products.

Experts’ concerns focus on how the U.S. will respond if domestic manufacturers complain formally about the exchange rate.

Frank Vargo, vice president for international economic affairs at the U.S. National Association of Manufacturers?said “the best would be a negotiated solution,”?but said he would support a WTO case if needed.

Washington-based lobbyists said the issue is a political hot potato not only because the NAM and Coalition for a Sound Dollar are waging a strong political campaign, but also because the issue has grassroots support across the U.S., where there is growing concern about the effects of imports on domestic manufacturing jobs.

A spokesman for the U.S. Trade Representative Robert Zoellick, declined to comment?on whether the USTR would consider bringing a complaint on the yuan to Geneva.

Jeffrey Bader, who served as the chief U.S. negotiator in China’s WTO-entry talks, said, “There is a plausible legal basis for bringing a WTO case, but whether a WTO dispute panel would be prepared to make a ruling in an area it has not gone before, and with the broad potential ramifications on international currency, is highly uncertain.”

But even if a case was brought, he said it’s not clear the WTO would act. Said one Washington-based trade lawyer: “The implications of this are really huge and it would not take long for a panel to throw it out.”

On Sept. 24, deputy assistant U.S. Trade Representative Charles Freeman 3rd, told the Congressional Executive Commission on China: “To the extent imports from China disrupt U.S. markets, the administration is fully prepared to assert the rights of the U.S. under China’s WTO accession agreement.”Sergio Marchi, Canada’s WTO ambassador, said after the collapse of WTO talks in Cancún, he hoped the WTO’s dispute-settlement system “does not become a court of first resort.”

The relevant WTO rule on exchange rates stipulates that “contracting parties shall not, by exchange action, frustrate the intent of the provisions of this agreement, nor by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.”

Moreover, China as part of its WTO entry terms,?is also required to provide the global agency with information on its foreign exchange and payments.

A senior U.N. trade and finance expert, who requested anonymity, said it would be hard for the U.S. to make a currency-trade case as China has no restrictions in place on its current account transactions.

As the value of a currency depends on many factors, and not only trade, the WTO “may have a lot of difficulty to bring an objective judgement,” said a senior?Japanese diplomat.

But given the huge economic interest and political ramifications at play, the odds are the Bush administration will push for “a resolution through diplomacy,” said a former senior U.S. official.

The Governor of the Bank of China, Zhou Xiaohuan, on Sept. 23 stressed that, before adequate flexibility can be introduced in the exchange-rate regime, the country needs to first reform China’s state-owned commercial banks, liberalize its services trade and remove excessive restrictions on capital account transactions.

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