By  on July 27, 2007

WASHINGTON — The Senate Finance Committee overwhelmingly passed a bill Thursday that takes the first legislative step toward establishing rules to punish China if it does not boost the value of its currency.

The bill targets countries, notably China, that undervalue their currencies and lays out steps to reform their policies or ultimately face U.S. or World Trade Organization penalties. The committee approved the bill by a 20-to-1 vote, setting the stage for it to move to the Senate floor, although its fate in the Senate and House is uncertain due to jurisdictional disputes and competing bills.

Sen. Christopher Dodd (D., Conn.), chairman of the Senate Banking, Housing and Urban Affairs Committee, has said he will mark up his own bill next week, but the Finance Committee made the first inroads on the issue that has gained momentum on Capitol Hill.

At the Finance Committee hearing, senators repeatedly blamed China's undervalued currency for a record U.S. trade deficit with the country, which hit $232.5 billion in 2006, and the loss of manufacturing jobs in the U.S. Critics of China's policies argue that it keeps the yuan undervalued by as much as 40 percent to make its exports cheaper, which undercuts the competitiveness of U.S. manufacturers and workers.

"We recognized that some international currency exchange rate policies can be disruptive," said Sen. Max Baucus (D., Mont.), chairman of the committee. "We recognized that when a country's policies keep its currency undervalued, those policies make that country's products unfairly cheap here and we recognized that those policies also make American products unduly expensive there."

Baucus acknowledged the bill has been criticized.

"Some see this bill as too harsh and accuse the U.S. of China-bashing," he said. "Others see this bill as too weak and believe that we have given the administration too much discretion. I think we have struck the appropriate balance."

Industry observers closely watched the amendments senators offered to the bill Thursday to strengthen or weaken it. Sen. Jim Bunning (R., Ky.) withdrew an amendment that would have subjected imports to countervailing duties from countries that are deemed to "misalign" their currencies. His amendment would expand the current countervailing duty laws, which apply to imports that are deemed illegally subsidized, to define and include currency manipulation as an unfair subsidy."I believe this legislation could be strengthened if it includes a countervailing duty remedy as well," said Bunning, adding that he would pursue his amendment in the Banking Committee's bill or on the Senate floor.

The U.S. textile industry, which has argued the bill needs to be strengthened, was disappointed Bunning withdrew the amendment.

"A stronger bill would include the countervailing duties and not give the President such widespread discretion to stop trade remedies from occurring," said Cass Johnson, president of the National Council of Textile Organizations.

The bill approved by the Finance Committee was introduced in June by Baucus, Chuck Grassley (R., Iowa), Lindsey Graham (R., S.C.) and Charles Schumer (D., N.Y.), after Treasury Secretary Henry Paulson Jr. stopped short of accusing China of currency manipulation, choosing instead to use diplomatic pressure to get the Chinese to reform.

Although the bill does not target China specifically, it is intended to force a revaluation of the yuan and impose new consequences for inaction. The measure would direct the Treasury Department 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 for the most egregious cases if bilateral negotiations fail. It would allow the U.S. for the first time to offset undervalued currencies by raising antidumping duties on Chinese imports.

Retailers and wholesale apparel importers who bring in billions of dollars worth of goods from China each year are concerned they could face higher duties. Erik Autor, vice president of international trade at the National Retail Federation, said the bill "will expose retailers to a great deal of unpredictability." Autor said retailers are concerned about how the government will determine how much a country's currency is undervalued and then base antidumping duties on that calculation.

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