China Warns of Trade War If U.S. Currency Bill Passes

Chinese citizen counting money amid the global economic crisis. The Chinese Premier expressed concern over the $1 trillion in US debt held by the Asian nation., a photo by Pan-African News Wire File Photos on Flickr.

China warns of trade war if U.S. currency bill passes

1:00am EDT
By David Stanway and Aileen Wang

BEIJING (Reuters) - China warned Washington it is "adamantly opposed" to a proposed U.S. bill aimed at forcing Beijing to let its currency rise, saying its passage could lead to a trade war between the world's top two economies.

In a coordinated response, the Chinese central bank and the ministries of commerce and foreign affairs accused Washington of "politicizing" global currency issues.

The bill to be debated in the United States this week violates World Trade Organization rules and forcing the yuan to appreciate would weaken joint efforts to revive the global economy, the foreign ministry said.

"By using the excuse of a so-called 'currency imbalance', this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations," foreign ministry spokesman Ma Zhaoxu said in a statement posted on China's official government website (www.gov.cn) on Tuesday.

"China expresses its adamant opposition to this."

U.S. senators voted on Monday to open a week of debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to slap countervailing duties on products from countries found to be subsidizing their exports by undervaluing their currencies.

U.S. lawmakers, eyeing 2012 elections, said the undervaluing of China's currency had cost American jobs and that a fairer exchange rate would help cut an annual trade gap of $250 billion.

Ma urged U.S. legislators to "proceed from the broader picture of Sino-U.S. trade and economic cooperation" and "forsake protectionism."

He repeated Beijing's position that it will continue to gradually reform its currency policy, "strengthening the flexibility of the renminbi exchange rate."

BLAMING CHINA

Monday's vote bolsters prospects for the bill to clear the Senate later this week, but prospects for action in the House of Representatives are murky.

If the bill did clear both chambers, it would present President Barack Obama with a tough decision on whether to sign the popular legislation into law and risk a trade war with Beijing, or veto it to pursue a more diplomatic approach.

"My colleagues, both Democrats and Republicans, agree that China's deliberate actions to devalue its currency give its goods an unfair competitive advantage in the marketplace," said Senate Majority Leader Harry Reid.

China has routinely denied claims that its policies are responsible for trade imbalances and a high rate of unemployment in the United States, saying that structural problems were to blame.

"It is widely understand that the renminbi exchange rate is not the cause of China-U.S. trade imbalances," Ma said.

China's central bank said in a statement that the bill failed to address the underlying issues in the U.S. economy.

"The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China's reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see."

China's currency has appreciated 7 percent since June 2010, when the central bank decided to adopt a more flexible exchange rate, said foreign minister spokesman Ma, adding that Beijing would continue "proactive" and "gradual" reform.

The central bank added that Chinese inflation had already pushed the real yuan exchange rate further "toward the equilibrium."

Ministry of Commerce spokesman Shen Danyang said the United States was trying to pass on the blame for its own failings.

"Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern," he said in a statement issued on the ministry's website.

TRADE WAR

Shen said any move by the United States to force the yuan to appreciate would undermine joint efforts to revive global economic growth, which took another blow on Monday with data showing that global manufacturing shrank in September for the first time in over two years.

"It will weaken China-U.S. efforts to join hands and together promote global economic recovery," he said. "The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment."

U.S. critics of China's currency policy have gained some traction as a weak economy keeps U.S. unemployment stuck above 9 percent and as 2012 presidential elections draw near.

Passage of the bill by the Democratic-controlled Senate would send it to the House, which is run by traditionally free-trade-friendly Republicans.

A China currency bill passed the House last year with 99 Republican votes, but lapsed because the Senate took no action. This year, the bill already has more than 200 House co-sponsors and this week supporters expect to reach 218, the number needed to pass it.

However, House Republican leaders have not shown a great appetite to pursue currency legislation, and it is unclear if the bill would ever face a vote in that chamber.

As with similar legislation in the past, the Obama administration has not taken a public stance on the bill, although White House spokesman Jay Carney said on Monday that the president shares "the goal it represents."

U.S. critics of the bill also warned of the risk of a trade war with China -- one of the fastest-growing markets for U.S. goods -- just when a weak global economy can least afford it.

The Emergency Committee for American Trade called the bill "a highly damaging unilateral approach that will undermine broader efforts to address China's currency undervaluation."

It also said the bill was unlikely to pass muster at the World Trade Organization and would open the door to Chinese retaliation "to the detriment of U.S. exports and jobs."

The Senate decision was a sign that China was being made a scapegoat by struggling western economies, said Wang Jun, a researcher at the China Center for International Economic Exchanges.

"Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue.

"We need to launch some pre-emptive measures to hit back against any more attacks," Wang said.

(Additional reporting by Chris Buckley; Editing by Neil Fullick)