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Congress acts to press China on currency

Proposed sanctions could spur retaliation, analysts say. The White House takes a less confrontational stance.

June 14, 2007|Molly Hennessy-Fiske | Times Staff Writer

WASHINGTON — Congressional leaders are pushing the Bush administration to sanction China for undervaluing its currency, a move economists and business leaders say risks antagonizing the Chinese.

China's currency, the yuan, is undervalued by as much as 40%, according to the China Currency Coalition, an alliance of American industry, labor and agricultural groups.

The tactic puts U.S. exporters at a disadvantage by effectively increasing the prices of their products in China, the group says.

On Wednesday, Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, and the panel's top Republican, Sen. Charles E. Grassley of Iowa, introduced legislation to compel the Treasury secretary to sanction governments that undervalue their currencies.

But in a semiannual report to Congress released the same day, Treasury Secretary Henry M. Paulson Jr., who has led efforts to persuade Beijing to revalue its currency, declined to cite China as a currency manipulator.

And the U.S. trade representative rejected a petition, submitted last month by a bipartisan group of 42 House members, urging that a complaint alleging currency manipulation be filed against China before the World Trade Organization.

Co-sponsors of the bill, including Sen. Lindsey Graham (R-S.C.) and Sen. Charles E. Schumer (D-N.Y.), accused the administration of being soft on China.

"The administration has been too slow to act," Schumer said. "If we continue to do nothing, the problem will only get worse and could lead to a meltdown of world financial systems."

The new bill, which was written to comply with the world trade group's standards, would require Treasury officials to identify countries with "fundamentally misaligned currencies" and sanction them if they failed to reform their practices within 180 days.

Sanctions would include tariffs on imported goods that are considered undervalued due to the level of the exporter's currency, and withholding U.S. government contracts to businesses, multilateral bank financing and financing through the U.S. government-funded Overseas Private Investment Corp.

The legislation would also require that, after 360 days, the Treasury Department and Federal Reserve consider intervening in the currency markets to offset the devaluation. At the same time, the U.S. trade representative would seek a consultation with the accused country through the WTO.

The legislation does not single out China, but it was written with China in mind and would result in sanctions against Beijing, Baucus said.

"There's so many provisions written into this bill that make it very difficult for a Treasury secretary not to find misalignment," he said.

Although the legislation would give the president broad authority to waive sanctions, Bush would have to justify a waiver to Congress, Baucus said -- a tough sell given the current climate. The U.S.-China trade deficit hit a record $232.6 billion last year, a big chunk of the overall $758.5-billion trade gap.

A second China currency proposal offered this week by Sens. Christopher J. Dodd (D-Conn.) and Richard C. Shelby (R-Ala.), the chairman and ranking member of the Banking Committee, sets similar benchmarks.

Baucus said he and Dodd have agreed to work on bringing a single proposal to a vote by September. He also spoke this week, he said, with Rep. Charles B. Rangel (D-N.Y.), chairman of the Ways and Means Committee, who is working on a House version of the bill.

Support has been building in the House for currency legislation, sponsored by Reps. Duncan Hunter (R-El Cajon) and Tim Ryan (D-Ohio), that would sanction China for illegally subsidizing exports through currency devaluation.

Hunter, who is seeking the Republican presidential nomination, said that the U.S. had an interest in protecting jobs through a fair exchange rate with China.

"We've lost 1.8 million manufacturing jobs to China. Maybe not all of that is currency, but a good portion of it is," he said.

Some economists said the currency proposals were likely to antagonize the Chinese and could prompt a backlash in the form of protectionist trade policies.

"I don't think it's going to get the Chinese to where we want them to be," said Susan Aaronson, a professor at George Washington University's business school.

Business groups, including the U.S. Chamber of Commerce and the National Assn. of Manufacturers, said they needed more time to examine the potential effect of the proposals.

Jeremie Waterman, senior director for greater China at the U.S. Chamber of Commerce, said the Baucus-Grassley anti-dumping provision could hurt U.S. businesses if Beijing retaliated by reducing imports from the U.S. or tightening requirements for U.S. investors in China.

Gary Hufbauer, a senior fellow at the Institute for International Economics in Washington, said currency legislation was likely to pass Congress but would probably have to be amended to survive a veto.

"The key will be how much presidential discretion they allow, the shape of the potential penalties," Hufbauer said. "These will be key points where the administration will be arguing for a less confrontational approach."

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molly.hennessy-fiske@latimes.com

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