US bill to punish China faces uncertain future

As the U.S. economy slumps, lawmakers have renewed a push to punish China for what they see as currency manipulation that costs American jobs. Their prospects appear bleak at a time when the United States is seeking Chinese help in confronting crises around the world.

In the aftermath of North Korean nuclear and missile tests, the Obama administration wants China, a veto-holding permanent member of the United Nations Security Council, to use its leverage as North Korea's only major ally to push Pyongyang to return to nuclear disarmament negotiations.

During U.S. Treasury Secretary Timothy Geithner's first official trip to China next week, he will be looking for ways that China, with the world's third largest economy, and the United States can work together to deal with a global economy in turmoil.

"Right now, the administration's desire to partner with China on a variety of issues carries the day," said Derek Scissors, a fellow at the Heritage Foundation specializing in Asia's economy. "So that would bode pretty poorly for the chances of passage" of the currency legislation.

That could change, Scissors said, if high unemployment leads to anger at China among American voters or if U.S. lawmakers begin to question whether China is as important to U.S. interests as the Obama administration says it is.

Another reason the Obama administration probably will oppose currency legislation, according to Republican Rep. Ed Royce, is China's role as the biggest holder of U.S. government debt. China holds an estimated $1 trillion in Treasuries and other U.S. liabilities.

American manufacturers contend that an undervalued Chinese currency is the biggest cause for the huge trade deficit the United States runs with China. They argue that the yuan is undervalued by between 20 and 40 percent against the dollar.

The congressional legislation, called the Currency Reform for Fair Trade Act of 2009, aims to punish China for claims that its artificially lowered currency value provides a subsidy to domestic businesses that makes it harder for American companies to compete.

It would define clearly what should be considered currency manipulation and punish countries found to be in violation by putting up trade barriers against their goods.

Republican Sen. Jim Bunning, one of the bill's co-sponsors, said China's currency manipulation "hurts American goods in every market as we compete against artificially cheap Chinese exports."

"It is clearly an illegal trade subsidy," Bunning said. "But neither the Bush administration nor the Obama administration has had the courage to do anything about it."

Obama was tough on China as a presidential candidate looking to win votes.

"We've got to have a president in the White House who's negotiating to make sure that we're looking after American workers," Obama said at a debate. "It means that if they're manipulating their currency, that we take them to the mat on this issue."

But as president, he has followed the Bush administration's strategy of pushing for diplomatic and economic cooperation from China, not sponsoring punishing legislation.

In April, the Obama administration did not cite China as a country that is manipulating its currency to gain unfair trade advantages. That appeared at odds with Geithner's comments during his Senate confirmation hearings that Obama believed China was manipulating its currency.

The United States has praised China's role in the current global economic downturn.

At the same time, tensions have flared as U.S. lawmakers portray Chinese trade practices as unfair.

China's Commerce Minister, Chen Deming, writing in The Wall Street Journal in April, expressed regret that "trade measures by the U.S. against China are on the rise." He wrote that such measures "will seriously test China-U.S. economic and trade relations."