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WASHINGTON - The growing sentiment in the US Congress to penalize China for its currency policies is fueling worry among economists over trade frictions that might lead to serious consequences for both
countries.
Analysts say a bill unveiled Wednesday, which would punish countries with "misaligned" currencies and not only those that "manipulate" exchange rates, highlights wide bipartisan support for measures to deal with the massive trade deficit with China.
But many economists say such measures would be counterproductive and threaten the growing ties between the two economies on trade and investment.
"These kinds of punitive measures would be shooting ourselves in the foot," said Nariman Behravesh, chief economist at the research firm Global Insight.
"It would hurt our trade relationship, and hurt the willingness of the Chinese to invest in the US. There's no question that China has become the favourite scapegoat in the same way Japan was 20 years ago."
Key senators from both major parties introduced legislation requiring the US Treasury Department to penalize countries with "misaligned" currencies, and expressed confidence the measure would gain enough votes to override an expected presidential veto.
The announcement came hours after the Treasury, continuing its recent policy, stopped short of branding China a "currency manipulator," a designation that could lead to economic sanctions.
The Treasury report said the policies have left the Chinese yuan undervalued but that US officials could not conclude that this was a result of a deliberate effort to gain an unfair trade advantage.
This failed to assuage lawmakers who claim the yuan is undervalued by as much as 40 percent, and contend this is a key factor in the loss of US manufacturing jobs and a 232.5-billion-dollar bilateral trade deficit last year.
"This bill requires the Treasury Department to take firm but fair action when other nations play games with the US dollar," said Senate Finance Committee chairman Max Baucus.
The committee's top Republican, Senator Charles Grassley, denied the bill was specifically targeted at China.
"We are not picking a fight with anyone. Twenty years ago this legislation could have applied to Japan, tomorrow it could apply to country 'X.'"
Beijing has promised to "respond" to any new measures, and some fear a downward spiral of protectionism if the bill succeeds.
"Protectionism begets protectionism, and any attempt by the United States to limit market access or impose higher costs on imports is likely to provoke similar measures from other parts of the world," said Joseph Quinlan, market strategist at Bank of America.
"Tit-for-tat protectionism would benefit no one, especially not the US multinationals presently enjoying the best of both worlds."
Analysts say China is a key buyer of US Treasury bonds, and that any hint of a move away from this could push up US interest rates by forcing Washington to pay higher yields to attract investment.
Analysts said the latest bill appears to have strong bipartisan support.
"We have a very large trade deficit with China, and when (lawmakers') constituents are feeling economic woes, it's a good way to blame it on someone else," said Jay Bryson, global economist at Wachovia Securities.
But Bryson said it is misguided to blame China for problems in the US balance of payments.
"We should blame ourselves," he said. "We have a large current account deficit because we don't save enough. We spend more than we produce. If China disappeared tomorrow that deficit won't go away, we'll buy those goods from Mexico or Pakistan or whomever."
Bryson said the relationship between the US and China benefits both: "We need China because they help keep costs and interest rates down but at the same time China needs us. If we don't buy as many goods it will cause their economy to slow."
Some analysts say the latest moves may be part of maneuvers in Congress and the US administration to ramp up pressure that may force the Chinese to back down.
"I don't think anyone in forex land takes this bill seriously and most believe that the Chinese would allow the currency to accelerate in advance of sanctions," said Andrew Busch at BMO Capital Markets. - AFP/ir
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