The US Senate has voted to move forward with a bill designed to pressure China to allow its currency to rise in value in the hope that the yuan’s appreciation will create more jobs in the US.
Senators voted 79-19 in favour of opening debate on the Currency Exchange Rate Oversight Reform Act of 2011, which would give the US the power to impose countervailing tariffs on products from other countries deemed to be subsidising their exports through currency undervaluation.
This sets the stage for a debate between lawmakers, who charge that China artificially keeps value of the yuan low to give its exporters an "unfair competitive advantage" and believe this bill will return jobs lost to China back to the US, and critics who warn of a trade war and claim that the bill will not generate additional US jobs.
Senate Majority Leader Harry Reid said, "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," he said. "In the last decade alone, we have lost 2 million American jobs to China because of a trade deficit fuelled by currency manipulation," he added.
China does not allow the yuan to float freely on exchange markets. Academics have maintained it could be undervalued by as much as 20% to 40% compared to the US dollar.
Monday’s approval for the debate increases the chances that it will clear the Democrat-controlled Senate later this week, but whether it will be able to clear the Republican-run House of Representatives remains unclear. If the bill does clear both chambers it will present President Barack Obama with a tough choice on whether to sign the legislation into law and risk trade war with China, or veto it to pursue a more diplomatic approach. The bill has gained support as US unemployment continues to hover above 9% as the 2012 elections draw near.
Critics of the bill caution that the legislation’s passage will ignite a trade war with China, a rapidly growing market for US goods, at a time when the struggling global economy could least afford it. The Emergency Committee for American Trade labelled the bill "a highly damaging unilateral approach that will undermine broader efforts to address China's currency undervaluation." It added that the bill was unlikely to pass at the World Trade Organization and may result in Chinese retaliation "to the detriment of U.S. exports and jobs."
Report: Senate takes first step on China yuan bill (Reuters, 3 Oct 2011)
Report: US Senate backs debate on currency law amid yuan row (BBC, 4 Oct 2011)
China has voiced "firm opposition" against the bill. Foreign Ministry spokesman Ma Zhaoxu said on Tuesday that such a move "seriously violates rules of the World Trade Organization and obstructs China-US trade ties." He added that China calls for certain US Senators to "rationally savvy the Sino-US trade cooperation, which is mutually beneficial in nature, and stops to pressure China by using domestic law-making means of the United States."
The People's Bank of China, the Chinese central bank, said it regretted the vote and said the move could lead to trade disputes and affect Beijing's ongoing exchange-rate reform. It added that factoring in inflation, the yuan has appreciated "greatly" and is near a balanced level, and warned that the U.S. vote is unlikely to help resolve domestic issues such as the trade deficit, low savings rate and high unemployment, but could instead negatively impact the economy and market confidence.
Report: China "firmly opposes" US Senate's yuan bill, FM spokesman (Xinhua, 4 Oct 2011)
Report: China PBOC: Regret US Senate Vote On China's Currency Policy (Wall Street Journal, 3 Oct 2011)