House panel set to approve China currency bill

WASHINGTON (Reuters) - A congressional panel, in a move likely to increase trade tensions with China, was set on Friday to approve a bill that allows the United States to slap duties on goods from countries with "fundamentally undervalued" currencies.

The House of Representatives Ways and Means Committee was expected to approve the bill, clearing the way for an expected vote in the full House next week. The measure, however, may never become law because of the uncertain outlook for the Senate to approve it.

Lawmakers have long threatened legislation if China did not take action to increase the value of the yuan, which critics inside and outside Congress say gives Chinese companies an unfair trade advantage.

But Congress, in a fierce election season focused on sluggish U.S. economic growth, appears poised to move closer than ever to passing legislation that would penalize China. President Barack Obama, who has said that China has not done enough to raise the value of the yuan, has not taken a position on the legislation.

Chinese Premier Wen Jiabao, earlier this week, said the exchange rate of the yuan against the dollar is not the main reason for the U.S. trade deficit with China.

The bill amends U.S. trade law to essentially allow the U.S. Commerce Department to treat a undervalued currency as an export subsidy if certain criteria are met.

The change adds a new subsidy -- persistent and fundamental currency undervaluation -- to the list of subsidies the U.S. Commerce Department can already offset with "countervailing duties."

Commerce Department officials estimate that currently less than 3 percent of U.S. imports from China are hit with either countervailing or anti-dumping duties.

That number is expected to rise if the "Currency Reform for Fair Trade" becomes law because the promise of potentially higher duties could encourage more U.S. companies to bear the cost of trade litigation to seek import relief.

Many U.S. lawmakers and manufacturers complain China deliberately undervalues its currency by as much as 25 to 40 percent. However, under the bill, the Commerce Department would have to decide the precise amount of any undervaluation when presented a case.

Earlier this week, eight former U.S. Commerce Secretaries and Trade Representatives warned that expanding the U.S. countervailing duty law to treat undervalued currencies as a subsidy could backfire on the United States.

They said China was likely to challenge the measure at the World Trade Organization, exposing U.S. exports to trade retaliation if Beijing won the case.

It also could undermine U.S. pressure on China to lower trade barriers, stop piracy and counterfeiting of U.S. goods and change policies that threaten other U.S. intellectual property rights, they said.

(Reporting by Doug Palmer; Editing by Leslie Adler)