By Doug Palmer
WASHINGTON (Reuters) - A congressional panel turned up the pressure on China over the yuan on Friday, approving a bill that would let the United States slap duties on goods from countries with undervalued currencies.
In a move likely to increase trade tensions with China, the House of Representatives Ways and Means Committee backed the legislation on a voice vote and cleared the way for the full House to take it up next week.
The measure may never become law, however, as it faces an uncertain future in the Senate.
Critics inside and outside Congress claim that China enjoys an unfair trade advantage by undervaluing the yuan against the dollar by as much as 25 percent to 40 percent, hurting U.S. exports and employment.
House Ways and Means Committee Chairman Sander Levin said the bill would give the United States new tools to address China's "currency manipulation" because diplomatic pressure has not yielded satisfactory results.
The panel's approval came one day after President Barack Obama pressed Chinese Premier Wen Jiabao on its currency in talks on the sidelines of the U.N. General Assembly meeting.
Obama urged China to do more to move its currency toward a market-based exchange rate, and Wen said Beijing planned to push ahead with reforms, said Jeffrey Bader, a senior adviser to Obama on Asian issues.
The Obama administration has performed a cautious balancing act over the legislation. Senior U.S. officials have not publicly embraced it but neither have they sought to block it, leaving the door open for lawmakers to press ahead.
"We will carefully examine any proposals put forward by Congress, but we have not taken a position on the legislation," a Treasury spokesman said after the committee vote.
Republican critics said Democrats were raising the currency issue now with the hope it will help them in the November 2 elections, which have been dominated by a fierce debate over the struggling economy and persistently high unemployment.
Lawmakers have long threatened legislation if China did not take action to increase the value of the yuan.
"China's persistent manipulation is a major distortion in the international marketplace," Levin, a Democrat, said. China's undervalued currency "has a major impact on American workers and therefore American jobs. That's what this is really all about."
The panel's top Republican, Dave Camp, said he backed the bill because changes made to the legislation would bring it more into line with World Trade Organization rules.
There have been expectations that if currency legislation were passed, China would likely challenge the measure at the World Trade Organization, exposing U.S. exports to trade retaliation if Beijing won the case.
By conditioning its ultimate position on how well the bill stacks up with the WTO, the Obama administration left an escape route if it deems the legislation out of line with its diplomatic approach.
Wen said earlier this week the exchange rate of the yuan against the dollar is not the main reason for the U.S. trade deficit with China.
In the foreign exchange markets, the panel's approval of the measure drew little reaction.
"It will not have too much impact on currency markets," said John Doyle, senior currency strategist at Tempus Consulting in Washington. "It's more rhetorical"
The bill amends U.S. trade law to essentially allow the U.S. Commerce Department to treat an 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."
Ways and Means Committee aides said the bill does not guarantee the Commerce Department will apply countervailing duties against undervalued currencies, but removes an important hurdle.
Under the bill, the Commerce Department would have to decide the precise amount of any undervaluation when presented a case.
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.
Representative Kevin Brady, a Texas Republican, said he worried the bill could damage U.S. efforts to compete successfully in the growing China market.
"I am also suspicious that after four years of controlling Congress, Democrats are now rushing this bill to the House floor in the final weeks ahead of the election. Playing politics with an issue this serious is risky for American workers," Brady said.
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.
In addition to a likely challenge by China at the World Trade Organization, currency legislation 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.
(Writing by John Whitesides; Editing by Leslie Adler)
