The US Senate's passing of rules aimed at punishing China for depressing the value of the yuan sparks worries of protectionism.
US Senate's action sparks fears of global trade war
Fears of a global trade war are looming after the US Senate approved rules aimed at penalising China for holding down the value of its currency.
The proposed legislation is the latest of a series of steps under review by governments to help to boost their exports to stimulate stuttering growth.
China and other critics warn such measures are raising trade tensions and risk hastening a slide into a recession.
"There's a lot more scope for this to get a lot more serious," said Charles Robertson, the global chief economist at Renaissance Capital in London. "You've got US unemployment at 9 per cent and Europe going back into recession and both have huge trade deficits with China."
The Democrat-led Senate on Tuesday backed legislation that would impose tariffs on imports from countries with undervalued currencies.
Momentum behind the rules has been driven by the belief that the Chinese yuan has been kept artificially low, giving the country an unfair advantage by making its goods cheaper overseas.
The bill in its present form is unlikely to win the approval it needs from the Republican-led House of Representatives to pass into law. But high unemployment means Barack Obama, the president, will be under pressure to pass a similar proposal.
The fact US legislators are considering ways to force the hand of the world's biggest exporter of manufactured goods is symptomatic of the increasing readiness of governments to weigh protectionist measures, say economists. Protectionist rhetoric and action have been on the rise in recent months as governments struggle to create jobs and kick-start cooling domestic economies.
The World Trade Organization (WTO) could not yet comment on whether the US rules were legal, said Keith Rockwell, a WTO spokeman. "We have to be vigilant as there have been examples where governments have taken trade restrictive measures. Pressures exist and will remain as long as unemployment is high."
Brazil last month imposed a 30 percentage increase in import tariffs on cars. Guido Mantega, the finance minister, has submitted proposals to the WTO allowing countries to levy tariffs on imports from nations that artificially weaken their currencies. He argues cheap Chinese goods are hurting Brazilian car makers.
On Monday, the EU agreed to renew tariffs on warehouse lorries from China and Thailand for an additional five years to protect European manufacturers.
Under the American legislation, governments that do not take action to raise the value of artificially low currencies could face action including increased dumping duties and a ban on US federal procurement.
Many analysts agree the yuan is undervalued against the US dollar by as much as 30 per cent. China has let the yuan revalue 30 per cent against the dollar since 2005 and it maintains it is committed to further reform.
Critics argue the appreciation has not been fast enough.
Beijing has pleaded for Washington to throw out the bill. "China calls on the US to discard protectionism, stop politicising economic issues and take concrete action to create an enabling environment for the development bilateral economic relations and trade," China's foreign ministry said yesterday.
The renewed row between the US and China threatens to overshadow efforts by finance ministers at this weekend's meeting of the Group of 20 (G20) developed and emerging economies to focus on stemming Europe's debt crisis.
In a bid to defuse tensions, France, which holds the G20 presidency this year, has raised the prospect of the yuan entering the basket of currencies making up the IMF's special drawing right.
Such a move could help to promote the international use of the currency.