Risk of trade war rises as key US committee backs tariffs on China

The risk of a trade war between the US and China has increased after a key Congressional committee backed a bill to allow US companies to seek tariffs on Chinese imports.

Sander Levin, right, chairman of the House Ways and Means Committee Congressmen, speaks with colleague Charles Rangel during the hearing on the Currency Reform for Fair Trade Act. Photo: AFP

The adoption of the measure by the Ways and Means Committee on Friday means it will now be voted on by the House of Representatives on Wednesday.

"China's exchange-rate policy has a major impact on American businesses, and Americans jobs, which is what this is all about," said Sander Levin, a Democrat from Michigan and chairman of the committee.

China's determination to shackle the strength of its currency helped turn the country into the world's manufacturing hub for everything from iPods to T-shirts and, until the recession bit, attracted few critics. But an unemployment rate of 9.6pc in the US, as well as upcoming Congressional elections, is spreading anger across Capitol Hill.

According to the bill's supporters, a properly valued yuan would move jobs back to the US as exports from China become more expensive. The Peterson Institute for International Economics in Washington argues up to 500,000 American jobs could be created.

The move by the committee is awkward for the White House which has steered clear of officially classifying China as a "currency manipulator" for fear of the repercussions of a trade war. President Barack Obama urged Chinese premier Wen Jiabao to take more aggressive steps when they met at the United Nations on Thursday, but the Chinese leader said that the value of the yuan was not the cause of the $145bn (£91bn) trade deficit the US is running with China.

Underlining the high stakes for China over its key economic relationship, Mr Jiabao said that if the yuan rose sharply he couldn't "imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs".

Not every US company shares the committee's view. Wal-Mart and Citigroup are among companies lobbying against the Bill, fearing it will provoke retaliation in China. If the bill passes next week, the Senate will still need to vote on it.