The House stepped up pressure on China to let its currency rise faster, passing a bill on Wednesday that could penalize Chinese goods, as lawmakers blamed it for lost jobs in America.
The bill is likely to fan the flames of a long-running dispute with China over trade and jobs, even though passage in the Senate remains far from a sure bet.
China's Ministry of Commerce reacted Thursday by saying the bill violates the rules of the World Trade Organization.
The bill passed with solid bipartisan support just over a month ahead of mid-term elections as voters focus on the still-struggling U.S. economy and persistently high unemployment. Many lawmakers both in the House and the Senate have complained for years that China's policies create an unfair trade advantage, but this is strongest step taken yet.
The bill treats China's exchange rate as a subsidy, opening the door to extra duties on Chinese goods entering the United States, some of which are already subject to special levies.
It passed by a vote of 348-79, with 99 Republicans joining 249 Democrats to pass the bill. Five Democrats and 74 Republicans voted no.
Any vote in the Senate, however, won't come until after congressional elections on Nov. 2 when the U.S. political landscape could be greatly changed.
"China's persistent manipulation of its currency contributes to the outsourcing of American jobs and poses a very serious problem that requires real action," said House Ways and Means Committee Chairman Sander Levin.
House Speaker Nancy Pelosi said the bill would give President Barack Obama leverage in talks with China and "make it clear that if China wants a strong trading relationship with the United States, it must play by the rules."
The Obama administration has not taken a stance on the bill bill. But after the vote, a Treasury Department spokeswoman said the legislation reflected the "serious concerns" in Congress about China's currency practices.
"The president and (Treasury) Secretary (Timothy) Geithner share those concerns. They both have said repeatedly that China needs to allow a significant, sustained appreciation over time," she said.
China's conciliatory tone
After the House vote, Xinhua news agency quoted China's Commerce Ministry spokesman, Yao Jian, as saying: "Starting a countervailing investigation in the name of exchange rates does not conform with relevant WTO rules."
But Yao struck a conciliatory note, saying China was willing to work with the United States on concerted measures to promote more balanced bilateral trade.
"We hope that all sides in the U.S. can make an objective and comprehensive assessment of the facts to arrive at the correct decisions that are favorable for long-term Sino-U.S. economic and trade ties and America's own interests.
But Yao took issue with the contention of U.S. lawmakers that America's large bilateral trade deficit with China shows the yuan, also called the renminbi, is undervalued.
The yuan has risen 24 percent against the dollar since July 2005, when China scrapped a decade-old peg to the U.S. currency, but U.S. legislators say Chinese exporters still have an unfair currency advantage in global markets.
Beijing has consistently argued that the bilateral deficit reflects structural economic factors, first and foremost the fact that the United States saves too little.
And because China is the final link in a complex global production chain, its bilateral trade imbalance with the United States should not be viewed narrowly as "made in China."
"China has a trade surplus with the United States, but it has deficits with many Asian countries and regions," Yao said.
"The United States cannot say the yuan is undervalued simply because of the China-U.S. trade deficit, and can't take protectionist trade measures on that basis," Xinhua quoted him as saying.
Before the House vote, China's central bank reaffirmed its pledge to increase the flexibility of the yuan and improve the way it manages the exchange rate.
Obama and Chinese Premier Wen Jiabao talked about China's currency and huge trade surplus with the United States on the sidelines of the U.N. General Assembly last week.
Despite the yuan's modest gains against the dollar since Beijing allowed more movement in June, International Monetary Fund economists estimate the yuan is 5 percent to 27 percent undervalued.
Representative Dave Camp, the top Republican on the Ways and Means Committee, said he voted for the bill "because it sends a clear signal to China that Congress's patience is wearing out."
On the opposing side, Representative Jeb Hensarling, a Texas Republican, said he feared China could retaliate against the bill by shutting its market to U.S. farm exports, offsetting any gains in U.S. manufacturing jobs.
U.S. retailers, who source heavily from China, also expressed concern about being caught in the cross-fire.
Many lawmakers said the United States was already in a trade war with China and needed new tools to fight it.
Senator Charles Schumer, a Democrat who has been one of the loudest critics in Congress of China's trade policy, said after the vote that he was ready to take up the cause in the Senate. "We plan to push our bill in the Senate when we return later this year," he said.
Global currency war?
China's tight leash on the yuan is under intense scrutiny as countries around the world look to export their way back to economic health, raising concerns they will intentionally weaken their currencies to gain an edge.
Japan intervened this month to weaken the yen for the first time in six years.
The House move is certain to further roil relations with Beijing, which resents the criticism and says the decision about the speed of currency reforms is its alone.
China, the largest foreign buyer of U.S. government debt with holdings of nearly $847 billion as of July, also says its big trade surplus with the United States is due to Americans saving too little and no longer making the goods China sells.
While Obama has not taken a position on the legislation, House Majority Leader Steny Hoyer said lawmakers worked with the White House to ensure the bill did not violate WTO rules.
Treasury Secretary Timothy Geithner told Congress two weeks ago that Washington would work with Group of 20 nations to push China for faster appreciation but several allies expressed reluctance to join the effort. G20 leaders are set to meet in Seoul on Nov. 10-11.
Economists have doubts
The House bill allows the Commerce Department to treat "fundamentally undervalued currencies" as an illegal export subsidy so that U.S. companies can request a countervailing duty to offset China's price advantage.
That is expected to encourage steel, paper and other import-sensitive U.S. industries to file more cases. The United States now has countervailing duties on less than 3 percent of its imports from China, which totaled $296 billion in 2009.
Some economists said they understood the politics of the debate but questioned whether the bill would bring back American jobs or prod China to move faster on currency reform.
"We consume a lot. The Chinese save a lot. We're going to run a trade imbalance with them," said Derek Scissors of the Heritage Foundation.
China and the United States have a difficult but vital diplomatic relationship, not least in dealing with nuclear threats from Iran and North Korea.
In recent months, Washington and Beijing have also sparred over Chinese government procurement policies, Internet censorship, U.S. arms sales to Taiwan and U.S. sympathy for the Dalai Lama, the exiled Tibetan spiritual leader.