US-China Trade War Looms

American senators could vote this week to slap tariffs of 27.5 per cent on all Chinese goods, amid a rising clamour of protectionist anger on Capitol Hill.

The sponsors of the so-called Schumer-Graham Bill were in Beijing last week - Chuck Schumer's first official trip overseas in 25 years - to press home the message that China's cheap currency gives it an unfair advantage over the Americans. Schumer, a Democrat who represents New York, and his Republican co-sponsor, Lindsey Graham of South Carolina, have been promised a vote on the measure by the end of March.

Beijing announced a revaluation of the yuan last year, but so far it has only been allowed to appreciate against the dollar within tight limits - too slowly for Schumer, who said in Shanghai on Friday: 'We are not going to give up until we've seen a plan [from China].'

The US ran a trade deficit of more than $200bn with China last year, as shoppers sucked in low-cost consumer goods from the fast-growing economy. Like Japan in the Eighties, China is the target of protectionist rhetoric.

'There's a growing antipathy to free trade in Congress, and the Bush administration is fully on board,' says Dan Ikenson of free market think-tank the Cato Institute. Treasury Secretary John Snow has repeatedly pressed the case for the Chinese to float their currency.

Schumer and Graham will hold talks with colleagues in Congress to decide whether to press their bill to a vote. 'The jury's out,' Schumer said. 'We're going to make a decision next week. We're not saying yes, we're not saying no.'

A third Senator, Iowan Chuck Grassley, chairman of the Senate Finance Committee, has suggested he could table a compromise bill that would call for harsher scrutiny of the Chinese by the US administration, without imposing tariffs immediately.

Ikenson predicted that the senators would back away from making a move this week and await the outcome of a state visit by Chinese president Hu Jintao in April, but with many other anti-China bills also tabled in Congress, the pressure for action is mounting. He compared the rhetoric in Washington to furious objections to the takeover of US ports by Dubai Ports World last month. 'I look at the Dubai Ports situation - Congress turned into a mob. Everyone wanted to be seen as doing something about it. I think the same dynamic could take hold on the trade issue.'

Some analysts have compared the bill with the infamous 'Smoot-Hawley' tariffs of 1930, which kicked off a tit-for-tat transatlantic trade war and helped turn the stock market crash of 1929 into the Great Depression. Phillip Swagel of the American Enterprise Institute said that unless Schumer drew back from the brink this week, he could become known as the Smoot of the 21st century: 'He would go down in history as the man who crashed the US economy.' He said the anti-China senators were likely to 'declare victory', having delivered their message to the Chinese in person.

But Stephen Roach, chief economist at Morgan Stanley, who met the senators - and Beijing officials - in China last week, said the rhetoric on Capitol Hill was already damaging a fruitful trading relationship. 'China is deeply troubled over the outright hostility from an increasingly xenophobic US Congress,' he said.

He said the trade deficit was the flipside of America's insatiable demand for foreign goods and its lack of savings. The US consumes more than it earns and borrows the difference, much of it from Asian central banks, including China's.

'The danger is that the United States views China with a growing sense of distrust - poisoning the chances for strategic co-operation and squandering one of the greatest opportunities of globalisation,' Roach warned.

Chinese premier Wen Jiabao made it clear that he has no intention of acceding to US politicians' demands. 'It is unfair to make China a scapegoat for structural problems facing the US economy,' he said. China has repeatedly said that it plans to float its currency eventually, but it fears the impact of 'big bang' flotation on its fragile financial sector.

Ikenson warned that by threatening punitive sanctions, America would exhaust Beijing's goodwill, which it might need for tougher geopolitical issues in the future: 'If we continue to hound them about their currency, we're not going to have enough left to push them on issues that really matter.'