Battle Rises Over China

Paulson launched a high-level dialogue aimed at resolving a host of thorny trade issues, from the currency dispute to U.S. complaints of rampant piracy of intellectual property. After two rounds of talks, however, neither the value of China's currency nor Beijing's rhetoric has changed much.

Democrats, now in charge of Congress, have increased demands for tougher action on China as part of a broader push to tackle the strains of globalization.

In March, the Commerce Department announced punitive tariffs against Chinese paper manufacturers accused of dumping goods in the United States below cost. The decision yesterday by the Treasury to not label China as guilty of currency manipulation gave critics a fresh opportunity for complaint. Though a finding in the affirmative would have been largely symbolic, triggering talks with China, proponents said it could have pressured Beijing to go faster.

In its report, the Treasury said China's currency "is undervalued and market sentiment clearly favors appreciation." But the department said it could not brand China a currency manipulator because it was "unable to determine that China's exchange rate policy was carried out for the purpose of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade."

The U.S. trade representative, deferring to the Treasury, yesterday declined a petition from 42 members of Congress calling on the administration to challenge China's currency policy by filing a complaint with the World Trade Organization.

Critics accused the administration of using a technicality -- the inability to divine China's intent in managing its currency -- as an excuse to do nothing.

"It is difficult to understand why Treasury chooses not to say that currency manipulation is taking place when everyone knows it is," John Engler, president of the National Association of Manufacturers, said in a statement.

Rep. Sander M. Levin (D-Mich.), who chairs a House subcommittee on trade, called the Treasury's reasoning "the kind of dodge that gives this administration no credibility with American businesses and workers disadvantaged by China's persistent currency manipulation."

At a news conference, Treasury officials declined to respond directly to such criticisms but said they believe their approach to China would eventually yield results. "The best way to engage China is through dialogue and engagement, and not necessarily legislation," said Clay Lowery, the Treasury's acting assistant secretary for international affairs.

On Tuesday, the chairman of the Senate Banking Committee, Christopher J. Dodd (D-Conn.), and ranking Republican member Richard C. Shelby (Ala.) said they would craft legislation that directs the Treasury to declare currency manipulation regardless of intent. The Treasury would seek remedies through consultations with the International Monetary Fund or by filing a complaint with the World Trade Organization.

The Senate bill introduced yesterday is similarly aimed at forcing the Treasury's hand regardless of intent, requiring action so long as a currency is found to be "fundamentally misaligned."

The bill amounts to a refined version of legislation pressed last year by Schumer and Sen. Lindsey O. Graham (R-S.C.) that would have slapped 27.5 percent tariffs on all Chinese goods without a substantial appreciation of the yuan. That bill was seen as breaking the rules of the World Trade Organization. The bill outlined yesterday, with Schumer, Graham, Sen. Max Baucus (D-Mont.) and Sen. Charles E. Grassley (R-Iowa) as sponsors, is designed to comply with the rules, the senators said.

"This is pretty much a jab at the Treasury for not doing its job," said Gary C. Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics in the District. "There's a lot of domestic politics in these bills."

Correspondent Ariana Eunjung Cha in Shanghai contributed to this report.