US proposal to punish China prompts protectionism fears

Though the US Senate's legislation is unlikely to become law, economists worry the effort is symptomatic of increasing readiness to consider protectionist measures.

Fears of a global trade war are looming after the US Senate approved rules aimed at hurting China for holding down the value of its currency.

The legislation is the latest in a series of steps proposed by governments around the world to help boost their exports in order to stimulate stuttering growth.

China and other critics warn such measures are raising trade tensions and risk hastening a slide into a global recession.

"There's a lot more scope for this to get more serious," said Charles Robertson, 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 approved 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. Instead, a more watered-down version of the proposals is likely to be passed.

But the fact US lawmakers 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.