BEIJING—China's government gave a muted response to the U.S. House

BEIJING—China's government gave a muted response to the U.S. House legislation targeting its currency practices, reflecting Beijing's interest in minimizing a dispute that could threaten the $300 billion in annual trade flows between the two countries.

The bill, which faces uncertain prospects of actually becoming law, would permit though not require the U.S. to levy tariffs on goods produced by countries found to have undervalued currencies. Many U.S. lawmakers have long contended that China's tightly controlled exchange rate gives unfair support to its exporters.

The U.S. move highlighted long-simmering trade tensions between the two nations, and has raised fears that the U.S. and China could be on a path to an economically damaging trade conflict.

Sharp retaliation by China is unlikely in the short term, analysts said, since the bill hasn't become law and wouldn't immediately produce restrictions on Chinese goods even if it did.

In an apparent gesture to U.S. concerns, China has pushed the yuan up steadily in recent weeks; it was up 1.6% against the dollar in September.

High unemployment in the U.S. helped drive political pressure to crack down on China, but there are also powerful economic interests on both sides in keeping trade open. Millions of Chinese people are employed in factories producing goods for export. And while many U.S. companies fear competition from China, others depend on suppliers in China to produce goods for them at low cost.

Among U.S. corporations, reaction to the legislation was mixed, with some company officials opposed simply to Congress playing a role in the discussion.

Scott Wine, chief executive of Polaris Industries Inc., says he believes China is suppressing the value of the yuan, but thinks it will be rebalanced in time and that applying heavy-handed pressure won't help.

Mr. Wine says the legislation won't have a material effect on Polaris, a Medina, Minn.-based ATV and snowmobile maker, that has been sourcing from China for years, but just began selling into the Chinese market a year ago.

In Charlotte, N.C., Dan DiMicco, CEO of steelmaker NucorCorp., says he views China as an unfair competitor and supports efforts to force the country to revalue its currency. However, officials at Caterpillar Inc., the world's largest maker of construction equipment by sales, worry the bill could spark a trade battle with China.

Many analysts say they don't see that unfolding.

"We think enlightened policy makers in Beijing and Washington understand the economic interdependence of the two countries," said Li-Gang Liu, China economist for Australia & New Zealand Banking Group. "A trade-war scenario at this stage is unlikely to materialize."

 Reflecting those concerns, the Chinese government's first response to the House vote was critical but measured. "The Chinese side is willing to jointly take measures with the U.S. side to continue to promote the development of U.S.-China trade in a more balanced direction," Commerce Ministry spokesman Yao Jian said. He added that U.S. exports to China have been growing rapidly this year.

But Mr. Yao also said China doesn't undervalue its currency to gain a competitive advantage, and warned that investigations of currency values as a trade subsidy—the kind that would be authorized by the U.S. bill—would violate World Trade Organization rules.

Many lawyers say that if the legislation becomes law, China is very likely to challenge it at the WTO, and could well prevail.

Chinese officials have long argued that their currency's exchange rate isn't the key factor determining the U.S.-China trade balance, and for support, point to the fact that China's trade surplus increased sharply over 2007-08, just when the currency was appreciating rapidly. They also say that Americans don't appreciate that the majority of China's exports are actually produced by foreign-owned companies. Most of Apple Inc.'s products, for instance, including the iPhone and the iPad, are made in China by Taiwanese-owned factories.

 How China handles the tensions with U.S. over trade and currency will be closely watched. Business groups that oppose the legislation say they fear it could hurt rather help U.S. exports to China, if the Chinese government ends up retaliating by restricting imports from the U.S.

"Blaming China won't help the U.S. economy but this legislation may cost American jobs," said John D. Watkins Jr., the chairman of the American Chamber of Commerce in China.

There is some precedent for China to respond to U.S. moves on trade with measures of its own: Two days after the Obama administration's decision in September 2009 to impose restrictions on imports of tires from China, China's Commerce Ministry launched its own probes into imports of automobile parts and chicken from the U.S.

Yet such trade restrictions are a regular feature of the U.S.-China trade relationship, and typically affect a very small share of total trade. An increase in such actions could hit particular companies but is unlikely to be economically disastrous.

"U.S.-China relations can probably weather a proliferation of such acrimonious trade disputes, especially if they are channeled through the WTO and other rules-based mechanisms," said Evan Feigenbaum of Eurasia Group.

China could also express its displeasure with the U.S. in less official ways. For instance, Chinese companies, many of which are heavily influenced by the government, could become less inclined to give high-profile contracts to American companies. U.S. companies already complain that government officials have much discretion in enforcing regulations, so a deterioration in relations could make it more difficult for them to get routine business matters accomplished.

In one example of the kind of problems that are possible, sShipping agents say Chinese customs officers in several cities recently stepped up spot inspections of goods headed to Japan amid a diplomatic row between the two countries. The increase in inspections added costly delays to shipments in some cases.

Some in the U.S. have also worried that China could try to put pressure on the U.S. by selling some of its vast holdings of U.S. Treasury debt—a prospect that some of the more nationalistic elements within China have also raised.

Yet many economists think such a move is extremely unlikely, and China's State Administration of Foreign Exchange, the custodian of the country's foreign-exchange reserves, has publicly ruled it out.

The reasons are simple. China's government keeps the currency from rising against the dollar by selling yuan and buying dollars. If it were to reverse that, selling dollars and buying yuan, it would push up the value of its own currency—exactly what Beijing has been resisting U.S. pressure to do.

The prospect of another U.S.-China dispute at the WTO is much closer. China has become increasingly active and successful defending itself in trade law, and on Thursday a WTO panel found largely in favor of China in its recent challenge to U.S. measures restricting poultry imports.

With such potential challenges in mind, backers of the China currency legislation made a significant revision to the bill before moving it out of committee to the floor for Wednesday's vote. An earlier version of the bill would have required the Commerce Department to treat an undervalued currency as a trade subsidy, a requirement dropped in the final version.

According to Matthew Yeo, a lawyer with Steptoe & Johnson LLP in Washington, the original version would have fallen afoul of a WTO principle an investigation into the facts of a particular case is required to establish a trade subsidy. The change "significantly alleviates the earlier WTO problems," he said.

The U.S. Commerce Department, which investigates allegations of dumping and trade subsidies, has so far declined to treat China's currency practices as a trade subsidy—and it seems it could continue to do so even if the bill becomes law.

But if the administration does eventually decide to levy tariffs to counteract a perceived undervaluation of the Chinese currency, China could still challenge that action at the WTO.

"The revised legislation continues to raise serious issues that invite a WTO challenge by China if the United States applies countervailing duties to alleged subsidies from Chinese currency practices," said James Bacchus of the law firm Greenberg Taurig, who was a judge at the WTO for many years.

He thinks the chances are high that the U.S. would lose such a WTO case, since it would be difficult to prove conclusively that a currency is undervalued, or that the value of the currency is specifically aimed at supporting exporters rather than at other, broader economic concerns.