UPDATE 1-US Commerce aide warns against China currency bill

(Adds more comments, background, adds byline)

By Doug Palmer

WASHINGTON, Jan 30 (Reuters) - Congress will fuel U.S. inflation, invite trade retaliation and create a legal and administrative nightmare if it requires the Commerce Department to slap duties on Chinese goods to offset an undervalued currency, a top Commerce Department official said on Wednesday.

"China is the single-largest supplier of inexpensive products purchased by American consumers," Commerce Under Secretary for International Trade Chris Padilla said in remarks prepared for delivery at the Center for Strategic and International Studies.

"In this time of economic uncertainty, as Congress and the administration work together to stimulate growth, it would be very unwise to pass legislation that could inflate consumer prices" by slapping duties on Chinese imports, Padilla said.

U.S. lawmakers have complained for years that China's currency is undervalued by as much as 40 percent, allowing Chinese companies to undercut prices in the United States and making it harder for U.S. companies to make sales in China.

A sharp rise in imports from China pushed the U.S. trade deficit with that country to record levels in 2007, overshadowing the fact that China has also grown into the third largest export market for American goods.

"Passing currency legislation won't make the trade deficit go away," Padilla said, noting China's yuan has risen about 15 percent against the dollar since July 2005 while the bilateral trade gap has grown about 30 percent.

In a separate speech in New York, Treasury Under Secretary for International Affairs David McCormick on Wednesday applauded China for allowing a quicker rise in the value of the currency, which he said has appreciated about 4 percent in the past three months for an annualized rate of about 17 percent.

However, Congress still could pass legislation this year requiring the Commerce Department to calculate how much price advantage Chinese companies gain from Beijing's currency policies and then include that amount in anti-dumping or countervailing duties applied on Chinese goods.

In addition to potentially fueling inflation, the United States would be inviting "never-ending trade retaliation" if it introduces the idea of offsetting undervalued currencies into trade remedy cases, Padilla said.

"The United States is already the third-largest victim of anti-dumping cases in the world ... It's not hard to imagine foreign trade bureaucrats using the relative value of the dollar as an excuse to erect new trade barriers," he said.

Economists also vary widely in their estimates of how much China's exchange rate is undervalued, creating the potential for any decision the Commerce Department makes in a particular case to be challenged in court if the petitioner feels the duties awarded are too low, Padilla said.

"Do we really want judges to arbitrate the fair market value of the dollar against foreign currencies?" he asked.

Padilla acknowledged worrisome signs that China was backing away from open-market policies in favor of promoting "national champions" in industries from steel to software.

He said the Bush administration's approach of dialogue, combined with the use of existing trade remedy laws and action at the World Trade Organization when necessary was the best way to influence China on trade. (Editing by Andrea Ricci)