By Paul Eckert, Asia Correspondent
WASHINGTON (Reuters) - The United States must combat China's trade-distorting industrial and currency policies with U.S. trade laws and by using the World Trade Organization, a congressional advisory body said on Thursday.
China's trade policies generated big surpluses that contributed to the imbalances behind the global financial crisis that started in the United States in 2008, the U.S.-China Economic and Security Review Commission said.
"If China continues to pursue huge trade and investment surpluses and to accumulate vast financial claims, it will hinder the necessary global economic adjustment, create excess manufacturing capacity and lay the groundwork for the next financial crisis," the bipartisan commission said in its annual report to the U.S. Congress.
The fiscal stimulus plan that China has used to combat the crisis, which won praise in some circles, mainly supports more exports and "will only exacerbate overcapacity, aggravating the overall problem," said the 367-page report.
The annual report came just days after U.S. President Barack Obama visited China and discussed trade and global economic imbalances and it followed a spate of U.S. trade actions that have raised hackles among the Chinese.
The commission urged Congress to press the Obama administration to pursue a mix of WTO cases, the application of U.S. trade laws and pressure on Beijing to allow its currency to trade more freely.
"WTO cases, while important, are very industry specific, and fail to have an impact on the trade-distorting aspects of China's industrial policy or to deal with the underlying causes of the U.S.-China trade deficit," it said.
Congress should "urge the administration to ensure that U.S. trade remedy laws are preserved and effectively implemented to respond to China's unfair or predatory trade activities," said the report.
GREEN SUBSIDIES AND TARIFFS
Last week, the U.S. International Trade Commission approved the 12th investigation this year into charges of unfair trade practices by China, backing a Commerce Department probe into whether China and Mexico are selling seamless refined copper pipe and tube in the United States at unfairly low prices.
That measure followed preliminary duties on $2.63 billion of steel pipe used by the oil and natural gas industry in the biggest U.S. trade case ever against China. In September, the United States imposed import duties on Chinese tires under a special anti-surge measure that applies only to China.
Carolyn Bartholomew, chairman of the commission, told reporters she was concerned about China's policy of supporting "national champion" industries and building export juggernauts behind walls of protectionist policies.
Chinese subsidies and tariffs were blunting foreign competitors' advantages in environmental technology, an expected source of U.S. exports to China, Bartholomew
"We're going to end up losing our competitive edge before we even really get going on green technologies through a strategy of subsidies, tariffs, non-tariff barriers, buy Chinese provisions and a bunch of other things," she said.
Echoing U.S. manufacturers' complaints, the commission report said China subsidized land, water and energy to allow Chinese producers and foreign firms that relocate there to sell at deep discounts compared to their American competitors.
The commission also reiterated a long-standing U.S. complaint that China's renminbi currency is pegged at an artificially low value against the dollar to give China a cost advantage in trade that has helped it accumulate $2.27 trillion in foreign reserves -- the world's largest pool.
That currency policy prompted two U.S. senators to ask the Commerce Department on Thursday to investigate suspected Chinese currency "manipulation."
"Commerce has authority under existing law to initiate investigations that can help U.S. industries and protect U.S. jobs, and we are urging the Department to use that authority," Democratic Senator Charles Schumer and Republican Senator Lindsey Graham wrote in a letter to Commerce Secretary Gary Locke.
Data released by the Commerce Department this month showed the U.S. trade deficit with China widened 9.2 percent in September to $22.1 billion, the highest since November 2008.
The U.S.-China Economic and Security Review Commission was set up in 2000 to advise Congress on the economic and national security implications of the U.S.-China relationship.
(Editing by Peter Cooney)