By Tim Johnson,Knight Ridder Newspapers

BEIJING – The Bush administration toughened its stance toward trade with China on Wednesday, with U.S. Secretary of Commerce Carlos Gutierrez warning that China risks a “devastating” blow to its economy if it doesn’t take action to help head off rising protectionism in the U.S. Congress.

Hours later, Treasury Undersecretary Timothy Adams told a congressional committee in Washington that China had failed to move quickly enough to revalue its currency. “China’s progress has been way too cautious,” he said.

Trade tensions are soaring in the run-up to President Hu Jintao’s visit to Washington on April 20 amid U.S. unhappiness over what it says is an overvalued Chinese currency and its $202 billion trade deficit with China last year.

Gutierrez’s remarks signaled a notable shift in U.S. trade posture toward China. For the first time, he linked U.S.-Sino trade relations with China’s internal stability, saying that China may “put at risk the social harmony” within its own borders if it doesn’t work harder to meet U.S. demands.

“There is a real protectionist and isolationist sentiment creeping up, evolving, emerging in our country,” Gutierrez said in a speech to U.S. business executives.

Noting that the United States has become China’s No. 1 foreign market, Gutierrez said Beijing might put that market at risk unless it can “deliver results quite quickly” by opening areas such as telecommunications, services, direct sales and information technology to U.S. companies.

“Think what that would do to China’s economy if China’s No. 1 customer all of a sudden decided to be protectionist … and frankly not buy as much as it does today,” Gutierrez said. “It would be devastating to China’s economy.”

Gutierrez said China must relax “a wide array of barriers” confronting U.S. companies to “help us drive back those protectionist sentiments” on Capitol Hill, where several proposals targeting China await action.

Two U.S. senators, Charles Grassley, R-Iowa, and Max Baucus, D-Mont., on Tuesday proposed fresh legislation intended to force the Bush administration to take measures against China if it doesn’t make trade concessions.

“There is a very real sense among Americans that our trading partners – China, in particular – do not play by the rules,” Baucus said.

in a statement.

Two other critics of China’s policy to fix its currency at artificially low levels against the dollar, Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., postponed until September a vote that would have slapped 27.5 percent tariffs on Chinese goods unless China moved to float the yuan.

Boosted by soaring trade, China said this week that its foreign exchange reserves have climbed to $853.7 billion, surpassing Japan’s to become the largest in the world.

China’s top trade negotiator, Vice Premier Wu Yi, told Gutierrez that the United States should get its economic house in order instead of pressuring China to revalue the yuan, state media said Wednesday.

The trade issue has divided U.S. business. China’s delay in granting market access has angered big U.S. software and telecommunications service providers, while retailers and other U.S. companies benefit under current trade conditions.

Wal-Mart, the world’s largest retailer, is on track to buy $24 billion to $25 billion in goods from China this year, up from $18 billion in 2005, said Stephen Green, a senior economist with Standard Chartered Bank’s branch in Shanghai.

Green warned that imposing sanctions on Chinese goods would affect businesses not just in China, but throughout Asia and the United States.

“About 90 percent of Wal-Mart’s supplies out of China come from foreign-invested firms,” Green said, referring to plants built with foreign money and know-how.

If protectionist moves against China succeed, Green said, “there would be huge dislocation for American firms.” Green said Washington should focus on China’s slow progress on intellectual property rights protection rather than exchange rate reform.

Gutierrez concurred that fighting piracy is critical to healthy Sino-U.S. relations and noted that an increase in legal software sales would also benefit China.

“If China simply cuts software piracy rate from 90 percent down to 80 percent, it would generate $6.5 billion in tax revenue and create 2.6 million jobs in China,” he said.

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(c) 2006, Knight Ridder/Tribune Information Services.

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AP-NY-03-29-06 1710EST

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