WASHINGTON - 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 that are aimed at piling up big surpluses 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 comes just days after President Barack Obama visited China and discussed trade and global economic imbalances and follows a spate of U.S. trade actions that have raised hackles among the Chinese.

Among 42 recommendations to the U.S. Congress, the commission suggests lawmakers press the Obama administration to pursue a mix of WTO cases, 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.

The U.S. 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.

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 U.S. imposed import duties on Chinese tires under a special anti-surge measure that applies only to China and had never been used before.

RIFE WITH SUBSIDIES

Echoing U.S. manufacturers' complaints, the commission report said China's economy is rife with subsidies on land, water and energy that allow Chinese producers and foreign firms who relocate manufacturing there to sell at deep discounts compared to their American competitors.

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 the U.S. Congress on the economic and national security implications of the U.S.-China relationship.

In the security realm, the 2009 report called for close attention to what it said were China's increasingly aggressive espionage efforts to obtain U.S. technology for China's military and industry and stepped-up cyber warfare capabilities that posed a threat to U.S. computer networks.

(Editing by Vicki Allen)

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