One problem with this scenario is that China is by no means the only country or trading block the US is running a trade deficit against. In fact you'd be hard pressed to find almost any major economy the US is running a balance or surplus in it's trade with. The problem is more home grown than many in Washington are comfortable facing up to and more deeply entwined with the fabric of global free trade as it is practiced and lauded throughout the political spectrum than almost anyone, anywhere, would like to believe.

There is simply no precedent for the integration of such a huge new player with the characteristics of China into the system of mutual trade based on comparative advantage in production. Nations like South Korea and Japan give little guidance, as Japan for example has but the half of the population of the US. So Japan was bound to grow into a barrier where full employment and subsequent wage raises and increased standard of living, with internal demands for better social security and environmental safeguards, would equalise the advantage of lower costs. It's uncertain if such a barrier exists in any meaningful sense in the case of China. Any industrialised nation, not only the US, could well find itself in a chronic systemic disadvantage when competing against Chinese trade, not due to better productivity or quality, but through sheer labour cost arbitrage.

Another problem is that there is little the US produces that the Chinese could not produce cheaper themselves under almost any hypothetical currency scenario, and that goes for Chinese goods competing on the US market too. The only ones the Chinese would lose market share to in a situation where the yuan/renminbi rose substantially would be to other Asian countries with even lower labour costs. The US makes too few luxury items that are not easily reproduced elsewhere that might catch a market in a more affluent China. And luxury items are anyway a far too minuscule a sector to outweigh all the consumer goods being shipped into west coast ports every day on container ships that return across the Pacific with only ballast or scrap metal.

Now all this could be tolerated by other nations, at least for a while, if one or two things were to happen. If the Chinese signalled that the currency overhaul was but a small beginning in a series of revaluations (something the Chinese are loath to do for many reason, trade advantage being only one of them) and not simply an attempt to placate political anger for a while and a way to give themselves even more power of fiat to set the exchange rate against other currencies, that would go a long way towards soothing the nerves of politicians of other nations who are starting to feel the heat of voter anger under their feet. Any sign that the growth in Chinese exports were flattening out could also delay or ameliorate any backlash fueled by ever larger groups of voters increasingly hit by outsourcing and fierce competition.

But the chances of any of those two things happening are looking increasingly grim. First off, there are strong signals coming out of the Chinese leadership and the Chinese Central Bank that the paltry 2.1 percent revaluation, or a couple more equally anaemic hikes, is all anyone should expect for the medium term.

China apparently hopes that its revaluation will appease angry U.S. congressmen and derail legislation that would impose steep tariffs on Chinese imports. The Bush administration wants China's first revaluation to be followed by others. But even a 10 percent increase in the yuan over the next year would "barely slow China's export machine," concludes a study by economist Marc Levinson of JPMorgan. Some labor-intensive production of toys and shoes -- where China now supplies 95 percent and 69 percent of U.S. imports -- might move to lower-cost countries. Other Chinese producers would either raise prices slightly or absorb extra costs, he contends.

In addition there is the case of copper. It is said that copper is the metal with a PhD in economics. The reason is that so many aspects of modern industrial production use copper in one way or another. So looking at the consumption of that metal tells you a lot about where economic activity in that nation is heading. In China's case it's heading up.

The price of copper is particularly closely correlated with Chinese industrial output, and that seems to have stayed stronger than many expected. Last week’s official statistics showed output growing by 16.8% year-on-year in June, up from 16.6% in May. China consumes one-fifth of the world’s copper, and was the only big consumer to increase use of the metal in the four months from January through April, on figures from the International Copper Study Group (ICSG).

This is a pretty strong signal that there is little sign of any slowdown in the Chinese exporting machine. Added up the facts point to ever increasing trade deficits for the US, ever greater unemployment for the European nations, and a precariously low tolerance for high minded talk about the blessings of Free Trade among the people of those countries.

This article is also available at Bitsofnews.com.