how is free trade with China possible without a freely traded currency

In the midst of the polite and not so polite spats (and more) at the EU-China Trade Summit being held in Beijing, I see plenty of European concern about product safety, currency reform and the historically unprecedented and almost unbelievably large trade deficit.

One thing has been remarked on and will probably not be remarked on: the trade deficit is a direct result of the undervalued Chinese currency which makes Chinese goods cheaper in the world market.

How undervalued is the Chinese currency? Tthe Europeans view is that the Yuan is undervalued by probably as much as 25 percent. That is, Chinese goods are up to 25% cheaper than they should be, simply because the Chinese Communist Party which governs China keeps the currency artifically cheap.

But this is a system-flaw that is well-known to everyone who was and is involved in the WTO negotiations: we have so-called free trade, when everyone knows that whoever is prepared to manipulate their currency will win in the marketplace. So a freely-tradeable currency should be a pre-requisite to participation in the WTO "free trade" treaties.

But, for various reasons (mostly to do with their own back yards) none of the dominant powers want to make a freely-tradeable currency a pre-requisite for participation in the WTO "free trade" treaty.

So everyone knew of the danger that some countries would go down the route of manipulating the value of their currency. Now that the Chinese have been systematically making use of the dangerous possibility for some decades, the Europeans have finally joined the Americans in crying over spilt milk.

The way to cure the problem is not to whimper to the Chinese Communist authorities, but to change the rules of the WTO to what they should have been in the first place. Free trade is fine, but only on the basis of a genuinely level playing field. And that includes freely traded currencies from participating countries. Sphere: Related Content