Trade: Clash of the Titans; China's refusal to revalue its currency is pushing the two countries toward conflict.(Cover story)

Byline: C. Fred Bergsten (Bergsten is director of the Institute for International Economics and coauthor of "China: The Balance Sheet: What the World Needs to Know Now About the Emerging Superpower" (PublicAffairs, 2006).)

The United States and China have been the two locomotives of the world economy for the past five years. Hence, the meeting of Presidents George W. Bush and Hu Jintao in Washington this week should be a "G2" leadership conclave, reflecting their joint responsibility to ensure continued global growth and financial stability.

Unfortunately, the summit is unlikely to reinforce confidence in that outcome. Bush administration officials and congressional leaders are deeply frustrated and impatient with a wide range of Chinese policies. For its part, China believes it is being unfairly scapegoated by the United States, much as Washington stoked fears of a rising Japan in the 1980s. The summit is unlikely to reduce those tensions--and could even erupt into open conflict between the world's economic titans.

The chief culprit is the huge imbalance in the economic relationship. U.S. global trade and current-account deficits reached annual rates of $900 billion in late 2005, about 7 percent of the total American economy. China's global current-account surplus soared to $150 billion in 2005, the second largest in the world after Japan, and also about 7 percent of its GDP. Bilateral imbalances should never be the focus of policy because of the multilateral nature of world trade, but China's bilateral surplus of $200 billion with the United States in this case accurately reflects a profound disequilibrium.

This imbalance cannot continue. What's needed from China is an orderly readjustment in the value of its currency, the renminbi. In the absence of such action by China, angry U.S. policymakers are beginning to take matters into their own hands, with protectionist trade measures. New import restrictions have already been applied to six major Chinese export sectors (apparel, color television sets, semiconductors, shrimp, textiles and wood furniture). Sens. Charles Grassley and Max Baucus, the leaders of the Senate Finance Committee, have just introduced a bill that would levy severe sanctions against China. The Chinese ...