Financial Times columnist Martin Wolf has a particularly good summary today of the danger that China’s undervalued currency poses to the world economy. As Wolf points out, China’s “real exchange rate is … no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.” That means, in effect, that China is levelling a large, uniform tariff on imports (whose price is higher than they should be relative to China’s goods) and granting a large subsidy  to its own exports. That could prevent full-scale recovery in many of the world’s economies, including that of the United States, and could eventually hamper China’s growth as well.

During Barack Obama’s visit to China last month, the Chinese tried to deflect attention from its overvalued currency and huge surpluses by attacking the U.S. for putting tariffs on Chinese tire imports. As Wolf points, American protectionism is small potatoes compared to what the Chinese are doing. Obama, unfortunately, seems to have taken the bait and played down – publicly, at least – American disatisfaction with Chinese economic policies, preferring to focus instead on the relatively tame issue of internet censorship.  That may have pleased democracy advocates and Silicon Valley, but Obama’s protest will have little effect, while ignoring the most important source of global friction.