The Australian

By Geoffrey Garrett

Trade and currency wars must give way to more investment between both nations.

The fanfare surrounding the Aussie dollar's dizzying rise to parity against the US greenback conceals a flip side that is a much bigger story for the global economy and for Australia - the spectre of a damaging currency and trade war between China and the US.

Cool heads will probably prevail. But the time is now for a reset in China-US relations in which the story moves from trade and currency to investment between the two countries.

China-US investment has its own real challenges, but slanging matches and phony wars over trade and currency only get in the way of addressing them.

While the US economy is still in its post-GFC swoon, China has roared back. One obvious consequence would seem to be appreciation of the Chinese currency against the US dollar more or less in line with the Aussie's rise. But while the Aussie has strengthened by about 40 per cent against the greenback since early last year, the yuan has barely moved.

At the same time, the US's already gaping trade deficit with China is even wider. In the first eight months of the year, its trade deficit with China was a staggering $US173 billion, up 20 per cent on a year earlier and constituting fully 40 per cent of the US deficit with the whole world.

The political calculation in the US is obvious. Exports are the best way to kickstart a US jobs recovery desperately needed with unemployment stuck near 10 per cent despite massive monetary and fiscal stimulus. China is keeping its exchange rate artificially low, flooding the US with imports and choking off US exports to the world's new growth engine.

It is no surprise the US recently passed laws proposing to give the president the power to impose tariffs and other trade sanctions on China unless its currency rises towards what economists see as a natural level - at least 20 per cent higher than where it is today.

China is in no mood to be hectored on economic policy after it escaped the worst of the GFC on the back of its own fiscal stimulus and bank lending boom, while the US's failed to create jobs.

China is considering allowing its currency to rise, but on its own terms and in its own time. Authorities are worried about inflation and they want to increase domestic consumption. A stronger yuan would help on both.

Fortunately for the world economy, Chinese and US leaders have stayed remarkably calm in what is a tense environment. US Treasury Secretary Timothy Geithner has said on several occasions that China's exchange rate policy is its own business. The Wall Street Journal described China's reaction to the house bill, "China soft-pedals dispute with US".

Professor Geoffrey Garrett is chief executive of the United States Studies Centre at the University of Sydney.