Be careful what you wish for

Does the rest of the world really want China to let its undervalued currency appreciate? On his first official trip to China as America’s treasury secretary underway, Henry Paulson appeals to the Chinese to let their currency appreciate so their exports will be less competitive.

Even if the Chinese central bank does, as some expect, let the yuan strengthen more than previously anticipated, this will not be the panacea that many hope for. As Tyler Cowen, an economics professor at George Mason University, points out, China imports many of the components it assembles into finished products; a strengthening yuan will make these components cheaper, eroding some of the effect on export prices. Nor is China's competitive advantage limited to a cheap currency. And although China is one of the big funders of America's current-account deficit, it is certainly not alone. Unless Americans curb their appetite for imports bought with borrowed money—and start making more things other countries want to buy—the deficit will continue to be a problem. This is roughly what the Chinese government has been saying.

A rising yuan will have some negative effects on the West, not limited to a shortage of cheap electronics. Cheap Chinese imports have kept a lid on inflation in many countries, letting central banks keep interest rates low without worrying about their economies overheating. As Mervyn King, the governor of the Bank of England, has warned, once the yuan begins to strengthen, central banks will face higher inflationary pressures. With oil prices already pushing inflation to worrying levels, Mr Paulson may not be as eager as he seems for a rising yuan.