Trade tensions are brewing once again between the United States and China -- the largest holder of U.S. Treasury securities.

The United States continues to apply pressure on China to revalue its currency, the renminbi. China allowed its currency to trade within a defined band starting in July 2005 but progress on revaluation has been too slow for her largest trading partners in the West. Over the last 12 months the renminbi has gained 5% versus the dollar -- impressive considering most currencies have tumbled, except the yen.

The U.S. and Europe partially blame China for their economic ills because she enjoys an unfair trade advantage riding the coattails of a weak dollar. China's currency is not a free-floating unit; rather it trades within a defined trading band to limit volatility.

Tim Geithner, the new Treasury Secretary, who was absolved by Congress for failing to pay taxes, is starting to raise the volume on China-bashing rhetoric.

The United States continues to pin its labor woes on China when the real culprits lie with many large American multinationals that have piled into China over the last ten years because of cheap labor. It's the same for many European and Japanese companies desperately seeking to raise profit margins by expanding their emerging market manufacturing centers. China continues to offer among the cheapest wages in the world, despite a ratcheting of wage gains over the last 12 months.  

To be fair, China doesn't consume enough foreign goods and instead has grown rich through cheap exports. Western governments believe a higher Chinese currency, which is still not convertible, will alleviate this unfair trade advantage.

Virtually everything we purchase today outside of big ticket items like cars or high-end apparel is manufactured in China. The country has knocked-out the competition as previously cheap manufacuting hubs in Mexico, South Korea, Thailand and Taiwan have grown much more expensive; some countries, like Taiwan, Singapore and South Korea have transformed their production infrastructure to either high-tech industries or major industrial heavyweight industries for ships and cars.

Traditional low-end manufacturing is now virtually dominated by China with Vietnam making inroads over the last several years and harboring even cheaper labor than her largest trading partner.

Forcing China to consume more imports won't work. The Chinese are pragmatic, patient and savvy. They'll wait for the right moment to make changes when it suits their economic schedule -- still considered a miracle in the wake of a socialist mindset coupled with laissez-faire market capitalism.

It might make sense to accomodate, not engage, China.

The United States has a deep vested interest to keep China in her sphere since the latter is a major purchaser of U.S. Treasury debt. Yet even mighty China, where GDP growth is now slowing, will almost surely purchase less Treasuries this year as her previously massive trade surplus begins to shrink amid a plunge in exports since September. This event alone can push long-term interest rates higher in the United States as a blizzard of fresh supply comes to market in 2009 and 2010 to fund gargantuan fiscal spending and bailout packages.

Unfortunately, trade tensions are bound to become worse. Recessions or economic hardship usually ignites trade frustrations and in some cases, crisis and possibly, conflict. Forcing a sovereign nation to revalue its currency is not the right way to engage a trading partner -- especially when she owns more than $680 billion dollars' worth of your debt.      

Have a good weekend. See you on Monday.