Front page of yesterday's China Daily, my favorite newspaper, echoing stories throughout the Chinese press (for instance, here, in the English version of the leading economics magazine Caijing). I am referring to the "Exporters get sops" story.

For the background on why this spells trouble, check out this Atlantic article from two months ago, on the risks of China's trying to defend its trade surplus when demand is collapsing around the world. After the jump, a relevant excerpt from the article. More tomorrow, in between last-minute packing and other imperatives.

From "China's Way Forward," the Atlantic, April 2009. It starts with a reference to Michael Pettis of the Guanghua School of Management at Peking University, who noted the resemblance between China's role in the world economy now and America's on the eve of the Great Depression:

Pettis wrote recently that China's worldwide trade surplus, "the cleanest measure of overcapacity"--factories that are running and workers who are employed only because of foreign customers--is by one measure at least as large as America's was in 1929. China today, like America then, has a trade surplus equal to about 0.5 percent of global economic output. But as a proportion of its own economic output, China's trade surplus is much bigger than America's was. In proportional terms, today's China is five times as reliant on foreign customers to create domestic jobs as America was in 1929. So unless China can find a way to keep selling when its customers have stopped buying, it will face a proportionately greater employment shock.

That China might indeed try to keep selling is the concluding part of Pettis's cautionary analogy to the Depression era. As stock markets crashed and economies collapsed, the U.S. trade surplus nearly disappeared. American businesses, desperate to preserve markets and jobs, lobbied for passage of the infamous Smoot- Hawley Tariff,  which increased duties on a list of some 20,000 imported goods. Soon afterward, other countries retaliated with similar tariffs; world trade dried up, and the Great Depression was on. When people use the words "Smoot-Hawley" today, they usually mean them as a warning that any interference with trade, especially by the United States, could again prove disastrous.

Pettis's point is different, and in a way more worrisome. The real damage of Smoot-Hawley, he says, was less economic than political. Other countries understood that the United States was trying to protect its trade surplus and therefore its workforce. They didn't like it as a political matter, and they struck back.

If that were to happen again, would it be because of "Buy American" provisions or other forms of American "protectionism" editorial pages so often warn against? That's the wrong thing to worry about, according to this logic. The real counterpart to Smoot-Hawley would be Chinese protectionism--or rather, any effort by China to defend its huge trade surpluses, as the U.S. once did. China's government is unlikely to rely on outright Smoot-Hawley-style tariffs. Instead it could increase subsidies to exporters; it could try to push the RMB's value back down, after three years of letting the currency rise; it could encourage manufacturers to restrain wages; it could impose indirect barriers to imports, as with its recent pressure on China's airlines to cancel outstanding orders for Boeing and Airbus airplanes. By early this year, China's government was in fact doing every one of these things. As a result its global trade surplus, instead of shrinking as expected when the world economy deteriorated, grew dramatically. Exports fell, but imports fell much more: in January, exports declined by 17 percent and imports by more than twice as much--by 43 percent. This is an economic problem for other countries. But it could be an even more serious political provocation, if China is seen as forcing its share of unemployment problems onto everyone else. And thus, to bring this scenario to a close, the best China can expect from today's shocks might be unemployment rates higher than America's in the '30s. The worst would be for China to start a trade war that makes things even harder for itself.

Emphasis added. More later. In the meantime, Pettis's updated thoughts on his blog, here.