David Leonhardt is very good on the issue of China, and his column today is no exception. First, he calls intellectual property violations the "real problem with China," which he illustrates with a single statistic: "China has become the world's second-largest market for computer hardware sales -- but is only the eighth-largest for software sales" (... the implication being that China either uses computers for furniture, or steals most of its software).
Second, he makes the important but often overlooked point that although China's currency is obviously undervalued, Chinese inflation is raising prices in China the same way a currency appreciation might.
Without taking inflation into account, the renminbi has risen 3 percent against the dollar since last summer, when China began letting it rise. Once inflation is accounted for, the real increase has been about 5 percent. At that pace, the renminbi could erase its artificial undervaluation -- as some economists estimate it -- in less than two years.
The U.S. government wants to pressure China to raise the value of the RMB. With a stronger RMB, Chinese products would cost more for Americans, and American products would be more affordable in China. But consider the impact of inflation. Chinese prices are up 5 percent over last year. That means the price of bread, and hand baskets, and electronics is higher for both American and Chinese consumers.