Washington's influential [non-government] Institute for International Economics says as China is steadily increasing its exports to the U.S. market, it has become critical that Beijing revalue its currency to avoid trade friction with the United States.

The Economics Institute is convinced that as China's trade surplus with the United States continues to rise there will be over the next year politically irresistible Congressional demands for action to curb the imbalance. Institute economists point to data showing that America's bilateral deficit with China, now at 125 billion dollars, is already bigger than it ever was with Japan, which during the 1980s and 90s was a constant target of U.S. trade complaints.

The solution, says Institute director Fred Bergsten, is a minimal 20 percent revaluation of the Chinese currency, which since 1995 has been deliberately held steady against the dollar.

"I think the Chinese currency issue is immediate. It does need to be tackled at once," he said. "The longer it is delayed the more pressure the Chinese are going to get in terms of trade protection against them. In addition, there are more risks to the world economy of [a sharp, uncontrolled decline] of the dollar exchange rate, a fall that would weaken growth everywhere. And that would hurt China too."

But Mr. Bergsten and his colleagues at the Institute do not believe the Chinese are likely to make any significant adjustment in the value of the their currency. Institute economist Morris Goldstein says the International Monetary Fund is irresponsible in having failed to place the Chinese currency issue at the top of the agenda for its annual meeting that takes place in early October.

The Institute believes the protectionist pressures will come first from the beleaguered American textile and apparel industry, which faces the prospect of the January 2005 expiration of restrictions that have long regulated the global clothing trade. Chinese apparel exports are predicted to surge from their already significant 15 percent U.S. import share.

Mr. Bergsten says it is largely because their current practice of a fixed exchange has succeeded so brilliantly over the past two decades that the Chinese are unable to see that revaluation is in their own interests.

"The problem is that if they do not change it a lot of the things that have propelled their growth are going to be undermined: open markets for their exports, for example, will be undermined," he said. "That's been a key component in their economic strategy and that is put at risk by continued undervaluation of their currency, the huge deficits we're running, and therefore the protectionism that gets generated inside the United States against their trade."

China for the past decade has been the world's fastest growing economy. It has overtaken Japan to become the world's third largest importer. China has become the third largest trading partner of the United States [after Canada and Mexico] and the sixth largest market for U.S. exports.