Let’s be clear. The central problem of the exploding trade imbalances between China and the United States – and China and the rest of the world – is not the exchange rate. It is the addiction of China, following the pattern set by Japan and other Asian countries, to export-led economic growth. As long as this export dependency continues, Asian countries will pursue undervalued currencies, because a cheap currency aids exports and punishes imports. China’s decision last week to revalue the yuan by 2.1 percent doesn’t change that.

Among non-Chinese economists, the extent of the yuan’s undervaluation is a subject of debate. Jonathan Anderson, UBS’ chief Asian economist, estimates 15 percent; Nicholas Lardy and Morris Goldstein of the Institute for International Economics think 25 percent; Ernest Preeg of the U.S. Manufacturers Alliance argues 40 percent. But there is little disagreement about the effect of the 2.1 percent revaluation. “This will have zero impact on the Chinese economy,” said Anderson in a report.

China apparently hopes that its revaluation will appease angry American congressmen and derail legislation that would impose steep tariffs on Chinese imports. The Bush administration wants China’s first revaluation to be followed by others. But even a 10 percent increase in the yuan over the next year would “barely slow China’s export machine,” concludes a study by economist Marc Levinson of JPMorgan. Some labor-intensive production of toys and shoes – where China now supplies 95 percent and 69 percent of U.S. imports – might move to lower-cost countries. Other Chinese producers would either raise prices slightly or absorb extra costs, he contends.

The Chinese economy now depends heavily on exports. For 2005, Lardy predicts an overall Chinese trade surplus of $75 billion to $80 billion; Preeg expects as much as $150 billion. China’s surplus with the United States is bigger. In 2004, it was $162 billion. All these amounts loom large compared with China’s $1.6 trillion economy.

So far, the lopsided trade imbalances haven’t killed the U.S. recovery. American consumers keep buying enough to sustain both more U.S. jobs and more imports. But the imbalances can’t grow forever – sooner or later, that risks either a financial crisis (if foreigners receive more dollars than they want, triggering a wave of selling and a sharp drop in the dollar’s exchange rate) or a protectionist backlash (if Americans blame imports for economic setbacks).

Over the long run, everyone has an interest in narrowing the world’s growing trade imbalances. China and other Asian countries are an essential part of the adjustment, because they represented 43 percent of the U.S. trade deficit in 2004. Most Asian countries also have big overall trade surpluses (India is an exception). But in the short run, China and America each fears that the other is – through exchange rates – trying to steal its industry and jobs. And if China doesn’t adjust its currency, other Asian countries probably won’t either; they fear losing competitiveness to the Chinese.

Asia’s heavy reliance on trade dates to the early decades after World War II. Japan and other countries had trouble earning the foreign currency (mainly dollars) needed to buy essential imports, says Marcus Noland of the IIE. Their reaction was to adopt policies designed to encourage exports and discourage imports.

Japan’s initial success spurred imitation by South Korea, Taiwan, and others. Asia’s industry became heavily oriented towards exports. China, the latest beneficiary of this cycle, is moving rapidly up the value chain.

Chinese shipments now represent 16 percent of U.S. imports of semiconductors and 40 percent of computer equipment, reports Levinson. If this export dependency could be broken, Asia’s trade imbalances would largely cure themselves. As countries consumed more at home, their imports would rise, and they’d divert some export production to domestic markets. They’d be less concerned with defending cheap currencies by buying vast amounts of surplus dollars. But Asia’s efforts to stimulate stronger domestic growth have usually failed. Japan has been struggling to do so for nearly 20 years. South Korea recently encouraged the spread of credit cards – and ended up causing massive consumer loan losses.

Only China’s rulers know what comes next for the yuan. Last week’s official announcement by the People’s Bank of China promised “greater flexibility” for the currency. That was the English version; it implied more revaluations. But the PBOC’s Chinese-language commentary suggested otherwise. Lardy translated one question and answer as follows:

Q. After this reform is put into effect, will there be a large appreciation of the (yuan)?

A. A large appreciation could have a comparatively large impact on China’s economic and financial stability and would not be beneficial to our country’s basic interests.

Lardy anticipates a “firestorm” of protest from American politicians if the currency barely budges. One way or another, this story has just begun.