27 November, 2007: London, UK -- With all eyes focused on the Bush Administration’s efforts to bring peace to the Middle East, it would be easy to miss the other major negotiations happening elsewhere—in the Middle Kingdom.

This week China is hosting the European Union’s top policy-makers on monetary affairs—president of the European Central Bank, Jean-Claude Trichet, Luxembourg’s prime minister, Jean-Claude Juncker, and the EU’s monetary affairs commissioner, Joaquín Almunia—and will also stage an EU-China summit on Wednesday. These talks come as tensions have grown between the two sides; China’s trade surplus with the bloc has been growing and is estimated to reach €170 billion ($252 billion) by year’s end—an average of €2bn ($2.97bn) a week. With the country’s currency, the renminbi, actually falling 6.1% against the Euro this year because of its link to the free-falling U.S. dollar, there looks to be no respite in sight for Europe.

Further fueling tensions are concerns about the safety of Chinese exports and the country’s environmental and human rights records. Product safety is particularly contentious with both sides trading blows, saying safety regulations are being used as artificial trade barriers. Peter Mandelson, the EU trade commissioner, said: “Politicising product safety in this way is irresponsible.” There is the risk that relations could get worse as he intimated that his “patience is not exhausted, but I can no longer suffer in silence.”

The Chinese have consistently shown their unwillingness to change their exchange rate policy of slow and steady appreciation. Earlier this week, French president Nicolas Sarkozy was stonewalled when he pressed for a “harmonious and fair” renminbi valuation, but was able to secure multiple contacts worth billions for French corporations. Beijing has used similar deals to sugarcoat their stubbornness with U.S. officials during the two sides’ Strategic Economic Dialogues.

Consequently, Mr. Mandelson has taken an interesting line when negotiating with his Chinese counterparts. Seeing their intransigence on exchange rates, the trade commissioner has pressed for stronger intellectual property rules in China, tougher product safety regulations, and greater access for European companies to the Chinese market. His focus on non-exchange-rate issues could hold real promise. At its heart, this tack takes into account long-term and deep-seated issues that will need to be resolved if the ballooning trade imbalance is to be corrected. Furthermore, by raising the cost of production, Chinese goods will become more expensive and less attractive to consumers. Will his traveling colleagues follow this path?

It is highly unlikely that the trade imbalance can be wholly remedied without a significant appreciation in the renminbi—especially if estimates that the Chinese currency is 25% undervalued against the euro are true. But the question stands: Is this a promising line for negotiations? What else can Western leaders do to convince their counterparts to allow their currency to appreciate (especially given the growing inflationary pressures in China)? Send your thoughts along.