24 October, 2007: London -- The word from Washington has been consistent for some time: China’s currency, the yuan, is undervalued relative to the dollar, resulting in an unfair trade advantage for the Middle Kingdom.

This stipulation has come to be the central play in relations between Beijing and the Bush Administration as both sides look to contend with an uncertain global economy—highlighted by the subprime crisis in the U.S. and China’s galloping stock markets and ballooning surplus.

However, when leaders from the two sides, including Treasury Secretary Henry Paulson and his counterpart Wu Yi, have met in a series of negotiations dubbed the U.S.-China Strategic Economic Dialogue little progress has been made.

China for its part has relaxed its peg on the dollar and has allowed for some appreciation in the yuan in recent years—as much as 8 percent since July 2005—but many see this trend as wholly insufficient.

Seeing an impasse—and a political opportunity—the U.S. Congress began to assert itself on the issue earlier this year, with bipartisan support for a bill that would label China as a currency manipulator and slap penalties on Chinese goods. With an election on the horizon in the U.S., it is likely that anti-China rhetoric will increase as candidates look to demonstrate an authoritative stance on the issue to voters, many of whom see China and other emerging economies taking their jobs.

Now Europe is growing concerned about its own trade imbalance with China. Last week, European Union’s Trade Commissioner Peter Mandelson warned that the EU-China trade relationship was “deeply unequal,” noting that the trade deficit between the two was growing at an astonishing about $20million (£10million) every hour. China is making political decisions, not economic ones, according to Mr. Mandelson, who earlier this summer warned that economic relations between the bloc and Beijing were at “a crossroad.” In order to avoid any conflict, he called on China to meet its World Trade Organization (WTO) obligations and remove trade barriers.

Similarly, the French Economy Minister Christine Lagarde asserted that G-7 countries had together pressed Chinese authorities to allow for a faster appreciation of the yuan.

This new assertiveness on the part of Europe comes as the dollar has slipped to new lows against the euro. While there are some benefits for the EU, including mitigating the adverse effects of rising oil prices, which are listed in dollars, the bloc countries are facing the ominous risk of growing trade imbalances with both the U.S. and China.

Are Europe and U.S.’s concerns warranted, loyal readers? Will the EU’s pressure be enough to convince Beijing that it must allow for a greater appreciation in the yuan relative to the dollar? What else can the U.S. and EU do to effect a change in China’s exchange rate policy? If Beijing resists this pressure, what will the responses likely from Washington and Brussels be?

Send us your thoughts.

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Marc C. Partridge is a London Correspondent and regular contributor to the Diplomatic Courier Magazine. His blog is posted on Wednesdays.