Quit whining about the yuan. There is a far simpler solution

American complaints about China reached a crescendo last month ahead of Hu Jintao's trip to Washington, with US politicians again blaming the undervaluation of the yuan for exacerbating the US trade deficit, and threatening retaliation unless Beijing revalues its currency.

The US trade deficit, which is likely to come in at somewhere around US$650 billion for 2010, is a major economic headache for Washington. But if US politicians really want to tackle the problem, there is a much easier way to go about it than picking a trade fight with China.

They could introduce a value-added tax (VAT).

Levying a new tax might sound like an unlikely way to boost net exports, but it makes sense. Unlike most other countries, and all of America's main trading partners, the United States imposes no VAT on its domestic economy. This omission leaves US-made goods at a severe competitive disadvantage, in both their home market and in export markets around the world.

That's because countries which do charge a VAT on goods and services typically award exporters a full rebate on everything they sell abroad.

Normally, this confers no competitive advantage, because the importing country slaps its own VAT charge - typically around 20 per cent in developed markets - on goods and services from other countries. As a result, there is no tax difference between imported and domestically produced goods.