TIME FOR A closer look at the growing dispute between Beijing and Washington about the yuan exchange rate as it is likely to flare up this week with a visit to Beijing by United States Treasury Secretary John Snow. Mr Snow's comments on it in Japan on the first stage of his trip were reserved but he is considered the hawk on this issue in US President George Bush's cabinet and his line on it is clear. It is that China cheats in trade with the US because it has pegged the yuan at too weak a rate against the US dollar, thus giving Chinese producers much lower costs than they should have relative to US producers. If the yuan were to float on exchange markets, he argues, it would strengthen against the dollar, eliminating this unfair advantage. Let us look first at the record here. The red line in the first chart shows you a 20-year history of the yuan to US dollar exchange rate. Those sudden devaluations that the red line shows tie in with bouts of high inflation in China. Now let us assume that prices in China were roughly in balance with prices in the US when the yuan was valued at two to the US dollar 20 years ago. This is a tenuous assumption and I have no evidence for it but you have to start somewhere. Assume it is true and the argument becomes that if prices in China and the US were to stay in line from that point onwards, the yuan exchange rate should have weakened only by the extent that inflation was greater in China than it was in the US. The red line shows you what would have happened if this had been the case. The yuan's exchange rate would now be about 4.2 to the US dollar rather than its actual 8.27. In fact it does not really make much difference where you set the starting point for this comparison. Take it from almost any date and the yuan comes out as undervalued. So on this rough purchasing power measure Mr Snow seems to have a point. The yuan looks much too weak. It is time for some realignment. Now look at it another way by comparing wage levels in the US and China. The figures say that the average nominal wage in China comes to just under US$1,600 a year while the equivalent in the US is about US$27,000. This looks like further confirmation of Mr Snow's argument but there are several things to take into account here. In the first place, while average wages in the US may be 17 times greater than in China, gross domestic product in the US per employed worker is 44 times greater than in China. Americans may be paid more but they are also clearly more productive, by a much greater margin, in fact, than the disparity in wages with their Chinese counterparts, who do not seem at all to have an unfair competitive advantage on this measure. Mr Snow can argue, of course, that the disparity in production per worker is nowhere near as great in the manufacturing industries that represent China's exports to the US, and this is undoubtedly true, but then look at it another way again. The second chart shows you a comparison of wage growth in the US and China since the last big yuan devaluation at the end of 1993. It tells you average wages in China have risen by 300 per cent since then while average US wages have risen by only 35 per cent. So let us say that Mr Snow gets his way and the yuan is revalued by, let us say, 20 per cent. How much more will that do to give US workers a greater competitive advantage when only two years of wage growth in China at present rates would have the same effect? What is more, all of this assumes that it is wage levels which are critical here. Ask anyone with a production plant across the border, however, and he will tell you that wages paid in China amount to only about 10 per cent of the final cost of the goods when sold in US retail outlets. The rest is all effectively priced in US dollars anyway - raw materials, component goods, capital equipment, transport costs, financing charges and even energy costs which are just as sensitive in China to worldwide trends as they are anywhere. Revaluation would make no difference to these at all. What Mr Snow needs to take on board is that goods made in China are sweeping the domestic competition out of the way in the US because Chinese industry has become highly efficient and is simply more competitive, not just in terms of yuan exchange rate or wages in China but in quality, manufacturing processes and almost every way of measuring it. This is not a palatable message in the US, however, and you are therefore unlikely to see him concede the point. The noise here is actually all about politics and Mr Bush's re-election chances, not about commerce.