In the heat of the Democratic race for the presidential nomination last month, Senator Hillary Rodham Clinton summarised well the prevailing US sentiment about China: 'China's steel comes here and our jobs go there. We play by the rules and they manipulate their currency.' But in reality, China is actually doing what America has long demanded on trade and exchange rates. In addition to reducing barriers to imports and export subsidies, Beijing has allowed the yuan to appreciate significantly against the dollar - by more than 14 per cent since the middle of 2005. So why isn't the Bush administration silencing the Democrat's China bashing by trumpeting this apparent exchange rate victory? It's because the bilateral trade deficit with China, which a stronger yuan was supposed to reduce, continues to hit all-time highs - US$256 billion last year, a 10 per cent increase over 2006. But playing to American insecurities about China is not the way to stabilise what will be the US' most important bilateral relationship over the next several decades. What the US needs is a new vision for its relations with Beijing, one based on further economic integration, not protectionism. This is the best way to sustain America's long 20th century economic boom well into this century. Here are three trade secrets that should inform a 'straight talk' revolution in Washington where China is concerned. First, the trade deficit with China will not go away soon. But this has more to do with macroeconomics than trade barriers in China. Chinese domestic investment has boomed over the past decade, while the US economy has been driven by consumer spending. China has bought hundreds of billions of dollars to keep its currency down. But this has helped keep US interest rates low, allowing Americans to buy homes and to borrow against the real estate appreciation they expected. All these trends have now been reversed. Beijing has allowed the yuan to appreciate against the dollar. It has also put the brakes on domestic investment for fear that its economy is overheating. In the US, the subprime meltdown has brought the economy to a near standstill in growth terms. The combined result of these abrupt macroeconomic reversals is that US exports to China have grown twice as quickly as Chinese exports to the US in the past two years. So why does the US-China trade deficit continue to climb? The US exports to China less than one-fifth as much as it imports from China. The much faster growth on the much smaller exports base is still overwhelmed by the slower growth in the much larger import volume. Even if US exports continue to grow twice as quickly as imports from China, the bilateral deficit will increase for years to come. But the rapid growth in US exports to China should be cause for celebration in the US. And rising Chinese imports provide affordable goods to Americans. Focusing on the trade deficit conceals this fact. A second secret is that the bulk of Chinese exports to the US are not really made 'by China'. They are not even really 'made in China'. The Chinese economy today is in large measure an assembly platform for foreign firms to turn components designed and made elsewhere into final products, and then to export them to the rest of the world. More than 60 per cent of Chinese exports are in fact the sales outside China of multinationals operating in China. Consider the iconic Apple iPod. Every iPod shipped from China and sold in the US adds to the country's trade deficit with China. But what Apple says on the back of every iPod is true: 'designed by Apple in California, assembled in China' from chips, hard drives and screens made in the US, Korea and Japan. Chinese assembly adds only a tiny amount to the value of each iPod. US manufacturing jobs are no doubt lost as a result. But these are in assembly - the lowest tech part of the production process. Jobs are also created, and they are in the highest tech and most innovative parts of the American economy - design, marketing, finance and logistics. This is not only a positive trade-off for the US economy, it is also positive for the US labour force. A final secret is that the US has benefited from the vast quantities of dollars and Treasury bills (estimated at three-quarters of a trillion dollars) China has purchased in recent years to manage the dollar-yuan exchange rate. Ample China-funded credit kept US interest rates low after September 11 and the dot-com bust, fuelling both consumer spending and the run-up in housing prices. It is time for US leaders actually to lead on China, rather than pander to understandable insecurities in middle America. Turning trade secrets into widely understood facts of life is a very good place to start. Geoffrey Garrett is president of the Pacific Council on International Policy and Professor of International Relations at USC