The friction between Washington and Beijing over exchange rates is about to get a lot worse. On April 15, the US Treasury will issue the first of two semi-annual currency reports, mandated by law since 1988, in which China may be deemed to be manipulating its currency “for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade”. The Treasury and the Congress have been deliberating inconclusively on China's exchange rate policy since 2003, when the country's balance of payments surplus was a tenth of what it is now and its foreign exchange reserves were a sixth of the current stock of $2,500bn (€1,840bn, ￡1,660bn). This time, events may play out quite differently.

If China continues to stand firm in the face of US pressure for policy change, the case will almost certainly go to the World Trade Organisation. More to the point, it will become the most prominent of several bilateral spats, in which the US could threaten to impose across-the-board tariffs on Chinese imports and China could threaten to dump holdings of US Treasury bonds. A major economic dispute between the US and China would be in no one's interest, least of all China's, but it looks unavoidable for three reasons.

First, the financial crisis has shocked the US and Europe into a major change in behaviour and exposed China's economic model as being in conflict with the global system. America, the world's biggest debtor, is going to save more and borrow less. The change has started in the private sector, and the public sector will follow. But this will only work if China, as the world's major creditor, saves less. If we all end up trying to be savers, the global economy will tilt more heavily towards protectionism and recession. The US will not watch as this happens and is right to demand stronger action from China.