International trade politics is going through an exceptionally bad tempered patch, with the Renminbi - pegged at 8.28 to the US dollar since 1995 - coming under sustained rhetorical assault in Europe and the United States. Currency speculators are trying to position themselves for a sharp revaluation of the RMB, adding to the pressure. Yet the intellectual case underpinning the latest wave of attacks on the RMB is extraordinarily weak.

The usual indignant mercantilist populism accounts for the loudest and most depressing chorus, based on the hopelessly confused assumption that imports are "worse" than exports and trade deficits are a form of humiliating economic sickness. More dangerous, because superficially more rational, are arguments based on a set of stubbornly misleading Keynesian assumptions on the relationships between currencies, trade, inflation and growth. Among foreign commentary, only an embattled minority of supply-siders and other economic realists are making much sense.

Mercantilist prejudices - while perennially infuriating - are so theoretically degraded they are scarcely worthy of discussion. Those who truly think importing foreign goods in exchange for pieces of paper is a bad deal are evidently lacking not only economic education but also simple common sense. In the US case, where "seignorage" resulting from the status of the US dollar as an international reserve currency means the paper is unlikely to ever be redeemed, the cognitive malady tips over into something darkly comical. One can only hope that serious policy makers are unaffected by such bizarre ideas.

The intellectual relics of Keynesia-nism also remain disturbingly influ-ential, reinforcing seriously dated and extremely misleading policy prescri-ptions. To state the matter brutally: Keynesian policies are structured essentially as a confidence trick. They aim to manipulate economic behaviour by misleading relevant agents - consumers and businesses - about future levels of inflation, taxation and other key variables. When such manipulation is exposed, it ceases to be effective, as occurred worldwide from roughly the early 1970s. The targets of Keynesian "demand management" eventually adjust their behaviour through updated "rational expectations" and cease to respond to the desired artificial stimulus, which merely results in "stagflation" - a vicious spiral of impotent currency debasement.

In the area of international trade such manipulation is focused on exchange rates. Anyone old enough to remember the 1970s will recall the futile "competitive" devaluations which exhibited the nadir of Keynesian thinking in the world arena: beggar-my-neighbour attempts to gain an artificial price advantage by debauching one's own money faster than other countries were able to do. A return of such "lose-lose" or mutually damaging policies surely beckons if the floating of the RMB ushers in a new downward arms-race of currency destruction.

The world should have evolved beyond such ideas and be focusing on the realities of market-based economic reform and trade liberalization rather than turning to the ruinous hallucinogenic drug of currency manipulation. It is no coincidence that, despite supposedly "unsustainable" imbalances in their bilateral economic relations, China and the United States - where supply-side reforms are relatively advanced - have been posting the world's most significant growth figures. Chinese exports have suppressed inflationary threats worldwide, while buoyant US growth has maintained global demand. Together, the two countries have been effectively propping up the entire global economy, in the face of a tight oil market, expensive security threats and the chronic economic weakness of Europe and Japan. Structural rigidities and an absence of effective market incentives are the true causes of underperformance, compared to which currency values are merely symptoms and diversions, however appealing the topic may be to awkward and ill-informed political constituencies.

China has a large heap of important reform issues on its plate, including a dysfunctional stock market, a weak financial system, badly needed SOE reforms, incomplete property laws and troubling real estate bubbles resulting from a lack of attractive investment options for local savings. As the country's leaders seem fully aware, floating the RMB before the nation's financial institutions are in good order would be reckless in the extreme.

It remains unclear whether intolerable political pressure based on protectionist threats will force China into a premature revaluation of the RMB. If the dam does burst, the world will probably be the poorer for it.