Smarting from Tim Geithner’s comments about China manipulating, its currency, the Chinese have retaliated with a condemnation of U.S. economic policy in the harshest of terms. At the World Economic Forum, Chinese Premier Wen went on the attack, accusing the United States of undisciplined profligacy.

As I indicated just yesterday, irrespective of Geithner’s motives in branding China a currency manipulator, his language was unwise. Further comments of these sorts can only increase tensions between China and the U.S.

There seems to be a blame game making the rounds in policy circles these days in which Asia is at fault for the credit crisis and economic downturn. The meme goes like this: Everything was fine until the Asians started manipulating their currencies and creating excess savings to export to the West. This mercantalist policy of low domestic demand, high savings, and an export-oriented economy set up huge macro imbalances that created the debt bubble and recession we see today. Asians need to save less and buy more — and stop manipulating their currency. Do you buy this line of argument? I don’t.

In an FT opinion piece, Jagdish Bhagwati, a famous name in economic circles on the issue of free trade, issued a blistering attack on president-elect Barack Obama’s commitment to free trade in the face of a deteriorating U.S. job market. Bhagwati was optimistic about Obama as a free-trader during his primary battle with Hillary Clinton. However, Bhagwati is now deeply skeptical of Obama and his free trade bona fides.

Are we headed for another bout of Smoot-Hawley? If you agree with Professor Bhagwati, you might answer yes. Here is a snippet of his remarks below. I have highlighted the pieces I most agree with.

Marshall Auerback here. This will be short, but I felt compelled to post with my views on China.

There was clearly a bubble in exports in the past four years, with exports serving to cover capital inflow (overinvoicing must have been a big part of that). So this is just part of the overall collapse of speculative capital flows, and not so much a decline in real effective demand. China can handle this, the population is not constrained by either income or debt.

The punderati has been especially kind to China. As the global recession takes hold, the conventional wisdom has moved from the largely debunked de-coupling of China to a story where China slows, but much less so than the west. But is that really how things will play out?

Below is an article that has been syndicated on a number of sites in the Indian press (hat tip Ravin) which challenges the common wisdom that Asia, and particularly China, will weather the downturn better than the U.S. While the articles conclusions are contentious, its analysis bears noting, making those conclusions an outcome to not dismiss.

The World Trade Organization has called al any renewed discussions about expanding free trade. No one wants it now that the global economy is sick. Stephen Roach has been warning for months that this would be the likely result of global rebalancing and recession. Now, we are seeing he was correct.

When the going gets tough, the tough turn into populists. Or at least that’s what we have seen time and again throughout history. In the 1930s, as the Great Depression was savaging the American Economy, people trembled in fear at the economic devastation. Members of Congress, sensing they needed to do something [...]