BAE Systems has been about to win the contract to supply India’s airforce with

BAE Systems has been about to win the contract to supply India’s airforce with trainer jets for at least two decades now, so we should perhaps wait for formal confirmation from the company before accepting that the $1.7bn deal has after all these years finally been done. We have to think about our own comparative advantage and ask the tough question: what can we do that Chinese people on one-tenth of our wages can’t?. We are more likely to lose service industry jobs to India than manufacturing ones to China. Our self-interest is damaged, however, if hostility in the US to China spills out into more general US hostility to the multilateral trading system.But there is one thing from which there is no escape. China will play an ever-greater economic role in the world over the next decade, maybe the next two or three decades. China, too, will see that while it needs to remain competitive, it does not need to be super-competitive.

So gradually the tourniquet will be eased.From a UK perspective, the issue seems less pressing than it appears in the US. Trade with China is a smaller proportion of the total and investment there is much more modest. But China will want help in rebuilding its banking system and that will give the US a lever on policy. There will be some restrictions on Chinese imports into the US because, politically, the Bush Administration will have to be seen to do something. These measures will be ineffective, just as measures to curb Japanese imports were pretty ineffective.

Japan still has a huge trade surplus now but was gradually forced to export its own jobs by building plants in the US.China is a long, long way from that. But Chinese policy will change when the country’s leaders feel it is in its self-interest to change My guess is that it will all be fairly messy. Certainly the gut instinct of Americans under these circumstances is to go for import controls But we will see. Since the imbalance has in large measure been driven by the actions of US companies, it is tricky to see what can or should be done.My guess is that the US will gradually try to increase pressure, just as it did on Japan 30 years ago. Japan, similarly, manipulated its exchange rate to make it super-competitive, building up huge stocks of dollars, which it then invested spectacularly badly. One US senator, Charles Schumer, said he may introduce a bill that would raise “legitimate trade barriers” to China’s exports.