The latest EU foray into Beijing underscores the limits of negotiating without leverage. The EU got "agreement" from China to cooperate to avoid large currency swings. Excuse me, but what the currency doctor ordered was a substantial revaluation of the renminbi. How does an agreement to avoid big changes promote the big change that's needed? Then the EU settles for its own version of Henry Paulson's pathetic "Strategic Economic Dialog." The Chinese are like most people. If they know that you are not prepared to take action to enforce your rights, they will feel less and less compunction about ignoring their obligations to you. More dialog is just empty rhetoric until it's backed by real trade sanctions. The EU, like its hapless friends in Washington, needs to treat deliberate currency misalignment as a countervailable subsidy. Then, under agreed international rules, an offsetting duty could be applied to imported goods that are determined to injure domestic producers. If Europeans and Americans were to act in concert on this issue and take full advantage of the WTO rules, each would finally have substantial leverage and the Chinese would be asking how much of a revaluation would be sufficient to avoid a slew of countervailing duty cases.

It's time for Europeans and Americans to act on Ronald Reagan's famous argument in that to be free trade must also be fair and within the rules. Our timidity in insisting on this obvious truth encourages reckless, lawless mercantilism that imperils the global financial system and with it, the prosperity of ordinary citizens in the US, Europe and China itself.