Emerging economies have benefited tremendously from the increase in trade and the lowering of the trade barriers around the globe. China and a host of other nations wouldn’t have been able to achieve sustainable economic growth rates without the explosion in free trade.

This is not a first in financial history, as free markets and free trade have always benefited participating economies. The US is the quintessential example of an economy that expanded and grew because of free trade and free enterprise.

But protectionism often rears its head during times of economic difficulty and political uncertainty. Economic weakness, particularly after a period of strong growth and excess, often prompts a search for scapegoats–a culprit for the sudden change in fortunes. Nations at both ends of the power spectrum are prone to a protectionist turn in bad times.

Economies are political in nature. The role of the politician traditionally has been to identify ways to increase economic growth, while ensuring that the people firmly believe that this growth stems from their own hard work. This helps the politician’s case for re-election. All too often, the geo-political factors and other levers that supported the economic growth recede to the background of the electorate’s mind or are disregarded completely.

Bearing these time-honored patterns in mind, it’s no surprise that part of the US political and economic establishment has stepped up its criticism of China’s currency valuation. Although it’s no secret that the Renminbi (RMB) is undervalued relative to the US dollar, US and a growing number of EU politicians still think their jeremiads can force China undertake a one-off revaluation of its currency.

The “theoretical” grounding for these actions often comes from high-profile commentators seeking to remain relevant and “controversial”–code words for widely read and profitable. NY Times contributor and Nobel Prize winner Paul Krugman, for example, has provided airy justifications for pressuring China into revaluing its currency.

I’ve long stated that the Chinese will gradually revalue the RMB this year, just as they did between 2005 and 2008. People forget that the Chinese currency appreciated by 21.2 percent over that three-year period; China had to stop the process, as the global financial crisis was hurting its exports. 

Mr. Krugman’s “careful” analysis aside, the Chinese government doesn’t want to create the impression that it’s bowing to political pressure from Washington. As China’s Premier Wen Jiabao recently noted, domestic concerns take precedence:

I know there is an unemployed population of 2 million in the US, which makes the government very anxious. But the figure for the Chinese government when it comes to providing jobs to our people is 200 million, and there’s a huge gap between urban and rural areas.

The Chinese also won’t risk being exploited by global financial markets during these uncertain times.

And the prevailing view in China is that the country has done more than its share to stimulate domestic demand and buoy the global economy during the recession. Asking the Chinese to move hastily on such an important issue is unlikely to bear fruit.

Krugman and other theorists are making the case for RMB appreciation as the US economy appears to be on course to grow 4 percent in 2010, well above the trend. And no one in their right mind would believe that US consumers can afford a 25 percent price increase at their local Wal-Mart. To top it off, China remains the fastest growing market for US goods.  Between 2000 and 2009, US exports to China rose by 330 percent, while US exports to the rest of the world rose only 29 percent. Don’t dismiss the long-term potential of this growth.

In short, US investors should pay limited attention to the China currency issue in terms of strategic importance. I expect China will ultimately follow Singapore’s lead and peg the RMB to a basket of currencies instead of to the dollar alone. The timing of this endgame remains to be seen.

Sail Away With Me!

KCI’s editors have been combing the globe for their next luxury investment cruise: Any ports of call must be ripe with investment potential, of course, but they must provide a rich slice of the world’s treasures and unique insights into human luxury. And after the brutal year we just finished, who couldn’t use some luxuriant down time learning how to prepare their portfolios for what this next decade has in store.

Save the dates: Thursday, October 21 – Monday, November 1, 2010. Explore the wonders of Turkey and the Greek Isles while learning about the newest investment strategies from myself, Roger Conrad, Elliott Gue and Gregg Early. While you enjoy unfettered access to the finest minds in investing today, Seabourn Cruises will upgrade the way you think about luxury cruising as you are feted aboard the brand new Seabourn Odyssey. From its all-included open bar of premium liquor, wine and beer to its almost better than 1:1 staff:passenger ratio, to its maximum capacity of only 450 passengers, you will understand why it immediately jumped to the top of the luxury cruise line ratings charts when it hit the water in 2009.

For those of you lucky enough to have sailed with this keen crew in the past, you know you are in for a meticulously planned journey into the business, investment and cultural offerings of the region. KCI in partnership with Joseph H. Conlin Travel Management is offering this journey solely to KCI subscribers and their friends. For more information and reservations, please click here.