The RMB exchange rate is not just a bilateral question between the U.S. and China. As has been widely noted, revaluing the RMB would make China's exports more expensive – cutting living standards and creating inflationary pressures in the U.S., where 20 percent of imports come from China. But three quarters of China's exports go to other countries. Those urging early RMB revaluation are therefore arguing for pressure on living standards and for inflation to be transmitted not only to the U.S. but worldwide.

To understand how early RMB revaluation would damage the world economy we should also recall China is not only the world's largest exporter but also the fastest growing importer. Since the crisis, China's imports have provided the single biggest boost to other economies' external demand.

In annualized terms, between July 2008 and December 2009 OECD data shows US imports fell by $550 billion and China's imports rose by $100 billion. In the same period the US trade deficit shrank by $364 billion and China's surplus fell by $180 billion. The US therefore was subtracting $364 billion from international net demand while China was adding $180 billion.

Furthermore, while the U.S. explicitly aims to reduce its trade deficit – thereby reducing overall international demand, China's policy is to expand demand by boosting imports and cutting its trade surplus.

Since more than half of the goods China imports are inputs to exports, a cut in China's exports would lead to cut in its imports. This would hit countries like Japan, South Korea, Germany and Australia especially hard.

Those urging immediate revaluation argue that since China runs a trade surplus it should revalue the RMB. Unfortunately the second statement only follows from the first if factually RMB revaluation would lead to a reduction in China's surplus – it is not an issue of logic.

To see this, assume the RMB exchange rate went up 10 percent but China's exports fell by only 5 percent. In this case China's trade surplus would actually increase. For China's trade surplus to fall after RMB revaluation, changes in the volume of China's exports and imports would have to be sufficient to offset the fact that export prices would rise and import prices fall; in economic terms, the assumption is that demand for China's exports and imports is elastic. Krugman and Hutton make no attempt at all to demonstrate this – they claim it without proof. The reason they don't attempt to prove it is that in the short term, which is crucial for the world as it emerges from the financial crisis, it is almost certainly false.

A crucial point in this is to examine the effect of RMB revaluation over different time frames.

There is a large literature modelling the long term effect of increasing the RMB's exchange rate – with findings ranging from a reduction in China's trade surplus to an increase. But in the current circumstances this does not matter, as in the present extraordinary state of the international economy, it is crucial to pay attention to the short term – the next 6-18 months.