"I don’t think there’s a clear case that one story is “truer” than any other. But I do know that a future in which the US and China are warm friends looks far better than a new cold war based on avoidable grievance. My first-best prescription for the US is to avoid singling out China at all, while using nondiscriminatory capital controls (or else “import certificates“) to unilaterally enforce a balance of trade. But if we must single out China, we should prefer revaluation via higher wages to nominal appreciation. If we are not stupid about how we frame the issue — if we don’t throw around accusations of sweatshops and slave labor as an offensive sort of cudgel — we might find that China’s leadership is more open to wage appreciation than currency appreciation. Higher wages balance the cost of reduced international competitiveness with the benefit of increased domestic demand. Giving ordinary people more money always has a political upside. Rising wages don’t attract self-defeating flows of “hot money”, like gradual nominal appreciation does. And China’s leadership, with its laser-focus on stability, prefers gradual experiments to bold, dramatic adventures."