Willem Buiter's blog: Tim Geithner, the nominee for US Treasury secretary, has risked damaging the global economy even before his confirmation by the full Senate. In a written answer to questions from US senators, Geithner said: "President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency." In the US, the words "currency manipulation" are fighting words. If Barack Obama's administration were formally to name China as a currency manipulator, a range of trade sanctions could be imposed by the US government.

The threat to world trade comes from the Omnibus Trade and Competitiveness Act of 1988. Should the Treasury officially determine China to be a currency manipulator, itcould unleash a range of remedies, including antidumping measures, countervailing duties and safeguards. Although the World Trade Organisation permits certain retaliatory responses from importing nations that can prove they suffered material injury because of unfair trade practices, much of what Congress and some members of the Obama administration have in mind is likely to be in clear violation of America's WTO obligations. It would provoke a response from China. The bilateral trade war that is likely to result could easily spread to the European Union, Japan and emerging markets.