In April 2005, two Senators, Charles Schumer（D – New York）and Lindsey Graham（R – South Carolina）tried to push through legislation（S. 295）that would impose an additional 27.5 percent duty on all imports from China unless China reevaluated its currency by the same amount within a specific time frame. The bill was taken off the table and later withdrawn by the two senators after a personal appeal from President George W. Bush. Since then, China’s currency has been on the appreciation track. It has appreciated 24 percent, a number not much different from what Schumer and Graham originally wanted.

Pressuring China to further appreciate its currency is based on a dubious ground that American manufacturing jobs will be lost as China’s undervalued currency grants its products unfair competitive advantage over America’s goods. This implicitly has two assumptions. First, the Chinese currency is undervalued. For a currency to be judged undervalued, one needs to know the equilibrium or the fair value of the currency. Yet, up to this moment, no economists are able to provide a confident answer. Even if China’s currency was considered undervalued by many in 2005, the assertion is debatable today among economists as well as market participants after the yuan’s 24 percent appreciation. In fact, after the trading band was doubled in April this year, a move by the Chinese government toward a system in which the value of the Chinese currency will eventually be determined by the market, the yuan has instead depreciated by 1.5 percent. The market no longer overwhelmingly believes the yuan to be undervalued. Slowdown of growth, potential local government debt crisis and worry of inflationary pressure all made investors less confident in the yuan’s further appreciation. If Romney would not know the fair value of the yuan, pressuring China to increase its currency value is without basis.

Second, the loss of American jobs has to do more with the shift of industrial structure than China’s currency. While America lost 5 million manufacturing jobs, it gained 4 million service jobs since 2001. China, meanwhile, lost 46 million manufacturing jobs during the same period. As a matter of fact, the decline of manufacturing jobs and the rise of the service sector is not just an American phenomenon. It has occurred in Brazil, China, Korea, Japan and many other countries, as the rise of manufacturing labor productivity moves jobs to the service sector. Simply focusing on manufacturing jobs will lead to misguided policies.

In my previous post, “The Real Reason the U.S. Doesn’t Make iPhones：We Wouldn’t Want to,” I argue that America has been losing ground in manufacturing long before China entered the world market. In the 1960s, about one out of three American workers were making “things.” In 1977, the year before China opened its doors, it was reduced to about one out of five. In 2001, the year when China entered the World Trade Organization, it was one out of eight. Today, less than one out of 10 Americans were classified as manufacturing workers. Appreciation of the Chinese currency has not been able to halt the decline of manufacturing jobs in America. From 2004 to the start of the 2008 financial crisis, while the yuan appreciated by 18 percent, the American manufacturing sector shredded more than 300,000 jobs. Likewise, I am not convinced that making China’s currency further appreciate will be able to bring jobs like assembling Barbie Dolls or iPhones back to America.

There is a theory of comparative advantage, put forth by political economist David Ricardo, on which most economists tend to agree. This theory basically says that developing countries, such as China, India or Thailand should be more competitive in manufacturing industries that deploy its inexpensive unskilled labor, such as sewing Gap clothes, assembling iPhones, or making Vidal Sassoon hairdryers. America has a comparative advantage in making knowledge intensive products, such as Boeing airplanes, Hollywood movies and cancer drugs. I would be very surprised if Romney, a Harvard MBA, does not know this theory. In fact, the investment made by Brookside Capital that listed Romney as the sole owner and CEO, according to the Securities and Exchange Commission filing on April 8, 1998（http://www.sec.gov/Archives/edgar/data/1028348/0000927016-98-001550.txt）, in a Hong Kong based appliance outsourcing company, Global Tech Appliances, is clearly consistent with the theory of comparative advantage. Global Tech manufactured household appliances for Hamilton Beach, Mr. Coffee, Sunbeam and Vidal Sassoon in Dong Guan, China, utilizing inexpensive Chinese workers. Mr. Romney would do better by explaining to the American people that manufacturing products of low technological contents in China while moving America to a high technology value chain is good for the United States. To me, there is nothing wrong in profiting from China’s comparative advantage. It is not right to accuse China of playing unfairly after taking advantage of this.

Labeling China as a currency manipulator is counterproductive. China is likely to retaliate. If that happens, it will hurt America as much as it hurts China. If an elected Romney thinks that China is acting unfairly, it would be better for his administration to take China to the WTO, an international organization that makes sure trade is fair. Unilateral action such as labeling China as a currency manipulator is not consistent with the spirit of the WTO and will likely backfire.

Taking on China has become an election year ritual. It is more likely to be used heavily by non-incumbents to challenge an incumbent. It is no surprise that Romney has made “standing up to China” one of his main campaign platform pillars. Being a tough guy on China may win a bit of applause on the campaign trail. People who are willing to take a closer look at Romney’s pledge, however, will quickly realize that it is just politics as usual, used to grab a few extra votes. I hope that Romney is not serious about his labeling-China-as-currency-manipulator pledge. Even if he is serious, it is unlikely that the Republican business constituents or a Republican controlled Congress would allow this to happen.

America faces many problems：the public debt, social security, health care, education and technologies among others. China, on the contrary, is not one of them. Taking on China, the second largest economy in the world which has huge leverage by holding about $1.8 trillion of American debt, will instead create a problem for America. Romney would be better off by focusing on the real issues facing the American people and making a clear plan on how to deal with them.