From the Chinese side of the Pacific, Treasury Secretary John Snow's trip to Beijing was puzzling. Snow came to town singing the Bush Administration line that China must revalue its currency, the yuan. Snow seemingly came away with nothing more than a pious repeat of China's oft-stated promises that it will eventually move toward more of a market-based system.

It was an entertaining stage show. But it was more about posturing in the run-up to next year's U.S. Presidential election than the value of China's currency. The U.S. has been hemorrhaging manufacturing jobs during the Bush Administration. More than one of every five has been lost on Bush's watch alone. In response Bush, Snow, and the rest of the White House team are talking tough, hoping to convince laid-off and insecure workers in the U.S. that they're doing something about the problem.

SHADOW PLAY. Bashing China's currency policies is no doubt good sport in America. And it may help Bush pick up some crucial votes. But the U.S. might take a lesson from Hong Kong, which didn't complain or whine about the extraordinary manufacturing productivity gains that its giant neighbor racked up over the past quarter-century. The entire manufacturing base in Hong Kong was eviscerated, when factory jobs moved across the border.

In fact, Hong Kong now has the most service-oriented economy in the world, with that sector now accounting for 85% of GDP. Yet Hong Kong-based companies employ a staggering 12 million people in the neighboring Pearl River Delta region. That's twice the population of Hong Kong itself. The lesson: You don't necessarily need manufacturing jobs to make a successful economy.

Snow's kow-towing visit was weirdly reminiscent of the sorts of trips U.S. officials used to make to Japan in the late '80s and early '90s, when they went asking for Japanese help with the American economy. All in all, the shadow-boxing over the yuan looks like good political theater but silly economics.

China's leaders came out of the visit looking surprisingly good. Hu Jintao and the new Chinese leadership were able to buttress their nationalist credentials by rebuffing the foreign supplicant. "It's good politics," Yiping Huang, a trade expert and Hong Kong-based economist for Citigroup. "No [Chinese] leaders want to be seen as giving in to foreign pressure. High-profile remarks and a visit by John Snow can actually be counterproductive in terms of inducing policy change."

UNSTOPPABLE. Goldman Sachs Hong Kong-based economist Fred Hu also notes that a modest yuan revaluation would have little effect on China's growing manufacturing prowess. Direct labor costs are less than 10% of the retail costs of most manufactured goods, and many of the key inputs are imported. Hu doesn't expect the Chinese to float the currency or to allow for capital account convertibility, which would affect the way deficits are calculated. But he does expect the Chinese to widen the band in which the yuan trades, effectively allowing for a 3% to 5% revaluation, perhaps as early as the end of 2003 but more likely sometime next year.

Still, absent a big shock [like a repeat of the pneumonia-like SARS virus] or a truly radical revaluation of the yuan, which isn't in the cards, it's hard to see what can slow China's manufacturing juggernaut. China [especially the Pearl River Delta region of Guangdong, next to Hong Kong] is an incredibly productive manufacturing center, and it's getting more so by the day.

And it hasn't escaped notice over here that it's not really the U.S. that is the big victim of China's success. Analysts point out that the East Asian trade surplus with the U.S. is little changed over the past decade -- China's exports have been growing at the expense of Mexico, Eastern Europe, and its Asian neighbors, such as the Philippines, Indonesia, Taiwan, and South Korea. "The currency is not that significant an issue in terms of economics," says Citigroup's Huang, echoing a view widely held among economists. "China's exchange rate policy is not a major cause of structural problems in other countries."

FOCUS ON STRENGTHS. Snow's diplomatic saber-rattling didn't win him friends in Beijing. A column in the government-owned China Daily newspaper on the day of his visit [Sept. 3] lambasted his call to revalue the yuan. "China is now on trial," wrote Yan Xizao in an editorial in the Communist Party mouthpiece. "As reason gives in, an issue that is economic in nature is dressed up in a weighty political matter.... The Chinese economy cannot afford not to grow. Once the Chinese economic locomotive loses steam, so does the world's.... As those with insight have observed, the appreciation of the yuan may ultimately go against the intentions of its advocates by throttling the Chinese economy and damaging their own economies in return."

Rather than looking to blame China for the loss of its old-line manufacturing industries, the U.S. needs to start focusing more on its own extraordinary strengths in technology and innovation to create new jobs.

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