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Currency Imbalance Should Not Become a Distribution

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When it comes to our foreign trade, references to one country dominate the discussion -- China. This is not surprising. China is the second largest trading partner of the U.S., and more importantly, our biggest source of imports and trade deficit.

The main argument being made by many is for a higher-valued Chinese currency, renminbi. It is argued this will raise the price of exports from China, and therefore, help boost employment and domestic economy of the U.S. However, would a drastically appreciating renminbi be an effective solution?

The answer is "No." Let's put things in perspective.

Since the 1970s, East Asia has been the source of abundant cheap labor for the world economy. The rise of the Four Asian Tigers - South Korea, Hong Kong, Taiwan and Singapore - has been largely driven by this focus on exports of labor-intensive goods, the exact same focus China adopted in late that decade.

Now China has become the go-to place for manufacturing even within Asia. Many products that used to come from countries like Japan and South Korea now are originated from China. Therefore, China's share in U.S. deficit has climbed while the share of East Asia has gone the other direction. In 1998, East Asia accounted for an astounding ¾ of the U.S. trade deficit, which dropped to less than ½ in 2007. Meanwhile, China's share in our deficit in that period rose from 24 percent to 32 percent.

If the U.S. could remove China as the primary source of trade deficit, we would either revert back to those outsourcing Asian countries or newly emerged sources of cheap manufacturing workers, such as Vietnam and Thailand or in South America.

It's unlikely that the U.S. will get basic, low value-added manufacturing jobs back.

Even if the goods made in China become pricier, and even if we can somehow channel the manufacturing jobs we have lost back to our country, the more important question we have to ask ourselves is: Can we afford it?

No. The U.S. Labor Department predicts a net drop of 3.1 million in labor supply comparing the period of 2006-2016 to the prior decade. The only way out is to concentrate this limited labor supply on sectors that will generate the most wealth.

By focusing our attention on the currency issue, we are taking our eye off the ball -- How to drive long-term competitiveness with innovation, the factor that ultimately allows us to achieve a high-level of productivity, just as it has done so for us in the past.

The U.S. boasts the most powerful innovation-based economy. Our high tech industry is undoubtedly viewed as the locomotive of the world. The Silicon Valley alone dwarfs the rest of the world with its number of start-ups as well as the size of venture capital funding.

However, we recently have been losing our lead in a few major innovation indices. The World Economic Forum lately ranked the U.S. No. 3 when it comes to effective use of information and communication technology. The Boston Consulting Group and the Information Technology and Innovation Foundation last year listed the U.S. as the eighth and the sixth, respectively, in global innovation competitiveness.

With a much smaller population than China and some other developing nations, it will for sure be a losing battle to flight if we shift the focus of our economy to compete in labor-intensive industries. Our innovativeness will continue to trend down.

As a matter of fact, it is China's ambition to compete with the developed world on an equal footing in technology-intensive areas. Lenovo's acquisition of IBM's PC business and Huawei's attempt to buy 3Com, as well as Chinese Premiere Wen Jiabao's recent reiteration of innovation as a national strategy, are all evidence that China understands that those who win the innovation war will ultimately lead in the global trade arena.

The U.S., just like the rest of world, understands it. Fixing our attention on the currency issues is a distraction, and takes our eyes off the core issues that will keep our lead in our economic power. And that is not China's problem. It is America's problem.

John S. Chen is Chairman, CEO and President of Sybase, Inc., and Chairman of the Committee of 100. Mr. Chen was named by Forbes magazine as one of the Top 25 Notable Chinese-Americans in Business and served on the President's Export Council under President George W. Bush. Mr. Chen also serves on the board of directors for the Walt Disney Company, and Wells Fargo & Co.