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Decoding the Debate on Manufacturing and China

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If you tuned into the presidential debate Tuesday night wondering why President Obama and Mitt Romney spent so much time hitting each other on manufacturing and China, then you don't live in a swing state.

The good news is that America really has a future in manufacturing.  The brightest minds at Harvard, MIT, and in the consulting community see enormous possibilities for American manufacturing. We're competitive in energy costs, labor productivity, and other factors.  Reshoring has already begun. Both the candidates recognize the possibilities, which is why the ad war on China and manufacturing has been underway since this summer.

Here's a quick primer on what the candidates have been saying, and where American manufacturing can travel in the next few years:

1. Could a college graduate get a manufacturing job?

Audience member Jeremy Epstein said he's wondering about a job after he graduates, and President Obama launched into his jobs plan, with a focus on manufacturing. Even the Huffington Post's Howard Fineman, whom I admire, missed the point in a post-debate Tweet stating that Americans don't want manufacturing jobs. In fact, the Bureau of Labor Statistics reports that there are roughly 250,000 job openings in manufacturing, and a fair number of those challenging positions require a college degree. Think engineers, managers, accountants, scientists, and the like. It's a good job option for many college graduates, and consulting firms like BCG believe that the U.S. could produce 2-3 million more manufacturing jobs in the coming years.

2. Who's created manufacturing jobs?

Mitt Romney said we've lost 500,000 manufacturing jobs since Obama took office. The larger picture is this: The United States lost 5.5 million manufacturing jobs 2000-2009--before and during the Great Recession, the largest decline on record. The vast majority of the bloodletting occurred during the Bush Administration. We've gained 500,000 manufacturing jobs since the beginning of 2010. That's the largest gain in manufacturing jobs since the early 1990s. Granted, the gains are a drop in the bucket compared to what we need, but at least the needle is generally headed in the right direction. It's true that China passed the United States to become the largest manufacturer in the world, but that was a trend well underway before Obama took office in 2009.

3. Who's tougher on China?  Here, both candidates have points to make.

Mitt Romney rightly points out that President Obama has failed to designate China as a currency manipulator. There is no question that China manipulates its currency. There is also no question that China's exchange rate policy harms American jobs. Unless you've been living in a cave, you know that Mitt Romney will "designate China as a currency manipulator on day one of his Administration." But, why hasn't Mitt Romney asked House Speaker John Boehner to bring a bipartisan currency bill to the floor for a vote? Why did Paul Ryan vote against a China currency bill in 1010, when more than half of House Republicans supported it? The China currency bill was the only major bill to beat a Senate filibuster by Mitch McConnell over the past two years. Also, after Romney calls out China, what's the plan to change China's behavior?

President Obama reminds us that he's cracked down on China. He's put tariffs on Chinese tires, a move that Romney opposed. He's initiated an action against Chinese auto parts, and has supported relief for American solar, steel, and other producers against dumped and subsidized products from China. His enforcement initiatives are the best we've seen since the 1980s. President Obama further charges that Romney invested in Chinese firms...and still does.

4. Who's got a plan to grow manufacturing?

President Obama has laid out a plan to create 1 million new manufacturing jobs in a second term. Investing in education, innovation, and infrastructure, trade enforcement/opening new markets, eliminating tax breaks for offshoring and deepening tax cuts for manufacturing in America are key elements of the plan, as well as investing in all domestic forms of energy. Mitt Romney doesn't offer a specific job creation promise on manufacturing, and focuses on traditional energy investment, broad tax relief, and reducing regulation, as well as cracking down on China and entering into free trade agreements with Latin American nations.

5. Differences on the auto bailout.

There is no doubt that President Obama helped to save the American auto industry and transformed it for the future. American consumers have better choices, and Chrysler and GM are hiring again after decades of shedding production and jobs. The Administration used a managed bankruptcy, emergency loans, and other tools to achieve this. Most outside observers believe Mitt Romney's plan would have liquidated the industry as we know it.

6. Is this focus on China counterproductive?

Not at all. Putting pressure on China works. That's why the value of China's currency is now at an all-time high, even though it is still undervalued. We have more leverage than most Americans believe. China does own some of our public debt, but its holdings are falling. Sadly, perhaps, there are plenty of buyers of public debt--we don't need to depend on China. China buys dollars to help keep the value of its own currency artificially low. And, it buys dollars because it runs about a $28 billion per month trade surplus with the United States. That's a terribly unhealthy dynamic. On the other hand, China depends on the American consumer and unfettered access to our market. If we conditioned access to our market on playing by the rules, China would have no other choice because it has no substitute. China is a growing market for U.S. exports, but it pales in comparison to Chinese imports to the United States. It's worth standing up to China.

8. Are labor costs really the only reason why Apple manufactures in China?

Actually, it's the least significant reason of all. Bigger factors are the exchange rate, China's restrictive policies on rare earth mineral exports (which are essential to this type of production), subsidies, and lack of enforcement of labor, health, and environmental rules. Plus, for as good as Apple is at design, it is terrible at manufacturing. Instead of investing in a sophisticated, modern production facility that is operated by robots and highly-paid American engineers, it opts to exploit hundreds of thousands of Chinese workers. Public policy can help to create the proper ecosystem for Apple to shift its production to America. Not every manufacturing job is coming back, but these certainly can.

So, what's next?

Expect a crescendo on China next week when the candidates spar on foreign policy at the Boca Raton debate. And, expect shrill editorials from all the editorial boards that got it wrong on China the first time as they fret about "China bashing." When the elites are losing the argument, they start name-calling. The debate on manufacturing and China is long overdue. Let's keep it going.