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The House of Representatives recently passed the Currency Reform for Fair Trade Act (H.R. 2378) that would allow the Department of Commerce to place duties on imports from countries, such as China, with undervalued currencies. Washington has long accused Beijing for keeping its currency artificially low. The sponsors of the legislation contend that allowing the yuan to appreciate would make American manufacturers more competitive and create an estimated half-million more jobs here.

At first blush, Macroeconomics 101 seems to support this argument. Typically, a foreign country’s currency appreciation causes an increase in domestic exports and a decrease in consumption imports. But it is difficult to imagine that there will be significant job creation in the United States as a result of this bill. An overwhelming majority of Chinese exports to the U.S. are electronic components assembled to become popular products such as the Apple iPhone, Dell and Hewlett Packard computers. As these products would cost exponentially more to be produced here, placing tariffs on Chinese supplied goods will simply push manufacturing to other low-wage foreign production centers. With a bleak job picture and the midterm elections around the corner, Congress’s recent protectionist actions seem to be driven more by politics than economics.

China's government rebuked the legislation’s passage, insisting that it will not kowtow to foreign pressures to appreciate its currency. H.R. 2378 also faces considerable challenges in the Senate, in which bills related to China are often bogged down due to a lack of clarity on which committee has province over Sino-U.S. matters. Even though President Barak Obama recently pressed Premier Wen Jiabao on the currency issue, his signature is by no means a certainty. China’s leadership feels that the United States should be beholden to them for significantly financing our long-term debt and providing cheap goods to American consumers. If this bill becomes law, Beijing might retaliate with trade sanctions or measures to limit access for American companies and financial institutions to invest in China.

Both countries have more to lose than gain from engaging in a trade war. Leaders in Washington and Beijing must recognize that China’s vast holdings of U.S. treasury bonds and our nearly $300 billion trade deficit only increases both countries’ mutual dependence. Earlier this year, China surpassed Japan to become the world’s second largest economy. With millions of Chinese citizens ascending into the middle class, these consumers are becoming new purchasers of foreign-brand cars, smartphones and other popular electronics like Apple’s iPad that went on sale in China last month. U.S. exports to China in the last decade have grown at a faster rate than to any other country. China’s growth will only spur more imports of American aerospace, software, advanced machinery and value-added high-tech components that are only produced in Japan, the U.S. and other advanced industrial nations.

Alternatively, it is also in China’s best interest to ensure a strong American economy. The U.S. Census Bureau estimates that the first seven months of 2010, U.S. imports from China totaled over $193.9 billion, higher than the European Union or any other country in the world. As continued economic performance is the key source of legitimacy for the one-party-led country, greater American consumption will keep the Chinese population employed and China’s investment in our sovereign debt sound.

The United States and China have powerful incentives to ensure joint prosperity. Rather than participating in tit-for-tat protectionism, Washington should reengage Beijing to become a more responsible global economic power by stepping-up intellectual property protection, mending its poor record on worker’s rights and liberalizing capital accounts to allow capital to flow out of China. Whatever the answer is to right the economy and to bring jobs back, it does not lie in initiating a disastrous trade war with China. The solution more likely will be found through mutual cooperation.

Eric Fung is a lawyer residing in Jacksonville, Florida. He is a graduate from Georgetown University’s School of Foreign Service and University of Maryland School of Law, and had been a researcher at the Center for Strategic and International Studies - Freeman Chair in China Studies between 2004 and 2005.

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