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Trade Deficit Drags on Recovery

Growth below 2% is difficult to sustain. Any disruption could set off a cycle of layoffs, falling consumer spending and ultimately a recession that pushes unemployment into double digits.

Should tax increases be necessary to reach a political compromise to further reduce the budget deficit, Congress should heed President Obama's recommendation to close loopholes like the carried interest provision -- which permits Wall Street traders and executives throughout the economy to pay lower tax rates than ordinary wage earners. That would do the least damage to aggregate demand, and actually improve economic incentives for productive investments in the United States and stimulate growth.

Imported oil and subsidized imports from China account for the entire trade gap.

Development of new onshore reserves in the Lower 48 has not delivered enough new oil, and a full push on U.S. potential in the Gulf, off the Atlantic and Pacific coasts, and in Alaska could cut U.S. imports in half. Shifting federal subsidies from cost-ineffective electric cars, wind and solar to more fuel-efficient internal combustion engines and plug-in hybrids could further cut U.S. petroleum imports.

The surge in natural gas production, and accompanying lower prices, substantially improves the international competitiveness of industries like petrochemicals, fertilizer, plastics, and primary metals. However, the Department of Energy is reviewing licenses to boost exports of liquefied gas -- a costly and environmentally risky process -- beyond what is required by statute. That would reduce the trade deficit, create many fewer jobs and spur growth less than keeping the gas at home to boost energy-intensive industries and alternatives to gasoline in transportation.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan through official intervention in currency markets and actions of state-owned banks, which often evade calibration in their scope. China extorts U.S. firms to transfer manufacturing technology, subsidizes exports and imposes high tariffs on imports. Other Asian governments, most recently Japan, have adopted similar exchange policies to stay competitive with the Middle Kingdom.

Economists across the ideological and political spectrum have offered strategies to offset the deleterious consequences of currency strategies on the U.S. economy and force China and others to abandon mercantilist policies. However, China offers token gestures, and sadly the Treasury accepts these instead of even acknowledging Beijing's cynical strategy.
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