NEW YORK (TheStreet) -- President Obama is betting a lot on free trade. Recently, he has agreed to open talks for mega trade deals with the European Union and Japan in hopes of jump-starting growth in both places and boosting U.S. exports and jobs. However, far from an elixir, free trade has been a rock on the back of the U.S. economy and American workers, and the Obama strategy will only make things worse.
On university blackboards where economists theorize, free trade is a compelling idea: Let each nation do more of what it does best, and international commerce will raise national productivity and incomes. But these benefits are not guaranteed if a few big nations can cheat on the rules.
The World Trade Organization has greatly reduced tariffs, export subsidies, and barriers to trade posed by domestic polices, such as biases in government procurement and discriminatory product standards. In addition, U.S. deals with Mexico, Canada, South Korea, and other small nations have reduced tariffs on bilateral trade to zero and eliminated even more nontariff barriers.
For these rules to optimize specialization, productivity and incomes, exchange rates between national currencies must adjust to reasonably reflect production costs and facilitate balanced trade. To buy Chinese television sets and smartphones, Americans must sell enough industrial machinery and software in China or U.S. unemployment rises.
Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and Japan have blatantly manipulated these markets, without a credible U.S. response and with ruinous consequences for U.S. workers. Japanese Prime Minister Abe has managed to push down the yen 23% from its value last August, and that is worth more than $2,000 on every Toyota (TM) sold in the U.S. The Japanese automaker can put that cash into additional vehicle content, advertizing, and discounts, making a mockery out of fair competition with Ford (F) and GM (GM). Similarly, troubles in southern Europe have motivated investors to move cash into U.S. Treasuries and stocks and suppressed the value of the euro against the dollar -- to the great advantage of German exporters. Paradoxically, austerity policies for the Mediterranean states, championed by Angela Merkel, are doing more to boost German exports than to resurrect those ailing economies.
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