Trade Deficit Creates Jobless Recovery

The growing trade deficit is putting a drag on the U.S. economy.
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The Commerce Department plans to report June trade figures tomorrow, and analysts expect there was a trade deficit of $41.5 billion, or 3.4% of gross domestic product, during the month.

The trade deficit is a huge drag on the economic recovery and job creation.

In the second quarter, imports grew so much more rapidly than exports that the trade gap subtracted 2.8% from growth.

If it weren't for the increase in the trade gap, GDP would have grown 5.2% instead of 2.4%. At that pace, unemployment would fall to less than 5% by 2013, where it was in the two years before the Great Recession

President Obama is seeking to double exports through marketing programs and new free-trade deals. However worthy those initiatives may be, doubling exports does no good if imports double too. By increasing the trade gap, more open trade policies would increase the drag on growth and jobs creation.

That is not an attack on free trade but rather on trade policies that permit a huge trade imbalance.

In the modern theory of comparative advantage taught in graduate schools of economics, the gains from free trade are premised on approximately balanced trade. Countries increase foreign purchases in industries where they are relatively less productive, and specialize in what they do best. The U.S. is doing too much buying but not enough selling.

Oil and consumer goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces unemployment of around 10% indefinitely.

President Obama's efforts to halt offshore drilling and otherwise curtail conventional energy supplies -- based on false assumptions about the immediate potential of electric cars and alternative energy sources -- threaten to make the U.S. even more dependent on imported oil.

Detroit can build many more attractive and efficient gasoline-powered vehicles now, and national policy to accelerate the replacement of the existing fleet would reduce imports, spur growth and create jobs.

To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into China, Beijing undervalues the yuan by 40%. It accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. In 2009, those purchases were about $450 billion, or 10% of China's GDP and about 35% of its exports of goods and services.

In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion, or nearly 3%. Unemployment would be falling and the U.S. economy recovering more rapidly but for the trade imbalance with China and Beijing's protectionist policies.

In June, China indicated it will adopt a more flexible exchange rate policy, but it has made clear Americans should not expect a dramatic change in the value of the yuan.

China recognizes President Obama is not likely to counter Chinese mercantilism with strong, effective actions. Hence, it offers token gestures and cultivates political support among U.S. businesses like

General Motors

that profit from investments in China.

President Obama should impose a tax on dollar-yuan conversions in an amount equal to China's currency market intervention divided by its exports. In 2009 that was about 35%. For imports, at least, that would offset Chinese subsidies that harm U.S. businesses and workers.

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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.