The Trade Deficit Stifles Growth

NEW YORK ( TheStreet) -- The trade gap will remain a significant barrier to growth and job creation.

Today, the Commerce Department reported the deficit in international trade in goods and services was $42.9 billion in June, down from $48 billion in May, thanks to lower oil prices and the recent slowdown in U.S. retail sales.

While the trade gap is its smallest since December 2010, both oil prices and retail sales are likely to rebound in the second half of the year, taking the deficit up again. Imported oil and subsidized imports from China account for nearly the entire growth-dragging trade gap.

The economic recovery began five months after President Barack Obama took office, and GDP growth has averaged 2.2%. In October 2009, unemployment peaked at 10%, but has fallen to 8.3% almost entirely because fewer Americans are seeking work.

President Ronald Reagan inherited a similarly troubled economy with unemployment cresting at 10.8% early in his presidency. When he sought reelection, the economy was growing at 6.3%, unemployment was 7.3% and a rising percentage of Americans were seeking work.

Nowadays, economists agree the U.S. economy suffers from too little demand. Consumers are spending and taking on debt, but too many dollars go abroad to pay for Middle East oil and Chinese goods that do not return to buy U.S. exports. Businesses remain pessimistic and don't hire.

President Reagan encouraged the development of natural resources and endured much criticism from environmentalists and academics. While President Obama has talked repeatedly about developing the full range of energy resources, he has bent to their pressure and imposed counterproductive limits on oil production in the Gulf, off the Pacific and Atlantic coasts and in Alaska. Merely replacing domestic oil with imports does little to improve air quality or curb carbon emissions.

These policies are premised on faulty assumptions about the immediate potential of electric cars and unconventional energy sources, and in combination, they make the U.S. much more dependent than necessary on imported oil.

Oil imports could be cut by two-thirds by boosting U.S. oil production to 10 million barrels a day and immediately implementing more feasible solutions like the aggressive use of natural gas in fleet vehicles and more fuel-efficient internal-combustion engines.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40%. It pirates U.S. technology, subsidizes exports and imposes high tariffs on imports.

President Reagan was a forceful advocate for U.S. economic interests with the preeminent rivals of his day, such as Japan. Whereas President Obama, like President George W. Bush, has sought to alter Chinese policies through endless negotiations.

Beijing offers token gestures, knowing President Obama will not take the strong actions advocated by economists across the ideological and political spectrum to force China to abandon its mercantilists policies. It successfully cultivates political support for the Bush-Obama policy of appeasement among large U.S. multinationals and banks doing business and profiting from mercantilism in the Middle Kingdom.

Cutting the trade deficit in half through domestic energy development and conservation, and forcing China's hand on currency manipulation and other protectionist practices, would increase GDP by about $500 billion a year and create at least 5 million jobs.

Longer term, large trade deficits shift resources from manufacturing and service activities that compete in global markets to domestically focused industries. The former undertake much more R&D and investments in human capital.

Cutting the trade deficit in half would raise U.S. economic growth by one to two percentage points. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10% to 20% greater than it is today, per capital income as much as five to ten thousand dollars higher, and unemployment not much of a problem.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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.