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Dr. Peter Morici: US trade deficit in April to show little progress; Blocks recovery and destroys jobs
By Professor Peter Morici
Jun 10, 2010 - 5:43:20 AM
President Barack Obama and President Mahmoud Abbas of the Palestinian Authority talk following their statement to the press in the Oval Office, June 09, 2010.
Dr. Peter Morici: Thursday, the US Commerce Department will report the April deficit on international trade in goods and services. Analysts expect it to increase to $41.0 billion from $40.4 billion in March. My forecast is $41.1 billion.
The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks, still burdened by bad loans, threatens to stifle the emerging recovery and keep unemployment near 10 per cent through 2011. At 3.3 per cent of GDP (gross domestic product), the trade deficit subtracts more from the demand for US-made goods and services than President Obama’s stimulus package adds to demand. Moreover, Obama’s stimulus is temporary, whereas the trade deficit is permanent and growing again.
Subsidized manufactures from China and petroleum account for nearly the entire deficit, and both will rise as consumer spending and oil prices rise through 2010. Money spent on Chinese coffee makers and Middle East oil cannot be spent on US-made goods and services, unless offset by exports.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.
To keep Chinese products artificially inexpensive on US store shelves and discourage US exports into the Middle Kingdom, China undervalues the yuan by 40 per cent.
Beijing 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 per cent of China’s GDP, and 11 per cent of its exports of goods and services.
In 2010, the trade deficit with China is reducing US GDP by more than $400 billion or nearly three per cent. Unemployment would be falling rapidly and the US economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies.
Longer term, China’s currency policies reduce US growth by one per centage point a year. The US economy would likely be $1 trillion larger today, but for the trade deficits with China over the last 10 years.
China has indicated it will not revalue its currency at this time. Some analysts expect only a gradual revaluation if any change in policy occurs—perhaps a few per centage points a year. Such a move would have little consequence for the US trade deficit, unemployment and growth.
China views its exchange rate policy as a tool of domestic development strategy but its policy has broad, aggressive and negative international consequences—it is choking growth and imposing high unemployment on the United States and other western countries.
Diplomacy has failed, and President Obama should impose a tax on dollar yuan conversions in an amount equal to the amount of China currency market intervention divided by its exports—currently that would be about 30 per cent. For imports, at least, that would offset China’s subsidies that harm US businesses and workers.
After diplomacy has failed for both Presidents Bush and Obama, failure to act amounts to no more than appeasement, and wholesale neglect of President Obama’s obligations to advocate a level playing field for US workers.
Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
