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Dr. Peter Morici: Obama, Pelosi and neglect of
trade deficit imperils recovery: Thursday, economists expect the US Commerce
Department to report the deficit on international trade in goods and services
was $47.2bn in July. That is less than the $49.9bn registered in June, because
many analysts expect stagnating wages are slowing import demand.
Still too large, the trade deficit subtracted 3.4 percentage points from second
quarter GDP growth, and threatens to derail an already weak U.S. recovery, throw
the economy into a double dip recession, and dramatically increase unemployment.
Without the second quarter jump in imports—led by consumer goods from China and
boosted by an undervalued yuan and export subsidies President Obama neglects—GDP
growth would be close to 5%, hundreds of thousands of Americans would be finding
jobs, and Democrats would be poised to retain their majorities in the House and
Senate.
President Obama and Speaker Pelosi chose to ignore the undervalued yuan and
other Chinese subsidies that result in an outsized trade deficit and millions of
lost jobs across the industrial Midwest and South.
Instead, the President and Speaker of the House obsess about taxing the rich and
social issues, and appease China on trade and the environment, as the United
States sinks into an economic quagmire similar to Great Britain in the 1950s and
1960s.
Notably, Britain in 1950 was on par with Germany and France. Twenty years later,
it enjoyed living standards half its continental rivals.
Each month, more and more Americans lose decent jobs, can’t find comparable
employment, and then settle for lower wages, as Americans enjoy the British
post-war folly of an overvalued currency and distracted leaders.
Simply, dollars that go abroad to purchase U.S. imports cannot be spent on U.S.
goods and services. When those dollars do not return to purchase U.S. exports,
jobs are lost and not replaced. A rising trade deficit slows growth and
increases unemployment.
Free trade based on a balance between exports and imports helps nations
specialize in what they do best, grow and prosper. Rising trade deficits,
financed on borrowed money to cover profligate government spending, erode
prosperity and compromise sovereignty.
But for the increase in the trade gap, GDP would have grown 5.2%, and
unemployment would fall to 7.5 by early 2011, and less than 5% by 2013.
Oil and consumer goods from China account for nearly the entire trade deficit,
and sustained economic recovery is not possible without dramatic changes in
energy and trade.
President Obama’s efforts to halt offshore drilling and otherwise curtail
conventional energy supplies—premised on false assumptions about the immediate
potential of electric cars and alternative energy sources—threaten to make the
United States even more dependent on imported oil.
Detroit can build many more attractive and efficient gasoline-powered vehicles
now, and a 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 $450bn or 10% of China’s GDP, and about 35% of its exports of goods
and services.
In 2010, the trade deficit with China reduces U.S. GDP by more than $400bn or
nearly three%. 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
that has not resulted in the needed realignment in exchange rates.
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 and Caterpillar who
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.
Until the President tackles the root causes of the trade deficit, unemployment
will remain near 10% and could surge much higher, and Americans face economic
decline.
Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
