|President Barack Obama and Education Secretary Arne Duncan talk in a hold area before the President delivers his third annual back-to-school speech at Benjamin Banneker Academic High School in Washington, D.C. Sept. 28, 2011.
Dr. Peter Morici: No economic policy could better
serve Americans than genuine free trade but open trade policies are failing
The basic idea is compelling. Let each nation do
more of what it does best, and specialization will raise productivity and
Americans are not sharing in those benefits
because President Obama, like President Bush, permits China and others to cheat
on the rules, unchallenged and to the detriment of the US interests he was
elected to champion.
The World Trade Organization has greatly reduced
tariffs, prohibits virtually all export subsidies, and regulates other national
policies that could subvert trade, such as health and product safety standards
arbitrarily slanted to favor domestic suppliers.
For these rules to optimize trade, raise
productivity and boost incomes, exchange rates must adjust to reasonably reflect
production costs. To buy Chinese televisions, Americans must be able to purchase
yuan with dollars; however, an artificially strong dollar that overprices US
tractors and software in China unravels the benefits of trade by denying
Americans opportunities to export to pay for those televisions.
Exchange rates are established in currency markets,
created by businesses trading through major financial institutions.
Unfortunately, China and several other Asian governments blatantly manipulate
those markets without a credible US response and with ruinous consequences for
the US economy American workers.
The United States annually exports $2.1trn in
goods and services, and these finance a like amount of imports. This raises US
gross domestic product by about $210bn, because workers are about 10% more
productive in export industries, such as software, than in import-competing
industries, such as apparel.
Unfortunately, US imports exceed exports by another
$565bn, and workers released from making those products go into
non-trade-competing industries, such as retailing, where productivity is at
least 50% lower.
This slashes GDP by $235bn, overwhelming the gains
from trade, and requires workers displaced by imports to accept lower wages. If
these workers find no work at all, the loss is much greater and could reach the
full $565bn - - in actual fact, that seems to be what is happening.
The trade deficit creates an excess supply of
dollars in international currency markets, as Americans offer more dollars to
purchase foreign products than foreigners demand to purchase US products.
Simple supply and demand should drive down the value
of the dollar against the yuan and other currencies, make US imports more
expensive and exports cheaper, and reduce or eliminate the trade deficit. But
the Chinese government subverts this process by habitually printing and selling
yuan for dollars in currency markets, keeping its currency and exports
Currency manipulation creates a 25% subsidy on
China’s exports, and other Asian countries are impelled to follow similar
policies, lest their exports lose competitiveness to Chinese products.
Also, huge trade imbalances between Asia and the
West, perpetuated by currency mercantilism, create an imbalance in demand - - a
shortage of demand for the goods and services produced in the United States and
Europe, and artificially robust demand for products made in China and elsewhere
Consequently, to keep the US economy going,
Americans must both borrow from foreigners and spend too much, as they did
through 2008, or their government must amass huge budget deficits by
borrowing from abroad, as it is now.
In the bargain, the United States sends
manufacturing jobs to Asia in industries that would be competitive in the United
States, but for rigged exchange rates. The trade deficit slices $400 to $600bn
off GDP, overwhelming the gains from trade by any measure, and Americans suffer
unemployment above 9% and sinking wages.
China grows at nearly 10% a year and makes American
diplomats look like fools for advocating free markets as a growth policy.
Campaigning for the Presidency, Barack Obama
promised to do something about Chinese currency manipulation, but he has simply
failed to act. Instead, like a good supplicant, he thanks Chinese officials for
buying US Treasury securities.
China’s development policies make its leaders look
smart but nothing makes them look like geniuses better than an American
president who appeases their beggar-thy-neighbor policies.
It will be impossible for the United States to
create the 14m jobs needed to bring unemployment down to pre-recession
levels without taking on China’s currency manipulation and other unfair trade
For that Americans may need to wait for a better
president - - one with the courage to stand up to China.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone