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Analysis/Comment Last Updated: Apr 16, 2013 - 12:26 PM


Dr Peter Morici: Trade pacts with Europe and Japan will boost US unemployment
By Professor Peter Morici
Apr 16, 2013 - 9:56 AM

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The US current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers— increased to $475.0bn (preliminary) in 2012 from $465.9bn in 2011. As a percentage of US GDP, the deficit decreased to 3.0% in 2012 from 3.1% in 2011.

Dr Peter Morici: President Obama is betting a lot on free trade. Recently, he has agreed to open talks for mega trade deals with the European Union and Japan in hopes of jump-starting growth in both places and boosting US exports and jobs. However, far from an elixir, free trade has been a rock on the back of the US economy and American workers, and the Obama strategy will only make things worse.

On university blackboards where economists theorize, free trade is a compelling idea-let each nation do more of what it does best, and international commerce will raise national productivity and incomes. But these benefits are not guaranteed if a few big nations can cheat on the rules.

The World Trade Organization has greatly reduced tariffs, export subsidies, and barriers to trade posed by domestic polices, such as biases in government procurement and discriminatory product standards. In addition, US deals with Mexico, Canada, South Korea, and other small nations have reduced tariffs on bilateral trade to zero and eliminated even more non-tariff barriers.

For these rules to optimize specialization, productivity and incomes, exchange rates between national currencies must adjust to reasonably reflect production costs and facilitate balanced trade. To buy Chinese television sets and smartphones, Americans must sell enough industrial machinery and software in China or US unemployment rises.

Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and Japan have blatantly manipulated these markets, without a credible US response and with ruinous consequences for US workers.

Japanese Prime Minister Abe has managed to push down the yen 23% from its value last August and that is worth more than $2000 on every Toyota sold in the United States. The Japanese automaker can put that cash into additional vehicle content, advertising, and discounts making a mockery out of fair competition with Ford and GM.

Similarly, troubles in southern Europe have motivated investors to move cash into US Treasuries and stocks and suppressed the value of the euro against the dollar-to the great advantage of German exporters. Paradoxically, austerity policies for the Mediterranean states, championed by Angela Merkel, are doing more to boost German exports than resurrect those ailing economies.

With the three largest US competitors enjoying undervalued currencies, it is no surprise the United States suffers from chronic, large trade deficits.

The United States exports $2.2tn in goods and services annually, and these finance a like amount of imports. This raises US gross domestic product by about $235bn, because workers are a bit more than 10% more productive in export industries, such as software, than in import-competing industries, such as apparel.

Unfortunately, US imports exceed exports by another $500bn and that reduces demand for US-made goods and services. With multiplier effects, the trade deficit is slashing at least $800bn off GDP.

Many US workers are pushed from high-paying jobs, not because they can't compete, but because the Administration fails to take a tough stand against currency manipulation. And as many as 8 million workers can find no work at all, because of misguided US trade policies, and wages remain depressed.

Domestic manufacturers have petitioned President Obama, and his predecessors, to take action-and economists spanning the ideological spectrum have suggested substantive measures that could combat currency manipulation and misaligned exchange rates.

The Administration has complained to China and Japan about currency manipulation but after years of US inaction, they simply ignore US warnings.

The Administration continues to negotiate trade pacts that open US markets to foreign competition but lack specific rules and penalties to address currency manipulation. Until an American president is willing to ensure free trade in goods is matched by free trade in currencies, the US economy will endure anemic growth and workers will suffer high unemployment and low wages.

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

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