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Morici: 8/10/10: Trade Deficit Causes Jobless Recovery

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The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School, and former economist at the U.S. International Trade Commission.

Wednesday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $41.5 billion in June or 3.4 percent of GDP.

The trade deficit is a huge drag on economic recovery and jobs creation.

In the second quarter overall, the imports grew so much more rapidly than exports that the growing trade gap subtracted 2.8 percent from growth.

But for the increase in the trade gap, GDP would have grown 5.2 percent instead of 2.4 percent. At that pace, unemployment would fall by 2013 to less than 5 percent, the level accomplished the two years prior to the Great Recession

President Obama is seeking to double exports, through marketing programs and new free trade deals. However worthy those initiatives may be, doubling exports does no good if imports double too. By increasing the trade gap, more open trade policies would increase the drag on growth and jobs creation.

That is not an attack on free trade but rather on trade policies that permit a huge trade imbalance.

In the modern theory of comparative advantage taught in graduate schools of economics, the gains from free trade based are premised on approximately balanced trade. Countries increase foreign purchases in industries where they are relatively less productive, and specialize in what they do best. The United States is doing too much buying but not enough selling.

Oil and consumer goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces unemployment around 10 percent indefinitely.

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 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 percent. 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 $450 billion or 10 percent of China’s GDP, and about 35 percent of its exports of goods and services.

In 2010, the trade deficit with China reduces U.S. GDP by more than $400 billion or nearly three percent. 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 it has made clear Americans should not expect a dramatic change in the value of the yuan.

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 profiting 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 percent. For imports, at least, that would offset Chinese subsidies that harm U.S. businesses and workers.

3 Responses to “Morici: 8/10/10: Trade Deficit Causes Jobless Recovery”

  1. Milt Heft says:

    I think the emphasis is on the wrong syllable. Professor Morici says that “The trade deficit is a huge DRAG on economic recovery.” Actually, the trade deficit is the RESULT of our economic crash, and will be reversed only IF our economy recovers.

    He suggests that the huge increase in imports over exports is the CAUSE of our malaise. However, this huge increase in imports is really the RESULT of our greatly reduced industrial production. These imports are merely filling the gap created by the 40,000 American companies who have outsourced their production to China, Mexico, and other low-cost producers.

    Professor Morici also ties unemployment to the trade gap and to GDP. Again, the accent is on the wrong syllable. Unemployment is directly related to the closing of those 40,000 factories, where WEALTH is created. 4 million productive jobs were lost, together with 12 million more service jobs (considering a 3:1 ratio between service jobs and production jobs).

    The problem is NOT to double our exports in order to catch up with imports; the problem is to reactivate the 40,000 industrial factories so that imports can be ELIMINATED to the extent that they were created by our factory closings.

    Reactivating our industrial production will create REAL, PRODUCTIVE jobs. Jobs are not the problem; jobs do not create wealth. IT IS WEALTH THAT CREATES JOBS.

  2. Jim Schollaert says:

    The wealth of Wall Street and corporate America has been creating jobs all right, in China and assorted other low wage, low tax foreign export platforms. Wealth is power, and wealth in the wrong hands, in a country with few retraints on its use, can wreak tremendous damage, as we should have learned by now. That wealth and power has been used to purchase effective political control of Congress and the Executive Branch, using lobbying arms like the U.S. Chamber of Commerce, the Business Roundtable, and NAM.

    They have enabled various forms of anti-social profiteering, like lowering our tariffs and remedies against predatory trade for their new offshoring business model of paying Chinese wages and charging U.S. prices.

    Concentrated wealth in huge private equity firms like Black Rock, Carlyle Group, and manufacturing conglomerates like TYCO has been used to buy up U.S. manufacturing companies, quickly move the jobs offshore and then sell company for an enormous profit, perhaps to an Asian sovereign wealth fund. Wealth has been very busy destroying our job base.

    Until we stop that prevailing dynamic which is still firmly in the saddle here, reestablishing our industrial capacity would be throwing money down a rat hole. And the people who now have our money will do anything and everything to keep themselves in the saddle.

  3. permabear says:

    Peter Morici is exactly right about the negative consequences of the trade deficit. Energy and China are the prime reasons. But Morici is wrong in suggesting that alternative energy cannot solve our problems. If you add in nuclear and natural gas, the U.S. has the capacity to become completely energy independent in 10 years. Personally I think concentrating solar thermal power has astonishing potential. Take 100 by 100 miles of the Nevade desert and you can completely provide all the electrical generation needs of the entire country. Transition to electric plug-in cars, and you’ve gone a long way to solving the problem of oil dependency. Don’t tell me that alternative energy doesn’t have potential.


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