Categorized | Economy, Trade

Trade Pacts with Europe and Japan Will Boost Unemployment

MoriciReposted from the blog of Peter Morici


 Trade Pacts with Europe and Japan Will Boost Unemployment

April 15, 2013  |  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 U.S. exports and jobs. However, far from an elixir, free trade has been a rock on the back of the U.S. 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, U.S. 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 U.S. 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 U.S. response and with ruinous consequences for U.S. workers.

Japanese Prime Minister Abe has managed to push down the yen 23 percent 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, advertizing, 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 U.S. 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 U.S. competitors enjoying undervalued currencies, it is no surprise the United States suffers from chronic, large trade deficits.

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

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

Many U.S. 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 U.S. 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 U.S. inaction, they simply ignore U.S. warnings.

The Administration continues to negotiate trade pacts that open U.S. 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 U.S. economy will endure anemic growth and workers will suffer high unemployment and low wages.

Peter Morici is an economist and professor at the Smith School of Business,, University of Maryland, and widely published columnist.


4 Responses to “Trade Pacts with Europe and Japan Will Boost Unemployment”

  1. RD says:

    Professor Morici is 100% correct about the failure of free trade policies. We need to end free trade and adopt real world-based trading practices to protect American economic interests. The reason that Japan and Germany continue to have a powerful manufacturing base despite having higher than average wages is their policy of protecting domestic industries.

    We need a scaled tariff to balance trade with nations that export far more to the U.S. than they import.. Countries that we have balanced trade or a trade surplus would not be penalized. With a scaled tariff, there would be strong incentives for both American and foreign owned companies to open factories in the U.S. to get on the right side of the tariff wall.

    Both parties have unfortunately supported free trade. Both President Obama and and former Governor Romney were talking tough about trade with China before the election. Now we hear very little about the problem of trade imbalances which are a tremendous drain on our economy. It is time for our leaders to become economic patriots and do something about the massive job-destroying trade deficit. The very survival of the USA may depend on it.

    • Mo says:

      The reason Germany and Japan have a stable manufacturing sector with high wages is because they have stable savings that leads to stable investment in manufacturing. Yes they do have protection but it’s only one part of the story. The US on the other hand has lower wages and a less stable manufacturing sector because it has been generally inflating faster then its trade partners and spending the money on endeavors that waste resources like war and nation building.

      When a country has stable or high savings it means the resources they have are being invested in infrastructure and their manufacturing sector to make their economy more productive. Countries with low savings means they are consuming resources in unproductive ventures.

  2. Morici’s article got me started writing this one:

    Korea-U.S. Trade Agreement Has Cost About 50,000 Jobs So Far

  3. Will Wilkin says:

    Mr. Morici is correct in his central idea, that more FTA’s will offshore more American jobs, production and tax base, further dismantling our economy and spreading unemployment and fiscal crises.

    “Boosting exports” is a false goal. The USA needs to BALANCE OUR TRADE, but each and every “free trade” treaty has brought worse trade deficits.

    So-called “free trade” is the offshoring of American jobs. The 1% who own and run globalized corporations get rich dismantling the American economy. NAFTA should have been enough to prove it, but the traitors and whores running Washington DC want more of the cash frothing off the this smash-and-grab economy, hurling the USA into Third World status and deindustrialization.

    Where I disagree with Mr. Morici is in his focus on currency exchange rates and “a few big nations that can cheat on the rules.”

    No doubt he is correct that currency exchange rates could be adjusted to make imports more expensive compared to domestically-produced goods. But fundamentally the problem for American workers and domestic manufacturing is that wages in China, India and many other countries are only a small fraction of American wages, and this is not so much due to any currency exchange rates as it is to the historically-achieved standard of living that differs in each country, something being deeply undermined in the USA and western countries generally if we are to compete with the standard of living and wages in those developing countries.

    Our grandchildren will be poor and our national industries off shored and dismantled before global wages and standards of living will equalize. Instead of blaming “cheating” when other countries act within their prerogatives to advance their national interests, we should instead hold the American Congress and Presidents of both parties responsible for American trade policy and the selling-out of the country to the 1% who have cast their lot with globalized corporations instead of the economy of the USA.

    Even if the value of the Ruan doubled, Chinese labor would still be under $200/month. That is the yawning gap “free trade” opens up. The labor arbitrage enriching Wall Street is throwing American industries and people over the cliff, and any currency manipulation is only a fraction of that process. The rest is the pure gravity of a qualitatively lower standard of living for the billions of foreign workers.

    It is time to stop blaming the foreigners and instead get rid of the traitors and whores in Washington DC who have sold the American market to globalized corporatists with zero loyalty to our country and our people.

    Instead of fooling with currency exchange rates, the most direct and guaranteed effective reform would be to implement a system of Import Certificates issued as import licenses, in the same dollar value as our exports. This would balance our trade and divert $600 billion annually directly into American industry, creating millions of jobs directly and millions more through the multiplier-effect.


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Ian Fletcher’s: “The Conservative Case Against Free Trade”

Ian Fletcher’s “Free Trade Doesn’t Work”