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Busch: China + Free Trade=Jobs

Thursday, President Obama addressed the key subject of US trade policy.

Last year, the Obama administration set a goal of adding two million jobs to the economy by doubling exports in the next five years. The added benefit is that export related jobs are generally higher paying than domestically focused work with the likely exception of government jobs. Last October, I met with senior US Treasury officials who adamantly supported this approach.

Yesterday, we also got the US trade deficit number for the month of January which improved 6.5% to -37.3 billion. The breakdown by region in billions tells the entire story: LatAm 0.0, E.U. -2.8, Japan -3.3, Canada -3.9, Mexico -4.6, and China -18.3. Even with a weak Euro, the trade deficit between the EU and the US fell over 56% from December to January. Overall, the US trade deficit fell between LatAm, E.U., Mexico, and Japan. However, the deficit between China and the US increased 1.1%.

Eugene Hoshiko

The President took the dragon by the horns and addressed the currency issue.

"As I've said before, China moving to a more market-oriented exchange rate would make an essential contribution to that global rebalancing effort," Obama said in the speech.

"We all need to rebalance. Countries with external deficits need to save and export more. Countries with external surpluses need to boost consumption and domestic demand."

Without question, this was the most direct and formal attack on the Chinese currency regime to date from the Obama administration.

Over the last several months, the Chinese have made it clear that they have no intention of allowing Yuan appreciation and resent having it as a political issue.

However, there have been reports in the Chinese press that a manufacturing stress test has been administered to see how this sector would respond to an appreciation of the currency. China will act when it's in their best interest. With inflation quickly accelerating and their trade position strong, the Chinese are nearer to allowing the Yuan to appreciate further. Over the last week, big financial heavyweights like the IMF and Nouriel Roubini have said they are anticipating a move by China on the currency soon.

Most likely, these folks don't say things like this unless they are getting information from the source.

There are other areas the administration could do to help boost export related jobs. Free trade was a mantra under the Clinton administration and NAFTA was and is still a resounding success. Study after study shows that if you break down trade barriers, you increase trade between countries. Currently there are free trade agreements with Panama, Colombia, and South Korea that remain stalled in the US Senate and have been that way ever since they were proposed under the Bush administration. While these would not be on the scale of NAFTA, they would help create jobs in all of the countries should the agreements be passed.

Lastly, the US needs to resolve the trade dispute with Mexico over trucking. In 2007, there was a pilot program between the US and Mexico that allowed Mexican trucks to travel into the US beyond the commercial border zone. According to the WSJ, this program was aimed at satisfying a component of NAFTA. Mexico has retaliated by placing $2.4 billion of tariffs on US agriculture and manufactured products that has cost the US 25,000 jobs according the US Chamber of Commerce. The Journal reports that the job losses may increase as most companies have eaten the tariffs without raising prices.

Like Guantanamo Bay and the Afghanistan surge, the President has to make a decision that goes against what he has promised his base to improve trade and jobs. While the health care fight and unemployment are dominating the headlines, a shift towards free trade and creating jobs would be a welcome sign from the chief executive. It certainly would be an issue that both Democrats and Republicans can support and may begin a shift towards seeking common ground between the parties.

A signing of the free trade pacts and resolving trade issues with Mexico (and Brazil) would allow the US to reassert themselves as the leader on trade. It would also allow the US to lead the world when it comes to putting pressure on China. Given that it may already be in China's interest due to inflation, this last push may be the defining factor to get them to move.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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