Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.
To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.
Beijing 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 28 percent of its exports of goods and services.
In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion or nearly three percent. Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing's currency policies.
Longer term, China's currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1 trillion larger today, but for the trade deficits with China over the last 10 years.
China has indicated it will not revalue its currency at this time. Some analysts expect only a gradual revaluation if any change in policy occurs-perhaps a few percentage points a year. Such a move would have little consequence for the U.S. trade deficit, unemployment and growth.
China views its exchange rate policy as a tool of domestic development strategy but its policy has broad, aggressive and negative international consequences-it is choking growth and imposing high unemployment on the United States and other western countries.
Diplomacy has failed, and President Obama should impose a tax on dollar yuan conversions in an amount equal to the amount of China currency market intervention divided by its exports-currently that would be about 30 percent. For imports, at least, that would offset China's subsidies that harm U.S. businesses and workers.
After diplomacy has failed for both Presidents Bush and Obama, failure to act amounts to no more than appeasement, and wholesale neglect of President Obama's obligations to advocate a level playing field for U.S. workers.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.