Oil and consumer goods from China account for nearly the entire trade deficit, and sustained economic recovery is not possible without dramatic changes in energy and trade.
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 a 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 that has not resulted in the needed realignment in exchange rates.
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 and Caterpillar who profit 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.
Until the President tackles the root causes of the trade deficit, unemployment will remain near 10 percent and could surge much higher, and Americans face economic decline.
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.