Morici: Obama, Pelosi Neglect of Trade Deficit Imperils Recovery

The Commerce Department reported the deficit on international trade in goods and services fell to $42.8 billion. That is less than the $49.8 billion registered in June, as a slowing U.S. economy dampened import demand and civilian aircraft shipments jumped. The latter is not likely to be repeated.

Still too large, the trade deficit subtracted 3.4 percentage points from second quarter GDP growth, and threatens to derail an already weak U.S. recovery, throw the economy into a double dip recession, and dramatically increase unemployment.

Without the second quarter jump in imports—led by consumer goods from China and boosted by an undervalued yuan and export subsidies President Obama neglects—GDP growth would be close to 5 percent, hundreds of thousands of Americans would be finding jobs, and Democrats would be poised to retain their majorities in the House and Senate.

President Obama and Speaker Pelosi chose to ignore the undervalued yuan and other Chinese subsidies that result in an outsized trade deficit and millions of lost jobs across the industrial Midwest and South.

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Speaker of the House Nancy Pelosi (D-CA) speaks during her weekly news conference at the US Capitol in Washington, DC.

Instead, the President and Speaker of the House obsess about taxing the rich and social issues, and appease China on trade and the environment, as the United States sinks into an economic quagmire similar to Great Britain in the 1950s and 1960s.

Notably, Britain in 1950 was on par with Germany and France. Twenty years later, it enjoyed living standards half its continental rivals.

Each month, more and more Americans lose decent jobs, can’t find comparable employment, and then settle for lower wages, as Americans enjoy the British post-war folly of an overvalued currency and distracted leaders.

Simply, dollars that go abroad to purchase U.S. imports cannot be spent on U.S. goods and services. When those dollars do not return to purchase U.S. exports, jobs are lost and not replaced. A rising trade deficit slows growth and increases unemployment.

Free trade based on a balance between exports and imports helps nations specialize in what they do best, grow and prosper. Rising trade deficits, financed on borrowed money to cover profligate government spending, erode prosperity and compromise sovereignty.

But for the increase in the trade gap, GDP would have grown 5.2 percent, and unemployment would fall to 7.5 by early 2011, and less than 5 percent by 2013.

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.