Morici: Trade Deficit Rises, Stifles Jobs Creation and Smothers Growth

On Tuesday, the Commerce Department reported the deficit on international trade in goods and services was $42.0 billion in July, up slightly from $41.9 billion in June.

Tom Grill | Photographer's Choice | Getty Images

Imported oil and subsidized imports from China account for nearly the entire $500 billion trade gap and pose the most significant barriers to robust growth and jobs creation. (Read More: US Trade Deficit Edges Up; Exports to Europe Tumble.)

The trade deficit on oil moderated a bit as economic activity slowed and prices fell from earlier in the year, but the trade gap with China continues to increase and now exceeds $350 billion on an annual basis.

The economic recovery began five months after President Barack Obama took office, and GDP (learn more) growth has averaged 2.2 percent. In October 2009, unemployment peaked at 10 percent, but has fallen to 8.1 percent entirely because fewer Americans are seeking work. (Read More: New Jobs at 96,000; Rate Hits 8.1%.)

Ronald Reagan inherited a similarly troubled economy with unemployment cresting at 10.8 early in his presidency. When he sought re-election, the economy was growing at 6.3 percent, unemployment was 7.3 percent and a rising percentage of Americans were seeking work.

The U.S. economy suffers from too little demand. Consumers are spending, but too many dollars go abroad to pay for Middle East oil and Chinese goods that do not return to buy U.S. exports. Businesses remain pessimistic and don’t hire.

Reagan encouraged the development of natural resources and endured much criticism from environmentalists and academics. Whereas Obama has talked repeatedly about developing the full range of energy resources, but has bent to their pressure and imposed counterproductive limits on oil production in the Gulf, off the Pacific and Atlantic Coasts, and Alaska. Merely replacing domestic oil with imports does little to improve air quality or curb CO2 emissions.

These policies are premised on faulty assumptions about the immediate potential of electric cars and unconventional energy sources — the failures of the government subsidized Chevy Volt and Solyndra are two of many examples of failed government investments in alternative energy projects premised more on hope than solid business plans. (Read More: GM's Volt: The Ugly Math of Low Sales, High Costs.)

In combination, curbs on domestic conventional oil production and squandered resources on alternative technologies not yet ready for commercial application make the United States much more dependent than necessary on imported oil and destroy jobs by the millions.

Oil imports could be cut by two-thirds by boosting U.S. oil production to 10 million barrels a day, and immediately implementing more feasible solutions like the aggressive use of natural gas in fleet vehicles and more fuel efficient internal combustion engines. (Read More: No Need to Import OPEC Oil: Pickens.)

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan through government intervention in currency markets. It pirates U.S. technology, subsidizes exports and imposes high tariffs on imports.

Reagan was a forceful advocate for U.S. economic interests with the preeminent rivals of his day, like Japan. Whereas Obama, like President George W. Bush, has sought to alter Chinese policies through endless pleadings and negotiations.

Beijing offers token gestures, knowing President Obama will not take the strong actions, advocated by economists across the ideological and political spectrum, to force China to abandon its mercantilists policies. It successfully cultivates political support for the American policy of appeasement among large U.S. multinationals and banks doing business and profiting from mercantilism in the Middle Kingdom.

Cutting the trade deficit by $300 billion, through domestic energy development and conservation, and forcing China’s hand on currency manipulation and other protectionist practices would increase GDP by about $500 billion a year and create at least 5 million jobs. (Read More: China's Wen Says Will Meet 2012 Growth Target.)

Longer term, large trade deficits shift resources from manufacturing and service activities that compete in global markets to domestically focused industries. The former undertake much more R&D and investments in human capital.

Cutting the trade deficit in half would raise U.S. economic growth by one to two percentage points. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10 to 20 percent greater than it is today, per capita income as much as $5,000 to $10,0000 higher, and unemployment not much of a problem.

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. Follow him on Twitter: @PMorici1.