These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:
The Commerce Department reported the deficit on international trade in goods and services was $51.8 billion in March. This was up from $45.4 billion in February, thanks to weakening conditions in Europe and chronic deficits with China and in petroleum.
The $620 billion annual deficit is the most significant barrier to economic recovery and creating jobs, and consumer goods from China and oil account for virtually the entire problem.
Economists agree the pace of economic recovery has been too slow, because of too little demand for what Americans make.
Consumers are spending again, the process of winding down household debt that followed the Great Recession; however, too many consumer dollars go abroad to purchase Middle East oil and Chinese consumer goods but do not return to buy U.S. exports. Consequently, businesses can’t justify expanding U.S. facilities and hiring workers.
Since the economic recovery began in June 2009, the trade deficit has doubled and GDP growth has averaged a disappointing 2.4% a year. Unemployment has fallen from above 10% to 8.1% mostly because Americans have quit looking for work, not found jobs.
Like President Barack Obama, President Ronald Reagan inherited a deeply troubled economy. He too implemented radical measures to reorient the private sector, and accepted large budget deficits to buy time for his measures to work. As Reagan campaigned for re-election, his recovery posted a 7.1% growth rate and unemployment fell much more rapidly than it has during the Obama recovery, even as more adults joined the labor force and looked for work.
Obama administration regulatory limits on conventional petroleum development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. And those make the U.S. even more dependent on imported oil and overseas creditors to pay for it, impeding growth and jobs creation.
Oil imports could be cut in half by boosting U.S. petroleum production by 4 million barrels a day, and cutting gasoline consumption by 10% through better use of conventional internal combustion engines and fleet use of natural gas in major cities.
To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing has managed the value of the yuan since 1994. Thanks to modernization, productivity improvements in China’s export and import-competing industries have far exceeded those in the U.S. and elsewhere in the West. Those advances require that its currency should increase in value by some 40% over the next decade, but China has kept its value firmly pegged.
Since 2005, the value of the yuan has increased by 31%. However, that adjustment only accommodates further improvements in Chinese productivity, and a 40% adjustment in currency values remains necessary to balance China’s trade and current accounts long-term. It is also needed to relieve artificial constraints on U.S. growth and job creation.
Obama has sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking business there.
The U.S. should impose a tax on dollar-yuan conversions until China revalues its currency. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. The duration of that tax would be in Beijing’s hands: Revalue the yuan and the tax ends. Such a policy would not be protectionism; rather, in the face of virulent Chinese mercantilism, it would be self-defense.
Cutting the trade deficit in half, through domestic energy development and conservation and offsetting Chinese exchange rate subsidies, would increase GDP by about $525 billion a year and create at least 5 million jobs.
(The author can be reached at pmorici@rhsmith.umd.edu; Twitter: @pmorici1.)
