Page 2 of 2 Of deficits, debt and
growth By Peter Morici
closely and currently is trading at about
7.81, down about 3.8% over 17 months.
Modernization and productivity growth raise the
implicit value of the yuan about 5% a year, and it
remains undervalued against the dollar by at least
40%.
China's huge trade surplus creates an
excess demand for yuan on global currency markets;
however, to limit appreciation of the yuan against
the dollar and drive it down against the euro, the
Chinese central bank
purchases more than $200 billion in US and other
foreign currency and securities each year. This
comes to about 9% of China's GDP and about 25% of
its exports. These purchases provide foreign
consumers with 1.6 trillion yuan to purchase
Chinese exports, and create a 25% "off budget"
subsidy on foreign sales of Chinese goods, and an
even larger implicit tariff on Chinese imports.
Diplomatic efforts to persuade China to
stop manipulating currency markets have failed.
The only reasonable policy left is to put in place
tariffs on China's exports equal to the value of
its currency-market intervention, which would be
reduced or removed if China reduced such
intervention.
Many US multinationals, such
as General Electric, Caterpillar and GM, have
earned huge profits investing in protected Chinese
and other Asian markets, and have lobbied the US
Congress and administration not to take action
against Chinese mercantilism. Together they have
persistently characterized as protectionist those
who advocate affirmative steps to offset China's
export subsidies, even as China practices the most
virulent protectionism.
The administration
of President George W Bush has bent to these
pressures, refusing even to acknowledge the
subsidy on exports China's currency-market
intervention creates, and placed corporate
interests ahead of the national interest.
Deficits, debt and growth Trade
deficits must be financed by foreigners investing
in the US economy or Americans borrowing money
abroad. Direct investments in the United States
provide only about a tenth of the needed funds,
and Americans borrow about $55 billion each month.
The total debt is about $6 trillion, and at 5%
interest, the debt service comes to about $2,000
per US worker each year.
The trade deficit
reduces growth, near-term, by reducing the demand
for US-made goods and services, and longer-term,
by shifting US labor and capital away from export
and import-competing industries that invest more
in R&D and highly skilled labor.
If
the US trade deficit were cut in half, GDP could
be increased by $250 billion over the next two or
three years, and longer-term, additional
investments in R&D and skilled labor would
potentially increase growth by a percentage point.
The US manufacturing sector has been hit
particularly hard. Were the trade deficit cut in
half, 2 million of the 3 million manufacturing
jobs lost since 2000 would be restored. These jobs
would pay higher wages and offer substantially
better health and other benefits than workers
receive in service activities.
Were it not
for large trade deficits over the past two
decades, US GDP would be at least 20% larger in
2007.
Peter Morici is a
professor at the University of Maryland School of
Business and former chief economist at the US
International Trade Commission.
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