The US trade deficit for February is likely to be up marginally to US$36.5
billion from January's $36 billion, according to the consensus forecaast before
the Commerce Department releases balance of trade data on Thursday.
In February, oil prices rose but the quantity of oil imports fell, and slack
consumer spending is breaking nonoil imports. Imports from China usually take a
seasonal dip in February but overall these have remained strong, even as
purchases from other regions have slacked off.
China has beefed up currency intervention, suppressing the value of the yuan to
boost exports, and increased other export subsidies. This strategy keeps China
growing by exporting some
of the worst effects of the recession to the United States and other industrial
Essentially, China is exporting unemployment - the ruinous strategy most
countries tried but failed to accomplish during the Great Depression. The
principal difference this time is that China has been given a pass. No one
dared challenge China at the recent Group of 20 summit in London, least of all
President Barack Obama.
The wages of this appeasement are simple. Unemployment is moved from the
coastal provinces of China to the US industrial heartland spanning from western
Pennsylvania and New York to eastern Minnesota and south to Missouri, as well
as to industrial areas in the US southeast. It is notable that President
Obama's economic team has little relevant experience working or even consulting
in these areas.
China's principal threat is that it will stop buying US Treasury securities if
the United States takes steps to offset its currency and other subsidies. The
Obama administration is foolish to buy it.
To undervalue the yuan, the People's Bank of China prints yuan and trades those
for dollars, removing dollars from circulation; then, not having enough places
to spend or invest those dollars, the People's Bank purchases Treasury
securities, returning the dollars into circulation.
If the People’s Bank instead held the dollars, it would remove those from
circulation, and the Federal Reserve could simply print additional dollars to
buy the Treasury securities. The net effect is that the Federal Reserve would
collect the interest instead of its Chinese counterpart, and US borrowing costs
would be lower. That would benefit, not hurt, the United States.
The trade deficit remains 3.6% of GDP, down from more than 5% at the peak of
the economic expansion in 2007. However, as the US, Chinese and other
countries' stimulus packages rev up the global economy, the price of oil will
rise and US imports of Chinese products will again exceed 5%, thanks in large
measure to China's currency and other export subsidies.
The trade deficit, even at current depressed levels, pulls the economy down
more than Obama stimulus package lifts it. Once the effects of the stimulus
package wear off, the trade deficit will thrust US economy back into recession.
Thanks to dysfunctional banks and the trade deficit, the US economy has entered
a depression that compares with the 19th century "long depression." From
October 1876 through June 1897, the US economy contracted in 161 of 285 months.
Unemployment peaked at more than 14% in 1876 and 18.4% in 1894.
Then, as now, bank failures and the dollar were central concerns. Either we fix
the banks and exchange rates, or we can look forward to a similar experience.
Peter Morici is a professor at the Smith School of Business, University
of Maryland, and the former chief economist at the US International Trade