No economic policy could better serve Americans than genuine free trade, but
open trade policies are failing Americans.
Free trade is a compelling idea. Let each nation do more of what it does best,
and specialization will raise productivity and incomes. Americans are not
sharing in those benefits because President Barack Obama, like president George
W Bush, permits China and others to cheat on the rules, unchallenged, to the
detriment of the US interests he was elected to champion.
The World Trade Organization has greatly reduced tariffs, prohibits virtually
all export subsidies, and regulates other national policies that could subvert
trade, such as health and product
safety standards arbitrarily slanted to favor domestic suppliers.
For these rules to optimize trade, raise productivity and boost incomes,
exchange rates must adjust to reasonably reflect production costs. To buy
Chinese televisions, Americans must be able to purchase yuan with dollars;
however, an artificially strong dollar that overprices US tractors and software
in China will unravel the benefits of trade by denying Americans opportunities
to export to pay for those televisions
Exchange rates are established in currency markets, created by businesses
trading through major financial institutions. Unfortunately, China and several
other Asian governments blatantly manipulate those markets without a credible
US response and with ruinous consequences for American workers.
The United States annually exports US$1.6 trillion in goods and services, and
these finance a like amount of imports. This raises US gross domestic product
by about $170 billion because workers are about 10% more productive in export
industries, such as software, than in import-competing industries, such as
apparel.
Unfortunately, US imports exceed exports by another $400 billion, and workers
released from making those products go into non-trade-competing industries,
such as retailing, where productivity is at least 50% lower. This slashes gross
domestic product by about $200 billion, overwhelming the gains from trade, and
requires workers displaced by imports to accept lower wages.
The trade deficit creates an excess supply of dollars in international currency
markets, as Americans offer more dollars to purchase foreign products than
foreigners demand to purchase US products.
Simple supply and demand should drive down the value of the dollar against the
yuan and other currencies, make US imports more expensive and exports cheaper,
and reduce or eliminate the trade deficit. But the Chinese government subverts
this process by habitually printing and selling yuan for dollars in currency
markets, keeping its currency and exports artificially cheap.
Currency manipulation creates a 25% subsidy on China's exports, and other Asian
countries are impelled to follow similar policies, lest their exports lose
competitiveness to Chinese products.
Also, huge trade imbalances between Asia and the West, perpetuated by currency
mercantilism, create an imbalance in demand - a shortage of demand for the
goods and services produced in the United States and Europe, and artificially
robust demand for products made in China and elsewhere in Asia.
Consequently, to keep the US economy going, Americans must both borrow from
foreigners and spend too much, as they did through 2008, or their government
must amass huge budget deficits by borrowing from abroad, as it is now does
thanks to stimulus spending and the Troubled Asset Relief Program.
In the bargain, the United States sends manufacturing jobs to Asia in
industries that would be competitive, but for rigged exchange rates. The trade
deficit slices $400 billion to $600 billion off GDP, and Americans suffer
unemployment above 10%.
China grows at nearly 10% a year and makes American diplomats look like fools
for advocating free markets as a growth policy.
Campaigning for the presidency, Barack Obama promised to do something about
Chinese currency manipulation. Instead, like a good supplicant, he now thanks
Chinese officials for buying US Treasury securities.
China's development policies make its leaders look smart, but nothing makes
them look like geniuses better than an American president who appeases their
beggar-thy-neighbor policies.
It will be impossible for the United States to create the 9 million jobs needed
to bring unemployment down to pre-recession levels without taking on China's
currency manipulation and other unfair trade practices.
For that, Americans may need to wait for a better president - one with the
courage to stand up to China.
Peter Morici is a professor at the Smith School of Business, University
of Maryland School, and former Chief Economist at the US International Trade
Commission.
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