Smith Faculty Opinion Article

By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

November 12, 2009 

Trade Deficit Threatens a Double-Dip Recession, Economic Armageddon

Friday, the Commerce Department will report September international trade in goods and services. The trade deficit-the amount imports exceed exports-is expected to rise to $32.5 billion from $30.7 billion in August.

The trade deficit was a principal cause of the Great Recession. Now, it threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future.

More than anything else, U.S. businesses need customers-more sales of U.S.-made goods and services-to get the economy rolling and hire more Americans.

The deficits on oil and trade with China account for nearly the entire U.S. trade imbalance, and money spent on imported gasoline and Chinese coffeemakers can't be spent on American-made products, unless offset by exports.

At 2.7 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama's stimulus package adds.

Obama's stimulus is temporary, whereas the trade deficit is permanent. Moreover, the trade deficit will increase, because oil prices will rise and imports of Chinese consumer goods will climb as the global and U.S. economies expand in 2010.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.

From 2004 to 2008, the trade deficit exceeded five percent of GDP, and Americans borrowed from abroad to consume more than they produced and keep the economy going. They posted as collateral overvalued homes financed on shaky mortgages. When mortgages failed, banks stumbled, home prices tumbled, and retail sales tanked. The economy was thrust into the worst recession in 70 years.

Now huge federal stimulus spending is required to resuscitate business activity. Once the stimulus money is spent, the demand for U.S.-made goods and services will fall, and the rising trade deficit will further tax demand and threaten a new round of layoffs and a second economic contraction. The much feared double dip recession could result and unemployment could rocket past 15 percent, igniting a second Great Depression.

President Obama ignores the fundamental causes of a rising trade deficit-China's subsidies for domestic oil consumption, which drive up global prices and the cost of U.S. oil imports, and China's purposeful manipulation of currency markets, which keeps the yuan undervalued against the dollar and subsidizes Chinese sales in U.S. markets.

President Obama's policies to fight the recession will deliver an inadequate, temporary lift to the U.S. economy, and he has not offered meaningful policies to reduce the trade deficit. He fails to challenge China's subsidies for domestic petroleum consumption and to even acknowledge the threat to American prosperity posed by China's currency mercantilism.

Industrial policies to promote exotic alternatives to conventional oil, conservation and battery powered cars will hardly dent oil imports for many years, and will create jobs numbering in the thousands, not the millions lost in the recession.

Left to fester much longer, the trade deficit could cause an economic Armageddon reminiscent of the Great Depression.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.