Smith Faculty Opinion Article
January 05, 2010
Why Free Trade Is Failing America
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 Obama, like
President Bush, permits China and others to cheat on the rules, unchallenged, to
the detriment of the U.S. 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
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 U.S. 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
U.S. response and with ruinous consequences for American workers.
The United States annually exports $1.6 trillion in goods and services, and
these finance a like amount of imports. This raises U.S. gross domestic product
by about $170 billion, because workers are about 10 percent more productive in
export industries, such as software, than in import-competing industries, such
Unfortunately, U.S. 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 percent lower.
This slashes GDP 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 U.S. products.
Simple supply and demand should drive down the value of the dollar against
the yuan and other currencies, make U.S. 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 percent 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 U.S. 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 TARP.
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 to $600 billion off GDP, and Americans suffer unemployment
above 10 percent.
China grows at nearly 10 percent 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 U.S. 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
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 University
of Maryland School of Business and former Chief Economist at the U.S. International