Smith Faculty Opinion Article

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

July 11, 2011

Fix the Trade Deficit to Create Jobs
Drill for Oil and Confront Chinese Mercantilism

Tuesday, the Commerce Department is expected to report the deficit on international trade in goods and services was $42.7 billion in May, down a bit from $43.7 billion in April. The trade deficit is the most significant barrier to jobs creation and growth in the U.S. economy.

Simply, the U.S. economy suffers from too little demand for what Americans make, and every dollar that goes abroad to purchase oil or Chinese consumer goods that does not return to purchase exports is lost purchasing power that could be creating jobs. Halving the $525 billion annual trade deficit would create 5 million jobs.

Jobs Creation

Oil and Chinese imports account for virtually the entire trade deficit. The failure of both the Bush and Obama Administrations to develop abundant domestic oil and gas resources, and address subsidized Chinese imports are major barriers to pulling down unemployment to acceptable levels.

The economy added only 18,000 jobs in June; however, 382,000 jobs must be added each month for the next 36 months to bring unemployment down to 6 percent. With federal and state government cutting payrolls, the private sector must add about 400,000 per month to accomplish this goal.

Americans are spending again, but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves U.S. businesses with too little demand to justify new investments and hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

In June, the private sector added only 57,000 jobs, and many were in government subsidized health care and social services. Netting those out, the private sector jobs created only 35,000 in June-that comes to 11 non-government subsidized jobs per city and county.

Economic Growth

The first half of 2011, GDP growth has averaged about 2.2 percent, well below the 3 percent needed just to keep up with productivity and labor force growth and keep unemployment from rising.

In 2010, consumer spending, business technology and auto sales added strongly to demand and growth, and exports have done quite well. However in 2011, the soaring cost of imported oil and subsidized Chinese manufactures into U.S. markets pushed up the trade deficit and offset those positive trends. Now consumer pessimism is pushing down home prices and sales again, and car sales dipped in May and June.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving, making the United States even more dependent on imported oil and overseas creditors to pay for it, and impeding growth and jobs creation.

Oil imports could be cut in half by boosting U.S. petroleum production by 4 million barrels a day, and cutting gasoline consumption by 10 percent through better use of conventional internal combustion engines and fleet use of natural gas in major cities.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking business there.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China's currency market intervention divided by its exports-about 35 percent. That would neutralize China's currency subsidies that steal U.S. factories and jobs. It would not be protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it would be self defense.

Cutting the trade deficit in half, through domestic energy development and conservation, and offsetting Chinese exchange rate subsidies would increase GDP by about $500 billion and create 5 million jobs.

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