Smith Faculty Opinion Article
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.
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.
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
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
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
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