Tags: trade | GDP | currency | China

Trade Deficit Slowing Growth, Destroying Jobs, Exacerbating Inequality

By Peter Morici   |   Monday, 05 Aug 2013 08:03 AM

Tuesday, the Commerce Department is expected to report the June deficit on international trade in goods and services was $43.0 billion. Overall, the deficit is up from $25 billion when the economic recovery began in mid-2009, and poses the most significant barrier to stronger economic growth.

Household spending has recovered, but too many of those dollars still go to pay for imported oil and consumer goods from China and cars from Japan. In the second quarter, gross domestic product (GDP) growth was a paltry 1.7 percent — consumer spending contributed 1.2 percentage points. However, the increase in the trade deficit subtracted 0.8 percentage points — the growth in imports from Asia and oil negated two-thirds of the increase in consumer spending.

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Consequently, businesses remain pessimistic about demand in the U.S. market and are reluctant to invest. With the majority of U.S. businesses subject to higher personal, as opposed to corporate, tax rates; more onerous and costly regulations; and paying more for employee health insurance, they remain reluctant to hire full-time employees and continue to offshore jobs.

Since January, 936,000 more Americans report working part time, while only 27,000 more say they have obtained full-time work. The explosion of part-time work places pronounced downward pressure on wages and exacerbates income inequality.

Sequestration only subtracted about $42 billion from actual government spending this fiscal year, and its impact pales by comparison to the $240 billion increase in the annual trade deficit and the $200 billion increases in taxes since January.

Fracking in the Lower 48 has not delivered enough new oil, and a full push on U.S. potential in the Gulf, off the Atlantic and Pacific Coasts and in Alaska could cut import dependence in half. Shifting federal subsidies from electric cars, wind and solar energy to more fuel-efficient internal combustion engines, plug-in hybrid vehicles and liquefied natural gas in rail and trucking could slice imports by another 25 percent.

Lower natural gas prices substantially improve the international competitiveness of industries like petrochemicals, fertilizers, plastics and primary metals. However, the Department of Energy's push to boost liquefied gas exports will handicap growth and create millions fewer jobs than keeping the gas at home for manufacturing and alternatives to diesel in transportation.

China systematically undervalues its currency against the dollar to keep its goods cheap in the United States. China steals technology, subsidizes exports and imposes high tariffs on imports, while effectively distracting the Obama administration from these commercial issues with persistent intransience on cybersecurity and passive resistance on nuclear issues with North Korea.

Other Asian governments, most recently Japan, have adopted similar currency strategies to boost exports. For example, the jump in the value of the dollar against the yen gives Toyota at least a $2,000 advantage in pricing of the Camry against the Ford Fusion. That may not show up in the list price, but it gives Toyota's importing arm in the United States the latitude to pack cars with better features, more aggressively discount and spend more on new and more innovative products.

Economists across the ideological and political spectrum have offered strategies to combat predatory currency policy and force China and others to abandon mercantilism. However, China, Japan and others, offering only token gestures and deflecting rhetoric, exploit President Obama's weakness on economic issues — the Obama policy of appeasement handicaps the U.S. recovery.

Cutting the annual trade deficit by $300 billion, through domestic energy development and conservation, and forcing China and others' hands on protectionism would increase GDP by about $500 billion a year and create about 5 million jobs.

Cutting the trade deficit in half would raise long-term U.S. economic growth by 1 to 2 percentage points a year. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10 to 20 percent greater than today, and unemployment and budget deficits not much of a problem.

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