According to data released by the Commerce Department this morning, the U.S. merchandise trade deficit with China set a new record high in 2011 at $295.5, up from the last record high, $273.1 billion in 2010. Previous to that, the record was $268.0 billion in 2008. The U.S. trade deficit with China has deteriorated for 23 straight months (when compared with the same month one year earlier), as shown in the graph below:
Trade deficits are a drag upon economic growth and produce a continuing loss of good paying U.S. jobs. When trade is in balance, jobs lost to imports are replaced by more productive jobs producing exports. But when the U.S. lets its trading partners manipulate currency values and place barriers upon U.S. products, the U.S. loses jobs while gaining little but debt.
In his State of the Union speech on January 24, President Obama said that he is doing much to improve our trade relationship with China. He suggested that someday he might even be able to reduce Chinese pirating of U.S. movies, music and software. Specifically:
I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don't play by the rules. We've brought trade cases against China at nearly twice the rate as the last administration, and it's made a difference.
Over a thousand Americans are working today because we stopped a surge in Chinese tires. But we need to do more. It's not right when another country lets our movies, music, and software be pirated. It's not fair when foreign manufacturers have a leg up on ours only because they're heavily subsidized.
Tonight, I'm announcing the creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China. There will be more inspections to prevent counterfeit or unsafe goods from crossing our borders....
Meanwhile, both of the leading contenders for the Republican nomination for president plan to deal with U.S. trade deficits if they are elected. Senator Santorum would reduce the corporate income tax on U.S. manufacturing to zero. Governor Romney would tackle China's trade cheating through the following steps:
- Increase CBP resources to prevent the illegal entry of goods into our market
- Increase USTR resources to pursue and support litigation against unfair trade practices
- Use unilateral and multilateral punitive measures to deter unfair Chinese practices
- Designate China a currency manipulator and impose countervailing duties
- Discontinue U.S. government procurement from China until China commits to GPA
Either candidate could quickly solve the problem by invoking a special WTO rule for trade-deficit countries, last invoked by President Nixon with an across-the-board 10% tariff in 1971. The scaled tariff (pdf), would be the ideal trade-balancing tariff under this provision. It would take in half of our trade defict with each trading partner as revenue, going up when our trade deficit with that country goes up, going down when the trade deficit goes down, and disappearing entirely when trade with that country approaches balance.
Faced with tariffs in proportion to its trade barriers, the Chinese government would quickly discover that it could let its people buy American-made movies, music, and software, that it could let its huge government sector procure from the United States, and that it could let its currency rise to a trade-balancing level.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.