Trade Deficit Burdens Economic Recovery

|
Includes: DIA, QQQ, SPY
by: Peter Morici

Tuesday, the Commerce Department will report the February deficit on international trade in goods and services. Analysts expect it to increase to $39.0 billion from $37.3 billion in January. My forecast is in line with the consensus.

The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threatens to stifle the emerging recovery and keep unemployment near 10 percent through 2011.

At 3.1 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds. Moreover, Obama’s stimulus is temporary, whereas the trade deficit is permanent and growing again.

Subsidized manufactures from China and petroleum account for nearly the entire deficit, and both will rise as consumer spending and oil prices rise through 2010

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.

To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.

Beijing accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. In 2009, those purchases were about $450 billion or 10 percent of China’s GDP, and 28 percent of its exports of goods and services.

In 2010, the trade deficit with China is reducing U.S. GDP by more than $400 billion or nearly three percent. Unemployment would be falling rapidly and the U.S. economy recovering more rapidly but for the trade deficit with China and Beijing’s currency policies.

Longer term, China’s currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1 trillion larger today, but for the trade deficits with China over the last 10 years.

In negotiations with U.S. Treasury Secretary Timothy Geithner, China has suggested a three percent revaluation of its currency over the next year; however, such a small change would do little to change those numbers. In fact, because of Chinese modernization, the intrinsic value of China’s currency rises each year. Hence, a three percent revaluation over the next year would not even amount to the change in yuan undervaluation.

As the U.S. trade balance with China grew worse, Beijing could say “see exchange rates don’t matter.”

President Obama must weigh much tougher action against Chinese mercantilism, or China’s trade policies will impose slow growth and high unemployment on the United States.

Disclosure: No positions

About this article:

Expand
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here