Solutions to Slow Growth: Develop Domestic Petroleum and Address Chinese Mercantilism

The Commerce Department reported the May deficit on international trade in goods and services increased to $50.2 billion, up from $43.6 billion when the economic recovery began. The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. A rising trade deficit again threatens to sink the recovery and push unemployment above 10%. Most fundamentally, U.S. economic growth and jobs creation has slowed, because the demand for U.S. made goods and services is expanding too slowly. Supplying what Americans and global consumers buy is not the issue, but rather U.S. and export customers dont want enough of what Americans make. America needs to play its strengthsabundant domestic energyand confront Chinese mercantilism that arbitrarily overprices U.S. goods at home and abroad. Globalization does not have to mean a new normal of slow growth, high unemployment and dead end careers for young people. Globalization does not have mean and end to American prosperity unless U.S. policy compels it. At 4% GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obamas stimulus package added. The Obama stimulus was temporary and now dissipating, whereas the trade deficit is permanent and swollen again. The high cost of imported oil and gasoline and subsidized manufactures from China account for nearly the entire deficit. During the recovery, both the cost of imported oil and Chinese imports have risen with consumer spending, and now these threaten to sink the recovery by year end. Money spent on Middle East oil and Chinese coffee makers 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. Annually, those purchases come to about $450 billion, or about a 35 percent subsidy on Chinas exports of goods and services. That would surely cut the trade deficit with China by half and perhaps more. Similarly the failure to develop U.S. oil and gas resourcesand speed the deployment of natural gas use and more fuel efficient vehicles and home heating purposessends abroad dollars that do not return to purchase U.S. exports. Greater domestic production and conservation might not much lower the price of gasoline or heating oil, but it would keep more of the dollars spent on energy in the United States, creating jobs. Excessive environmental regulation does not reduce risks to the oceans and atmospherelower U.S. production results in more imports and not less domestic consumption, it merely shifts production to developing countries where the risks can be managed less effectively. U.S. petroleum production could be easily raised by four million barrels a day, and better use of internal combustion engines, urban natural gas fleets, and substitution of domestic natural gas for heating oil could easily save another one or two million barrels a day. In combination that would cut U.S. oil imports in half. Cutting the trade deficit in half over three years would increase U.S. GDP by about $500 billion dollars and create up to 5 million additional jobs. This would increase growth to 3.6 percent from the expected 2.5 percent, and lower the unemployment rate by three percentage points. Absent some correction in the trade deficit, growth at 2.5 percent may prove too slow to be sustainable. Many companies will find they can boost productivity and slash payrolls to keep up with such slow growth, and undermine consumer confidence and send the economy into a negative spiral and recession. Longer term, the combination of expensive oil imports and Chinas currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1.5 trillion larger today, but for the trade deficits on oil and with Asia over the last 10 years. Addressing the trade deficit will permit the United States to grow at 3.5 percent a year, instead of the 2.5 percent expected as the new normal. China has indicated it will not significantly revalue its currency. Gradual revaluation of the yuan helps little, because modernization and accompanying productivity improvements raise the intrinsic value of the currency at about the same pace. This is evidenced by the continuing pace of Beijings purchases of dollars and other currency to keep the yuan at its target exchange rate. China views its exchange rate policy as a tool of domestic development strategy but its policy has broad, aggressive and negative international consequencesit is choking growth and imposing high unemployment on the United States and other western countries. Diplomacy has failed, and President Obama should impose a tax on dollar yuan conversions in an amount equal to the amount of China currency market intervention divided by its exportsabout 35 percent. For imports, at least, that would offset Chinas subsidies that harm U.S. businesses and workers. After diplomacy has failed for both Presidents Bush and Obama, failure to act amounts to no more than appeasement and wholesale neglect of the Administrations obligations to create a level playing field for U.S. workers.Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.