Saturday, February 6, 2010

China's Trade Practices: A Barrier To Job Growth

Peter Morici discusses one of the barriers to job growth, which is the enormous trade deficit with China due to huge tariffs, administrative barriers, and undervalued currency. Without taking action against China's trade practices, unemployment will remain high. See the following post from The Street.

President Obama is seeking to double U.S. exports and create 2 million jobs over the next five years. The new Commerce Department program to accomplish this goal is simply inadequate.

The Commerce Department initiative merely consists of redoubling existing efforts and not addressing the fundamental issues -- the undervalued Chinese yuan and high tariffs and other regulatory barriers that block U.S. exports in much of Asia.

Commerce Secretary Gary Locke is launching a program by increasing Export-Import Bank funding for small businesses from $4 billion to $6 billion; boosting Commerce Department personnel that assist exporters at U.S. embassies and consulates in China and India; and strengthening enforcement of trade laws and agreements.

Of course, these initiatives are helpful and could increase net exports by several billion dollars; however, those will not double exports, which now total $1.7 trillion or appreciably reduce a trade deficit of $440 billion caused by $2.1 trillion in imports. The trade deficit is likely to grow in 2010 and drag on the economic recovery.

The administration is correct to target China and India, but these initiatives don't address the reasons U.S. businesses don't sell enough in those countries.

China is the larger and faster-growing market and maintains an undervalued currency that makes Chinese products artificially cheap, whether at the Wal-Mart(WMT Quote) or competing with U.S. exports in China. It imposes huge tariffs and administrative barriers to U.S. exports. Conditions are not much better in India.

China exports about $330 billion to the U.S. but purchases only about $88 billion. Without a revaluation in the yuan large enough to end China's persistent purchases of U.S. dollars, the bilateral deficit is simply not coming down.

The president says he will try to persuade China to revalue its currency, but the diplomatic efforts by the Bush administration wholly failed to significantly alter China's policies.

Without strong U.S. action to offset China's currency market intervention, which exceeds $400 billion a year, China simply is not going to change its currency and trade policies, and U.S. unemployment will stay close to 10% or higher.

Taxing dollar-yuan conversion to offset China's currency subsidies would level the playing field, but the administration has offered no substantial proposals that promise to level the terms of competition for U.S. businesses in China or inspire a change in China's protectionist policies.

This post was republished from The Street.

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