President Obama is betting a lot on free trade. Recently, he has agreed to open talks for mega trade deals with the European Union and Japan in hopes of jump-starting growth in both places and boosting U.S. exports and jobs. However, far from an elixir, free trade has been a rock on the back of the U.S. economy and American workers, and the Obama strategy will only make things worse.
On university blackboards where economists theorize, free trade is a compelling idea—let each nation do more of what it does best, and international commerce will raise national productivity and incomes. But these benefits are not guaranteed if a few big nations can cheat on the rules.
The World Trade Organization has greatly reduced tariffs, export subsidies, and barriers to trade posed by domestic polices, such as biases in government procurement and discriminatory product standards. In addition, U.S. deals with Mexico, Canada, South Korea, and other small nations have reduced tariffs on bilateral trade to zero and eliminated even more non-tariff barriers.
For these rules to optimize specialization, productivity and incomes, exchange rates between national currencies must adjust to reasonably reflect production costs and facilitate balanced trade. To buy Chinese television sets and smartphones, Americans must sell enough industrial machinery and software in China or U.S. unemployment rises.
Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and Japan have blatantly manipulated these markets, without a credible U.S. response and with ruinous consequences for U.S. workers.
Japanese Prime Minister Abe has managed to push down the yen 23 percent from its value last August and that is worth more than $2000 on every Toyota sold in the United States. The Japanese automaker can put that cash into additional vehicle content, advertising, and discounts making a mockery out of fair competition with Ford and GM.
Similarly, troubles in southern Europe have motivated investors to move cash into U.S. Treasuries and stocks and suppressed the value of the euro against the dollar—to the great advantage of German exporters. Paradoxically, austerity policies for the Mediterranean states, championed by Angela Merkel, are doing more to boost German exports than resurrect those ailing economies.
With the three largest U.S. competitors enjoying undervalued currencies, it is no surprise the United States suffers from chronic, large trade deficits.
The United States exports $2.2 trillion in goods and services annually, and these finance a like amount of imports. This raises U.S. gross domestic product by about $235 billion, because workers are a bit more than 10 percent more productive in export industries, such as software, than in import-competing industries, such as apparel.
Unfortunately, U.S. imports exceed exports by another $500 billion and that reduces demand for U.S.-made goods and services. With multiplier effects, the trade deficit is slashing at least $800 billion off GDP.
Many U.S. workers are pushed from high-paying jobs, not because they can't compete, but because the Administration fails to take a tough stand against currency manipulation. And as many as 8 million workers can find no work at all, because of misguided U.S. trade policies, and wages remain depressed.
Domestic manufacturers have petitioned President Obama, and his predecessors, to take action—and economists spanning the ideological spectrum have suggested substantive measures that could combat currency manipulation and misaligned exchange rates.
The administration has complained to China and Japan about currency manipulation but after years of U.S. inaction, they simply ignore U.S. warnings.
The administration continues to negotiate trade pacts that open U.S. markets to foreign competition but lack specific rules and penalties to address currency manipulation. Until an American president is willing to ensure free trade in goods is matched by free trade in currencies, the U.S. economy will endure anemic growth and workers will suffer high unemployment and low wages.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.