Five years after the start of the great recession nearly nine million jobs are still needed to return to full employment. And as the Administration lays the groundwork for its second term, job creation should be goal number one. Under existing authority, the President can execute one simple policy that would create 2.2 to 4.7 million jobs over the next three years: End currency manipulation by a handful of countries, especially China. This policy would boost GDP, reduce unemployment and, in budgetary terms cost nothing. It would, in fact, substantially reduce the federal deficit. No other policy could achieve this jobs trifecta.
Over the past fifteen years rising trade deficits have devastated U.S. manufacturing employment. Since April 1998, the United States has lost 5.7 million manufacturing jobs, nearly a third of manufacturing employment and most of those job losses were due to the growing U.S. trade deficit. Although half a million manufacturing jobs have been added since 2009, a full manufacturing recovery requires greatly increasing exports relative to imports. While exports support domestic job creation, imports (and growing trade deficits) eliminate domestic jobs. Although the overall U.S. trade deficit declined slightly last year, the trade deficit in manufactured products increased by $44.7 billion in 2012. This growing manufacturing trade deficit is a threat to manufacturing employment and the overall recovery.
Currency manipulation, which distorts trade flows by artificially lowering the cost of imports to the U.S. and raising the cost of U.S. exports, is the single most important cause of these growing trade deficits. Halting global currency manipulation by making it illegal for China and other currency manipulators to purchase U.S. Treasury bills and other government assets is the best way to reduce the U.S. trade deficit, create jobs, and rebuild the economy.
China, Denmark, Hong Kong, Korea, Malaysia, Singapore, Switzerland, and Taiwan are the most significant currency manipulators, and Japan is also a threat as it has recently announced its intent to intervene. In the case of China, the largest and most important manipulator, the president has the authority to end China's currency manipulation with the stroke of a pen under the Emergency Economic Powers Act (Bergsten and Gagnon 2012, 18). He should announce his intention to restrict or ban Chinese purchases of U.S. Treasury bills and other U.S. assets if China does not substantially revalue and cease all currency intervention in the near future, and the president should issue such orders if China fails to respond. If China is unable to purchase U.S. assets it will no longer be able to manipulate its currency, which will rise with demand for Chinese goods and assets. Treasury and the Federal Reserve have the authority and resources to offset efforts by the other manipulators to suppress their currencies, and they should begin to do so, working in coordination with our trading partners, especially those in Europe and others in the G-20 that have been injured by currency manipulation.
A new EPI report has shown that eliminating currency manipulation by trading partners could reduce the U.S. trade deficit by between $190 billion and $400 billion and support the creation of between 2.2 million and 4.7 million U.S. jobs over the next three years. This could reduce the U.S. unemployment rate by between 1.0 and 2.1 percentage points, increase U.S. GDP by between $225 billion and $474 billion (a rise of between 1.4 percent and 3.1 percent), and reduce the U.S. federal budget deficit by between $78.8 billion and $165.8 billion per year (deficit reduction of 20.4 percent to 42.9 percent).
The Obama administration has dramatically increased trade enforcement in the past four years by filing a number of successful complaints against China, both here in the United States and at the World Trade Organization. However, much more needs to be done to eliminate unfair trade practices, especially currency manipulation. The administration's four years of pursuing quiet negotiations has achieved only mild success.
With the U.S. and European economies headed into a downturn in 2013, it is essential to rebalance global trade. Reducing imports to the U.S. relative to exports offers the best hope for creating millions of U.S. jobs and stimulating GDP--at no cost to the government. Time is short for the President to put in place policies that will end the jobs crisis that threatens to become his economic legacy. Ending currency manipulation is the place to start is by and now is the time to do it.