Killer Trade Deficits. Literally.

08/18/2010 11:03 am ET | Updated May 25, 2011
  • Scott Paul President, Alliance for American Manufacturing

Our nation is so far off course economically that we'll need more than a map to find our way back. We'll need courage, vision, and a real change of course--three things found in only trace amounts in Washington today. Two things I've read recently really crystallized the challenges we face.

Paul Krugman, the noted New York Times columnist and Nobel laureate, penned a blog titled "Killer Trade Deficits," in which he praised the Times editorial board for acknowledging the harm that our massive trade deficit and China's mercantilism do to our economy, but lambasted the Times for basically saying we should do nothing to stop the killing.

Krugman is absolutely right. We have the power to stop China's economic madness. If we don't use that power, we become more than just innocent bystanders to China's harmful economic warfare--we are at best appeasing it, if not outright supporting it.

And, as we've learned, thanks to an excellent piece by Annie Lowrey in the Washington Independent, the consequences are indeed grave: suicides are way up in areas of high unemployment such as Elkhart, Indiana, and Macomb County, Michigan.

That noise you hear is the social fabric of America being ripped apart at the seam. Those cries you hear are the unfulfilled pleas from the long-term unemployed, victims of the recession and our flawed economic policies that have offshored millions of jobs.

For any lawmaker--right, left, or center--who doesn't believe the recession and trade policy have consequences for Americans, read Lowrey's compelling story, and then act as Krugman suggests: get tough with China. Otherwise, please join the latest iteration of the Neville Chamberlain caucus, where memberships seem to be filling up far too fast.

Thanks in large part to the hard cash it accumulates through mercantilist economic policies, China is gaining military strength and economic clout at alarming rates, passing Japan as the number two economy in the world, while American workers are losing their jobs and our nation is piling up more trade debt.

Our trade deficit with China has destroyed 2.4 million American jobs over the past 8 years. One of the principal reasons for the trade deficit is China's currency manipulation, in which it buys dollars (accrued through its trade surplus with the U.S.) to keep the dollar artificially expensive and the yuan artificially cheap. That means China sells more than it otherwise would to the U.S., and the U.S. sells less than it otherwise would to China. The net result is that Chinese products dominate shelf space at big box stores and more American workers face layoffs and unemployment.

We can do something about this, but it will take American leadership--as it always has. We brought down trade imbalances in the early 1970s and the mid-1980s through strong responses to currency manipulation. Those efforts were far from perfect, but they surely beat what the Obama Administration has offered so far: a big nothingburger. China promised in June to move its currency. In doing so, it avoided a "scolding" by the Treasury Department, instead drawing modest praise.

China has moved its currency about one half of one percent against the dollar. The currency is undervalued by 40 percent. So at this rate, we'll have China's currency properly valued in a decade or two. That's far too long to wait as our economy--and some of the unemployed--continue to die in front of our eyes.

There is some good news. Efforts to hold China accountable for its currency manipulation have bipartisan support in both the House and Senate. If either chamber held a vote today on this perfectly reasonable legislation, it would pass overwhelmingly. That might be enough to get China to change its ways. But economically appeasing the Chinese government, as Tim Geithner has surely learned, gets you something akin to the 1938 Munich Agreement: it may look good on paper, but the net result is ultimately disastrous and costly.