Illustration by Brian Rea
Illustration by Brian Rea

President Barack Obama’s new jobs plan, if passed by Congress, might spark some activity and even some employment in the moribund U.S. economy. But it’s unlikely to foster the growth and job creation we urgently need, without adding new debt, because the plan ignores a key obstacle to genuine prosperity: the nation’s immense trade deficit.

Before the financial crisis peaked two years ago, most Americans and their leaders understandably, if not wisely, ignored the economic costs of the nation’s trade gap. This chronic shortfall reduced U.S. output and employment, and most economists warned that it was unsustainable. But a string of asset bubbles fueled enough growth and hiring to more than compensate, and the day of reckoning seemed comfortably far off.

Today, however, the importance of the trade deficit can no longer reasonably be denied. In the year through June, it was $422.9 billion (on an annualized inflation-adjusted basis), almost 3.9 percent higher than the year-earlier period. The increase in the trade gap since June 2009, when the recession technically ended, has reduced the growth of the American economy by much more (over 14 percent) than falling government purchases (about 6 percent) or the still-shrinking housing industry (less than 2 percent).

At this point, a substantial reduction in the trade deficit must be made a priority. Otherwise, any economic stimulus produced by the various recovery proposals offered by Democrats and Republicans, including Obama’s, would still leave America’s underlying debts dangerously large.

Stimulus Isn’t Enough

History shows that stricter government austerity, with or without reforms to government regulations or the tax system, can’t alone meet the challenge adequately. Nor could any new stimulus, whether in the form of spending or tax cuts, make up for enough of the money lost when Americans buy imported goods and make investments abroad at the rate they do now.

Reducing the trade deficit drastically, however, could speed growth while actually lessening the need to prop up domestic demand. It could, first, boost exports enough to allow U.S.-based producers to generate most future growth and employment by supplying new foreign customers. And it could lower imports, enabling domestic producers to meet more of the demand at home. In fact, even if demand within the U.S. were to fall somewhat, a reduction in imports could spur growth.

President Obama has set a goal of doubling exports, and Congress seems ready to approve three trade agreements -- with Colombia, Korea and Panama. But because these initiatives ignore our high level of imports, they are sadly inadequate. The U.S. trade deficit is now so large, and the world’s prospects for growth so poor, the payoff from decreasing imports would dwarf the benefits of increasing exports.

Inevitably, any effort to reduce imports raises longstanding objections to limiting trade. Such action, it is said, interferes with the operation of the free market, keeping it from optimally allocating global resources. But this argument ignores an important reality in the world’s current trading system: Certain countries follow mercantilist policies that aim to increase growth and employment by racking up big and persistent trade surpluses, and these policies interfere with genuine wealth creation and associated hiring in the U.S.

China, for one, artificially holds down the value of its currency, the yuan. This prices American-made products out of the Chinese market, and it gives Chinese goods an artificial advantage over American goods in the U.S. and elsewhere. Japan and Korea have also often manipulated their currencies to skew trade flows.

Phase-In Period

New U.S. trade barriers, it is also often said, might set off international economic conflicts or even lead to a global depression of the kind not seen since the 1930s. In fact, although our trade partners rely heavily on our hunger for imports, most of them would ultimately accept new trade restrictions, if only because they would want to guard against losing even more sales in the U.S. market during the period of phasing in these barriers.

Decisive moves by the U.S. to reduce imports might also help by shocking our trade partners into finally negotiating international agreements that rectify imbalances. In any case, for a world dangerously dependent on American consumption, the U.S.’s current and foreseeable economic plight overrules arguments against restricting trade.

Although it’s true that economic growth -- both in the U.S. and worldwide -- would slow as international supply chains adjusted to new U.S. restrictions, this problem wouldn’t be permanent. Sustainable U.S. trade accounts must be restored before a better-balanced, and thus truly healthy, world economy can emerge.

Several strategies recently proposed in Congress could, in combination, bring the U.S. trade deficit under control. First, and arousing the least amount of controversy, stiff tariffs should be slapped on imports from China and other countries that depress the value of their money. Even after years of pleadings by U.S. diplomats, currency manipulation continues to distort trade, and for reasons that have nothing to do with market forces.

Adding substantially to the price of goods from countries that practice currency manipulation would at least eliminate their artificial price advantages in the huge American market. These tariffs should be maintained and even periodically raised until America’s deficits with the offending countries decrease significantly.

VATs Are Protectionist

Tariffs should also be imposed on countries with value-added tax systems. VATs are less blatantly protectionist than currency manipulation, but they may contribute much more to U.S. trade deficits. Because these taxes are imposed on domestic consumption, they raise the price of imports. And because they are rebated on exports, they, in effect, subsidize overseas sales.

For many countries, VATs cancel each other out across borders, but the U.S., which is virtually the only VAT-less trading country, experiences only the downside. Unless and until the U.S. enacts its own VAT, these levies should be offset with another tariff.

Still another way Congress could greatly reduce U.S. imports would be to revisit the “Buy American” requirements that are imposed on federal agencies. After all, government spending represents 19 percent of the U.S. economy. The rules should be extended to lower levels of government as well, by making it a condition of federal aid to states and localities.

What’s more, no exceptions to the Buy-American rule should be allowed for products made by U.S. trade partners, even those countries that are currently entitled to nondiscriminatory treatment under a World Trade Organization pact on government procurement. Given the urgent need to right the trade imbalance, America’s own needs and the imperative of stabilizing the global economy must be placed ahead of the short-term interests of U.S. trading partners.

In fact, exemptions to the Buy-American rule -- including those for foreign-made items that are significantly less expensive or more widely available than their American-made counterparts -- should be strictly limited. And compliance with the rule should be monitored much more closely. (In recent years, according to U.S. Representative Dan Lipinski, a Democrat from Illinois, more than 20 percent of purchases by the U.S. Commerce Department have been imports.)

Next-Generation Spending

The Buy-American rule is especially important when it comes to public seed money spent on next-generation industries -- high-speed rail systems, for example, or advanced batteries and other fuel-saving devices for cars - - which have the potential to become highly profitable.

In cases where the government needs to buy things that aren’t made in the U.S. -- many electronics products, for example -- foreign suppliers should be required, wherever practical, to build factories to make the goods in the U.S.

Finally, the U.S. could limit future trade deficits by practicing more selective trade diplomacy. It still makes sense to have free-trade agreements with countries that share our critical free-market values. But such market-opening deals shouldn’t be made with flagrantly mercantilist powers. And those that have been made should be suspended, or at least rewritten, to strengthen America’s defenses against mercantilist practices.

Changes are also needed in pacts such as the North American Free Trade Agreement, which were designed not to increase net U.S. exports but to enable U.S. and multinational companies to supply the American market from production facilities in low-wage countries with few business regulations.

More sweeping import restrictions might still be needed, as well as new efforts to lure high-value production to American shores. The U.S. could, for example, emulate China in requiring foreign manufacturers who acquire U.S. real estate or companies, or create factories here, to use large percentages of American parts and components in their products, and to share their most advanced technology with American partners.

At the moment, the specific mix of new rules matters less than simply coming to a decision to act forcefully. The trade deficit is so large and growing so rapidly that, if unaddressed, it will eventually reduce living standards for all Americans. It’s best that the U.S. move quickly, while it can still assert its advantage.

(Alan Tonelson is a research fellow at the U.S. Business and Industry Council, which represents almost 2,000 domestic manufacturing companies. He is the author of “The Race to the Bottom: Why a Worldwide Worker Surplus and Uncontrolled Free Trade Are Sinking American Living Standards.” The opinions expressed are his own.)

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To contact the writer of this article: tonelson@usbusiness.org

To contact the editor responsible for this article: Mary Duenwald at mduenwald@bloomberg.net