We have the worst trade performance of any country in the world.  And they tell us we need a trade agreement with Europe?  The U.S. Chamber of Commerce is pushing it.  Here is more insight on why the Europeans want it.

European leaders are expected to press Mr. Lew on an eagerly anticipated free-trade agreement. A study by the European Commission found that a deal could increase European Union exports to the United States by as much as 28 percent, a lift for the flailing European economy.

If we are going to recover economically, job-wise and fiscally, we need to pursue balance trade.  That means eliminating the trade deficit.  We need to produce more of what we consume.  The bipartisan insanity on the U.S. side continues, as Obama and members of both parties in Congress have spoken in favor of an EU trade deal.

CPA members focused, in our March Legislative Fly In, upon convincing Congress that the trade deficit is THE core economic problem.  We need to strengthen our persuasion and our organization as Trade Promotion Authority is being crafted in Congress this year.

The following piece by Charles McMillion appeared in Manufacturing & Technology News. Click here to read the entire article.

The United States continues to lose production in the global economy, according to the first quarter 2011 trade figures for goods and services released by the Census Bureau on May 11. The first quarter trade deficit in goods and services is 23.5 percent worse than during the first quarter of 2010 and is 20.4 percent worse than during the last quarter of 2010. The dollar value of U.S. export growth remained near stagnant in the first quarter of 2011 (declining in February), while the value of imports accelerated sharply — largely due to higher prices for oil and other commodities.

Charles McMillion is President of MBG Information Services in Washington, D.C.

One thing is for certain already: the present international trading order will not be here in ten years, and quite likely not in five. The unsustainable American trade deficit alone makes this a certainty.

Since the end of the Cold War, and accelerating after NAFTA in 1994, that order has consisted in ever-expanding “free” trade worldwide — which in reality is a curious mixture of genuinely free trade practiced by the United States and a few others with the technocratic mercantilism of surging East Asia and Germanic-Scandinavian Europe.

From America’s point of view, this order is free trade, at least on the import side of the equation, so it is as free trade that we must criticize it, prepare to celebrate its passing, and investigate what should replace it.

Our free trade policy is the answer to a question that currently has most mainstream economists scratching their heads: what killed the great American job machine? This policy has been partly responsible for increasing inequality in the United States and the gradual repudiation of our 200-year tradition of broadly shared middle-class prosperity. It is a major player in our rising indebtedness, community abandonment, and a weakening of the industrial sinews of our national security.

America’s economy today continues to struggle to emerge from recession because our trade deficit — fluctuating around $500 billion a year for a decade now — acts as a giant “reverse stimulus” to our economy. It causes a huge slice of domestic demand to flow not into domestic jobs, thus domestic wages and thus more demand, but into imports, therefore foreign wages, and therefore a boom in Guangdong, China; Seoul, South Korea; Yokohama, Japan; and even Munich — not Gary, Indiana; Fontana, California; and the other badlands of America’s industrial decline. Our response? Yet more stimulus, leading to an ever-increasing overhang of debt, both foreign and domestic, the cost of whose servicing then exerts its own drag on recovery.

The American economy has, in fact, entirely lost the ability to create jobs in tradable sectors. This cheery fact comes straight from the Commerce Department. All our net new jobs are in nontradeable services: a few heart surgeons and a legion of bus boys and security guards, most of them without health insurance or retirement benefits. These are dead-end jobs, and our economy as a whole is also being similarly squeezed into dead-end industries. The green jobs of the future? Gone to places like China where governments bid sweeter subsidies than Massachusetts can afford. Nanotechnology? Perhaps the first major technology in a century where America is not the leading innovator. Foreign subsidies are illegal under WTO rules, but no matter: who’s going to enforce them when corporate America is happily lapping at their very trough?

All the complaints just mentioned are familiar to the public, but they fly in the face of a sanctified myth that the superiority of free trade is a known truth of social science. Supposedly, it was proved long ago that protectionism is just a racket for the benefit of special interests at the expense of consumers.

Never mind that every developed nation, from England to South Korea, and including the United States, became a developed nation by means of this policy. That little piece of economic history is airbrushed out of the picture in favor of the Cold War myth of the absolute superiority of perfectly free markets. America never embraced this myth on its merits, merely as a tactical device to prop up the non-communist economies of the world and make them dependent upon us.

The cycle repeats: China today is reenacting this 400-year-old mercantilist playbook, which was born among the city-states of Renaissance Italy and never quite forgotten.

Economic theory will be sorted out eventually. Thanks to the work of a small, brave group of dissident economists — scholars like Ralph Gomory, William Baumol, Erik Reinert, and Ha-Joon Chang — the credibility of free trade as a theoretical doctrine is crumbling, and the discipline will eventually change its mind. But it will almost certainly be a lagging indicator, ready to vindicate policy forged in crisis well after the dust has settled. Academia is a superb rationalizer, and will doubtless find a way to avoid embarrassing questions about its own past positions when it teaches undergraduates twenty years from now that free trade is a delusion and a mistake.

What’s wrong with free trade? A whole host of problems, many of them long known to economists but assumed in recent decades to be unimportant.

The technical plot thickens here fast, but we can begin by noting that any serious discussion of free trade must confront David Ricardo’s celebrated 1817 theory of comparative advantage, whose tale of English cloth and Portuguese wine is familiar to generations of economics students. According to a myth accepted by both laypeople and far too many professional economists, this theory proves that free trade is best, always and everywhere, regardless of whether a nation’s trading partners reciprocate.

Unfortunately for free traders, this theory is riddled with dubious assumptions, some of which even Ricardo acknowledged. If they held true, the hypothesis would hold water. But because they often don’t, it is largely inapplicable in the real world. Here’s why:

Ricardo’s first dubious assumption is that trade is sustainable. But when a nation imports so much that it runs a trade deficit, this means it is either selling assets to foreign nations or going into debt to them. These processes, while elastic, aren’t infinitely so. This is precisely the situation the United States is in today: not only does it risk an eventual crash, but in the meantime, every dollar of assets it sells and every dollar of debt it assumes reduces the nation’s net worth.

Ricardo’s second dubious assumption is that the productive assets used to generate goods and services can easily be shifted from declining to rising industries. But laid-off autoworkers and abandoned automobile plants don’t generally transition easily to making helicopters. Assistance payments can blunt the pain, but these costs must be counted against the purported benefits of free trade, and they make free trade an enlarger of big government.

The third dubious assumption is that free trade doesn’t worsen income inequality. But, in reality, it squeezes the wages of ordinary Americans because it expands the world’s effective supply of labor, which can move from rice paddy to factory overnight, faster than its supply of capital, which takes decades to accumulate at prevailing savings rates. As a result, free trade strengthens the bargaining position of capital relative to labor. And there is no guarantee that ordinary people’s gains from cheaper imports will outweigh their losses from lowered wages.

The fourth dubious assumption is that capital isn’t internationally mobile. If it can’t move between nations, then free trade will (if the other assumptions hold true) steer it to the most productive use in our own economy. But if capital can move between nations, then free trade may reveal that it can be used better somewhere else. This will benefit the nation that the capital migrates to, and the world economy as a whole, but it won’t always benefit us.

The fifth dubious assumption is that free trade won’t turn benign trading partners into dangerous trading rivals. But free trade often does do this, as we see today in China, whose growth is massively dependent upon exports. This is especially likely when trading partners practice mercantilism, the 400-year-old strategy of deliberately gaming the world trading system by methods like currency manipulation and hidden tariffs.

The sixth dubious assumption is that short-term efficiency leads to long-term growth. But such growth has more to do with creative destruction, innovation, and capital accumulation than it does with short-term efficiency. All developed nations, including the United States, industrialized by means of protectionist policies that were inefficient in the short run.

What is the implication of all these loopholes in Ricardo’s theory? That trade is good for America, but free trade, which is not the same thing at all, is a very dicey proposition.

Beyond the holes in Ricardo, there is an entire new way of looking at trade growing up around the theoretical insights of Ralph Gomory and William Baumol of New York University. The details are technical, but the upshot is they have managed to bridge the gap between the Pollyannaish “international trade is always win-win” Ricardian view and the overly pessimistic “international trade is war” view. The former view is naive; the latter ignores the fact that economics precisely isn’t war because it is a positive-sum game in which goods are produced, not just divided, making mutual gains possible.

So at long last, someone has given us a theoretical framework that can accommodate economic reality as we actually experience it, not just lecture us on what “must” happen as Ricardianism does. It’s both a dog-eat-dog and a scratch-my-back-and-I’ll-scratch-yours world. Economics has finally given common sense permission to be true. Ironically, their sophisticated mathematical models are actually closer to the thinking of the man on the street than those they replaced.

There is an appropriate policy response. For starters, the United States should apply compensatory tariffs against imports subsidized by currency manipulation, an idea that originated with Kevin Kearns of the U.S. Business and Industry Council and was passed by the House of Representatives in the previous Congress. Also essential is a border tax to counter foreign export rebates implemented by means of foreign value-added taxes.

Perhaps even more important than the pure economics of free trade is its political economy (an older and more accurate term). For the fundamental reality of free trade is that it relieves corporate America from any substantial economic tie to the economic well-being of ordinary Americans. If corporate America can produce its products anywhere, and sell them anywhere, then it has no incentive to care about the capacity of Americans to produce or consume. Conversely, if it is tied to making a profit by selling goods made by Americans to Americans, then it has a natural incentive to care about American productivity and consumption.

Productivity and consumption are prosperity. The rest is details.

Right now, America is confronting any number of long- and short-term economic problems with one hand tied behind its back: corporate America is, increasingly, quietly indifferent to America’s economic success. This must change. While any proposals to end the K Street dictatorship in America’s public life are welcome, the reality is that mechanical reforms are less likely to touch on true fundamentals than realigning the economic incentives they reflect.

This is not a utopian project. In fact, it has already been accomplished, during the long 1790-1945 era of American protectionism. America wandered away from Founding Father Alexander Hamilton’s vision of a relatively self-contained American economy in order to win the Cold War. We threw our markets open to the world as a bribe not to go communist. If we fail to return to a policy of strategic, not unconditional, economic openness, we may lose the next Cold War — to a Confucian authoritarianism no less opposed to the idea of a free society than Marxism, and considerably more efficient.

The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Press Advisory: Wednesday’s Trade Deficit Report

Tuesday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $47.7 billion in March, up from $45.8 billion in February.

This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.

Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years.

Jobs Creation

The economy added 244,000 jobs in April; however, 360,000 jobs must be added per month to bring unemployment down to 6 percent over the next 36 months. With federal and state governments trimming civil servants, private sector jobs growth must exceed 360,000 per month to accomplish this goal.

Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Simply, policies regarding energy and trade with China are not creating conditions for 5 percent GDP growth that is needed and easily could be achieved to bring unemployment down to acceptable levels.

In April, the private sector has added 268,000 jobs per month, but many were in government subsidized health care and social services. Netting those out, core private sector jobs have increased only 229,000 in April—that comes to 73 non-government subsidized jobs per county for more than 5000 job seekers per county.

Early in a recovery, temporary jobs appear first, but 22 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.

Economic Growth

Since the recovery began in mid 2009, GDP growth has averaged 2.8 percent, disappointing Administration economists who have consistently assumed 4 percent growth in budget projections and forecasts for the job creating effects of stimulus spending.

Consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures in U.S. markets have offset those positive trends.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking additional business in China.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

The following blog post by Travis McArthur appeared on Eyes on Trade, Public Citizen’s blog on globalization and trade here.

Earlier this week, the USDA released a report attempting to estimate the effects of the Korea, Colombia, and Panama FTAs upon U.S. agricultural trade. It also examined possible effects of the ASEAN-China and ASEAN-Australia-New Zealand FTAs upon the U.S.

Unfortunately, the USDA estimated the effects through a computable general equilibrium (CGE) model, which has a shoddy track record, to say the least. A 1999 U.S. International Trade Commission (USITC) study on the likely effects of China’s tariff offer for WTO accession used a CGE model to estimate that the U.S. trade deficit with China would increase by only $1 billion dollars due to China’s accession. In reality, the trade deficit with China skyrocketed by $167 billion between 2001 and 2008.

Similar studies on NAFTA were also way off the mark. An economist at the Federal Reserve concluded that a CGE-based study of NAFTA underestimated NAFTA’s impact upon U.S. imports by ten times the actual effect of NAFTA. He concluded his study with a recommendation: “If a modeling approach is not capable of reproducing what has happened, we should discard it.”

Not accounting for currency manipulation is a chief problem of CGE models, as Rob Scott at the Economic Policy Institute has demonstrated. The USDA’s report even acknowledges the devastating effect currency devaluation can have upon U.S. agricultural exports:

In 1997, U.S. apple exports to Southeast Asia peaked at 150,000 tons, just as the Asian financial crisis struck. The crisis led to sharp devaluations of Southeast Asian currencies that raised the prices of imported apples and income losses that further discouraged apple buying, triggering a dramatic decrease in U.S. apple exports to the region.

As we discuss in a factsheet, Korea is only one of three countries to have ever been placed on the Treasury Department’s list of currency manipulators, having repeatedly manipulated its currency in the past. The Korea FTA contains no prohibition against currency manipulation, so the Korean government could effectively negate the tariff cuts mandated under the FTA through currency manipulation. Despite the long history of Korea manipulating its currency, the USDA’s estimates do not attempt to account for the very real possibility of another devaluation, even though they could have done so through estimating alternative scenarios.

Given that fair trade opponents have touted beef as a major winner in the Korea FTA, a close examination of the USDA’s beef assumptions is warranted. The USDA assumes a very optimistic scenario for beef like the 2007 USITC study, although it is slightly less optimistic. (Who knows? Maybe the next study will have realistic expectations.) The 2007 USITC study assumed that U.S. beef exports would be unimpeded by current Korean regulations prohibiting the import of U.S. beef from cattle older than 30 months and it set the initial beef export level in the model at $1.1 billion, even though actual U.S. beef exports to Korea were tiny at the time the study was conducted. This USDA study assumes that the initial beef export level is $701 million. Actual 2010 U.S. beef exports to Korea amounted to about $350 million, far off the level of these optimistic scenarios. The initial level of exports is one of the primary determinants of the results of the CGE model, and higher initial exports result in greater predicted exports from tariff reductions. With the slightly lower initial beef export assumption, the USDA report projected increased beef exports to Korea of $563 million, compared to the USITC’s projection of $628-1,792 million greater beef exports. Realistic beef export data would result in even lower projected gains.

Finally, even though the report is some fifty pages, the USDA is highly stingy with its presentation of results. It presents the projections on the bilateral changes in trade flows with Korea and Colombia under the FTAs, but not how the FTAs will affect overall U.S. trade with the world. (The projected impact upon overall U.S. trade can be quite different from the bilateral results due to the trade diversion effects of bilateral trade pacts.) The decision to exclude the global results is especially puzzling given that the report focused on the effects of trade diversion in its assessment of the ASEAN-China and ASEAN-Australia-New Zealand FTAs.

It is likely that leaving the global results out of the report conceals the fact that the overall trade balance in several agricultural sectors is expected to worsen under the FTAs. The 2007 USITC report on the Korea FTA, which used the same model as the USDA study, did report both bilateral and global changes and found that several sectors expected to have improved bilateral trade balances would have worsening balances with the world, such as wheat, oilseeds, and miscellaneous crops. The global trade balance is what matters since it indicates the total effect of goods exiting and entering the U.S. upon farmers’ livelihoods. Thus, this USDA report does not contain sufficient information on projected imports and exports to evaluate the effect of the FTAs on U.S. farmers, even in terms of its own flawed CGE model.

In sum, at first glance this report projects significant gains for agriculture from the Korea, Colombia, and Panama FTAs, but a close examination reveals that methodological flaws render the report unreliable. Instead of these predicted gains, we could see a repeat of the NAFTA experience in which U.S. exports of beef and pork to Mexico in the first three years of NAFTA were 13 and 20 percent lower, respectively, than beef and pork exports in the three years before NAFTA was enacted, partly due to currency devaluation.

The usual suspects are racing to debunk Donald Trump’s foray into the most serious protectionism—a 25% tariff on China—proposed by a major presidential candidate since Patrick Buchanan ran in 1992.

They know this is big.  Our long-delayed national trade debate has begun.

I have expressed reservations about getting obsessed with just China before.  But broadly speaking, Trump is right on the money here. Nothing less than an actual tariff or the equivalent is ever going to get Beijing to stop gaming the international trading system to America’s disadvantage.

This matters, big-time.  Because until we sort out America’s trade mess—which must start by zeroing out, or close to it, our $600 billion-a-year trade deficit—our economy will never truly be healthy again.

Jobs are the aspect of this everyone understands.  But what a lot of people miss is that the current budget fight, and the angst over our mounting national debt, are also intimately connected to trade.

So Trump is onto something even bigger than people realize.

The budget fight ultimately comes down to the fact that we don’t have an economy large enough to generate tax revenue commensurate with the spending we have voted for. But why isn’t our economy big enough? Start with the fact that, as economist William Bahr has estimated, America’s accumulated trade deficits since 1991 alone have caused our economy to be 13 percent smaller than it otherwise would be.  The trade deficit costs us about one percent in GDP growth every year, and that compounds over time.

As for our national debt, or, more properly, our bloating public and private indebtedness? As I explained at length in another article, borrowing money (and selling off existing wealth, which has the same net effect) is a mathematically inevitable result of running trade deficits. The only way this can not happen is if a) the aforementioned $600 billion isn’t real money, or b) America is trading with Santa’s elves.

So, Mr. Trump… How do we rebalance America’s trade, starting with China?

Forget about doing it by playing nice. China will only give up one-way free trade (free for America, protectionist for them) when they are coerced into doing so. They are making far too much money to ever give up this sweet racket voluntarily.

We are constantly warned that imposing a tariff on China would trigger a trade war. But the curious thing about the concept of trade war is that, unlike actual shooting war, it has no actual historical precedent. In fact, the reality is that there has never been a significant trade war.

Anyone who knows otherwise, please name one.

The usual example free traders give is America’s Smoot-Hawley tariff of 1930, which supposedly either caused the Great Depression or caused it to spread around the world. But this canard does not survive serious examination, and has actually been denied by almost every economist who has actually researched the question in depth—including many free traders and ranging from Paul Krugman on the left to Milton Friedman on the right. (I debunked this myth at length in this article.)

There is, in fact, a basic unresolved paradox at the bottom of the very concept of trade war. If, as free traders insist, free trade is beneficial whether or not one’s trading partners reciprocate, then why would any rational nation start one, no matter how provoked? Wouldn’t they just keep lapping up the benefits of one-way free trade, if it’s so good for them?

Furthermore, if the moneymen in Beijing, Tokyo, Berlin, and the other nations currently running trade surpluses against the U.S. start to ponder exaggerated retaliation against the U.S., they will soon discover the advantage is with us, not them. Because they are the ones with the trade surpluses to lose, not us.  What exactly does the U.S. have to lose in a trade war? The only way a deficit nation can “lose” a trade war is by having its trade balance get even worse. Given that the U.S. trade balance is already outlandish, it is hard to see how this could happen.

Supposedly, China could suddenly stop buying our Treasury Debt.

Indeed they could, but this would immediately reduce the value of the $1.15 trillion or so they already hold.  Furthermore, this would depress the value of the dollar—exactly the opposite of their currency manipulation strategy.

Then there is the awkward problem of what China would do with all the money it would get by selling off its dollars. There just aren’t that many good alternatives for parking that much money. Japan doesn’t want its currency used as an international reserve currency, and the Euro has huge problems. Assets like gold and minor currencies are volatile or in limited supply. Others, like real estate or corporate stocks, are still denominated in those pesky dollars and euros.

We are still a nuclear power, so at the end of the day, China cannot force us to do anything that we don’t want to. We could—a grossly irresponsible but not impossible hypothetical—repudiate our debt to them (or stop paying the interest) as the ultimate countermove.

More plausibly, we might simply restore the tax on the interest on foreign-held bonds that was repealed in 1984 thanks to Treasury Secretary Donald Regan.  We have lots of little cards like that up our sleeve.

So an understanding will, most likely, be reached.  A deal (one of Mr. Trump’s favorite words!) will be struck. I think Mr. Trump understands this better than anyone else.  That’s one of the things I like about him.

The reality is that the United States is already in a trade war with China. Kowtowing to China today is economic appeasement, with the same result as political appeasement in the 1930s: a few more years of relative quiet with a bigger explosion at the end.

At some point, America’s ability to run gigantic deficits must end, due to a prolonged slide or sudden crash in the value of the dollar.  The longer we wait, the greater the likelihood that it will come as a sudden and destabilizing shock, rather than a managed, more gradual adjustment.

This issue is bigger than China alone. How America deals with China will set the precedent, and establish or destroy America’s credibility, for dealing with a long list of other nations.

Believe me, they’re watching Trump now in Tokyo, Berlin, and Brussels.

The following was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.

Thursday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $41.0 billion in January, up from $40.6 billion in December and $27 billion in mid 2009, when the recovery began.

This rising deficit subtracts from demand for U.S. goods and services, just as stimulus spending and additional temporary tax cuts add to it. Consequently, a rising deficit slows economic recovery and jobs creation, and the Obama Administration and Republican leadership in Congress have offered little to address it.

Rising oil prices and imports from China are driving the trade deficit, and these are major barriers to creating enough jobs to pull unemployment down to 6 percent over the next several years.

Jobs Creation

The economy added 192,000 jobs in February, and that was encouraging, after it gained only 63,000 in January; however, that is hardly enough. The economy must add 360,000 jobs per month over the next 36 months to bring unemployment down to 6 percent.

Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase imports and do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Simply, current policies are not creating conditions for 5 percent GDP growth that could be achieved to bring unemployment down to acceptable levels.

Over the last three months, the private sector has added 152,000 jobs per month, but many of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs have increased only 110,000 per month-that comes to 25 permanent, non-government subsidized jobs per county for more than 5000 job seekers per county.

Early in a recovery, temporary jobs appear first, but 20 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.

Economic Growth

Commerce Department preliminary estimates indicate GDP growth was only 2.8 percent, significantly disappointing Wall Street economists.

Consumer spending, business technology and auto sales all added strongly to demand and growth, and exports actually outpaced imports for the first time in a year. Pessimism, inspired by rising gasoline prices, health care reforms that drive up insurance costs, and import competition, caused businesses to run down inventories rather than add new capacity and employees.

Fourth quarter exports got a boost from a weaker dollar against the euro earlier in 2010-the export effect of a weaker dollar occurs with a lag of several months. In 2011, this situation is likely to reverse, owing in particular to Europe’s continuing sovereign debt woes and instability in North Africa and the Middle East. The trade deficit will grow, as oil import costs and consumer goods from China overwhelm further progress in U.S. export growth.

Policies limiting development of conventional oil and gas are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, limits on conventional energy development and excessive optimism about alternative energy technologies are making the United States even more dependent on imported oil and more indebted to China and other overseas creditors to pay for it.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking additional business in China.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports-about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

The following article appeared in the Inside US-China Trade publication on March 9, 2011.

The Coalition for a Prosperous America, which represents import-sensitive U.S. manufacturers, agriculture and labor, is hosting a fly-in of its members this week to press members of Congress to sponsor the House currency bill introduced last month by Ways and Means Ranking Member Sander Levin (D-MI), among other goals.

According to CPA Chief Executive Officer Michael Stumo, coalition members on March 9-10 will visit “about 25 percent” of House and Senate offices.

“Our message is that we have to produce more of what we consume, we have to neutralize the State-managed capitalism that we are being forced to unfairly compete with, and we have to balance trade in order to economically recover, because the trade deficit is a drag on GDP growth, wealth creation and job creation,” Stumo said in a March 8 interview.

U.S. trade policy “needs to acknowledge and neutralize state-managed capitalism” because the current “free trade regime does not match well and is unsuccessful” in competing against it, he added. As such, the coalition message to House and Senate members will be that “one of the first things we need to do is neutralize currency manipulation” being
engaged in by China, Korea, Japan and Singapore, among others.

Other CPA sources said new House members will be particularly targeted in the outreach. “We think the new Republicans, with their pro-America stance, should be receptive to a message of a national trade and economic strategy that’s based on being able to grow net exports,” Stumo said.

CPA will make the case to House members to support Levin’s H.R. 639, the Currency Reform for Fair Trade Act,which now has 107 House sponsors from both sides of the aisle. It is basically the same bill that encourages the Commerce Dept. to offset undervalued currencies as countervailable subsidies in trade remedy cases.

House Ways and Means Committee Chairman Dave Camp (R-MI) has said that China currency legislation is not a priority for him in this Congress, so supporters are focused on increasing the number of cosponsors of Levin’s bill to such an extent that it becomes politically difficult to avoid a vote.

In the Senate, Democratic leaders have made legislation targeting China’s undervalued currency part of their 2011 agenda of economic initiatives meant to generate jobs and keep the U.S. competitive. But Finance Committee Chairman Max Baucus (D-MT) seems to favor focusing on a range of Chinese trade barriers instead of largely on currency manipulation, according to informed sources.

He is expected to hold a number of hearings on China trade problems such as indigenous innovation, intellectual property rights violations and other market access problems, they said.

Another CPA source said members would be flying in from eight to ten states, including New York, Pennsylvania, Ohio, Illinois, Michigan and Colorado. But Stumo said members would represent an even broader array of states, “from coast to coast and North to South.”
Among those on the Coalition’s board are manufacturing co-chair Brian O’Shaughnessy of New York-based Revere Copper Products; agriculture co-chair Joe Logan of the Ohio Farmers Union; and labor co-chair Bob Baugh of the AFLCIO Industrial Union Council. Baugh and fellow board member Charles Bloom are also part of the leadership of the Fair
Currency Coalition, whose principal goal is passage of currency legislation.

CPA advisory board members include economist and author Pat Choate; ex-IBM executive Ralph Gomory, now president of the Sloan Foundation; and U.S.-China Economic and Security Review Commissioner Patrick Mulloy, among others.

Separately, U.S. textile companies are also visiting Washington this week and will hold a lobby day on the Hill on March 9 — but their focus will be on opposing passage of the U.S. trade pact with Korea. While visiting about 50 House offices, said an industry source, one point they will stress is that the Korea pact as negotiated will facilitate the transhipment
of Chinese-origin textile and apparel into the U.S. via Korea.

The following was written by Ian Fletcher, Senior Economist of the Coalition for a Prosperous America. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

I wrote in a previous article about why America’s manufacturing sector, despite record output, is actually in very deep trouble: record output doesn’t prove the sector healthy when we are running a huge trade deficit in manufactured goods, i.e. consuming more goods than we produce and plugging the gap with asset sales and debt.

But this analysis of the problem only touches the quantitative surface of our ongoing industrial decline. Real industries are not abstract aggregates; they are complex ecosystems of suppliers and supply chains, skills and customer relationships, long-term investments and returns. Deindustrialization is thus a more complex process than is usually realized. It is not just layoffs and crumbling buildings; industries sicken and die in complicated ways.

To take just one example, when American producers are pushed out of foreign markets by protectionism abroad and out of domestic markets by the export subsidies of foreign nations, it is not just immediate profits that are lost. Declining sales undermine their scale economies, driving up their costs and making them even less competitive. Less profit means less money to plow into future technology development. Less access to sophisticated foreign markets means less exposure to sophisticated foreign technology and diverse foreign buyer needs.

When an industry shrinks, it ceases to support the complex web of skills, many of them outside the industry itself, upon which it depends. These skills often take years to master, so they only survive if the industry (and its supporting industries, several tiers deep into the supply chain) remain in continuous operation. The same goes for specialized suppliers. Thus, for example, in the words of the Financial Times’s James Kynge:

The more Boeing outsourced, the quicker the machine-tool companies that supplied it went bust, providing opportunities for Chinese competitors to buy the technology they needed, better to supply companies like Boeing.

Similarly, America starts being invisibly shut out of future industries which struggling or dying industries would have spawned. For example, in the words of tech CEO Richard Elkus:

Just as the loss of the VCR wiped out America’s ability to participate in the design and manufacture of broadcast video-recording equipment, the loss of the design and manufacturing of consumer electronic cameras in the United States virtually guaranteed the demise of its professional camera market… Thus, as the United States lost its position in consumer electronics, it began to lose its competitive base in commercial electronics as well. The losses in these related infrastructures would begin to negatively affect other down-stream industries, not the least of which was the automobile… Like an ecosystem, a competitive economy is a holistic entity, far greater than the sum of its parts. (Emphasis added.)

One important example of this is the decline of the once-supreme American semiconductor industry, visible in declining plant investment relative to the rest of the world. In 2009, the whole of North America received only 21% of the world’s investment in semiconductor capital equipment, compared to 64% going to China, Japan, South Korea, and Taiwan. The U.S. now has virtually no position in photolithographic steppers, the ultra-expensive machines, among the most sophisticated technological devices in existence, that “print” the microscopic circuits of computer chips on silicon wafers. America’s lack of a position in steppers means that close collaboration between the makers of these machines and the companies that use them is no longer easy in the U.S. This collaboration traditionally drove both the chip and the stepper industries to new heights of performance. American companies had 90% of the world market in 1980, but have less than 10% today.

The decay of the related printed circuit board (PCB) industry tells a similar tale. An extended 2008 excerpt from Manufacturing & Technology News is worth reading on this score:

The state of this industry has gone further downhill from what seems to be eons ago in 2005. The bare printed circuit industry is extremely sick in North America. Many equipment manufacturers have disappeared or are a shallow shell of their former selves. Many have opted to follow their customers to Asia, building machines there. Many raw material vendors have also gone.

What is basically left in the United States are very fragile manufacturers, weak in capital, struggling to supply [Original Equipment Manufacturers] at prices that do not contribute to profit. The majority of the remaining manufacturers should be called ‘shops.’ They are owner operated and employ themselves. They are small. They barely survive. They cannot invest. Most offer only small lot, quick-turn delivery. There is very little R&D, if any at all. They can’t afford equipment. They are stale. The larger companies simply get into deeper debt loads. The profits aren’t there to reinvest. Talent is no longer attracted to a dying industry and the remaining manufacturers have cut all incentives.

PCB manufacturers need raw materials with which to produce their wares. There is hardly a copper clad lamination industry. Drill bits are coming from offshore. Imaging materials, specialty chemicals, metal finishing chemistry, film and capital equipment have disappeared from the United States. Saving a PCB shop isn’t saving anything if its raw materials must come from offshore. As the mass exodus of PCB manufacturers heads east, so is their supply chain.

All over America, other industries are quietly falling apart in similar ways.

Losing positions in key technologies means that whatever brilliant innovations Americans may dream up in small start-up companies in the future, large-scale commercialization of those innovations will increasingly take place abroad. A similar fate befell Great Britain, which invented such staples of the postwar era as radar, the jet passenger plane, and the CAT scanner, only to see huge industries based on each end up in the U.S. For example, the U.S. invented photovoltaic cells, and was number one in their production as recently as 1998, but has now dropped to fifth behind Japan, China, Germany, and Taiwan. Of the world’s 10 largest wind turbine makers, only one (General Electric) is American. Over time, the industries of the future inexorably become the industries of the present, so this is a formula for automatic economic decline. Case in point: nanotechnology is probably the first major new industry in a century in which the U.S. is not the undisputed world leader.

America’s increasingly patchy technological base also renders it vulnerable to foreign suppliers of “key” or “chokepoint” technologies. These, though obscure and of small dollar value in themselves, are technologies without which major other technologies cannot function. For example, China recently restricted export of the rare-earth minerals required to make advanced magnets for everything from headphones to electric cars. Another form this problem takes is the refusal of oligopoly suppliers to sell their best technology to American companies as quickly as they make it available to their own corporate partners. It doesn’t take much imagination to see how foreign industrial policy could turn this into a potent competitive weapon against American industry. For another example, Japan now supplies over 70 percent of the world’s nickel-metal hydride batteries and 60-70 percent of the world’s lithium-ion batteries. This will give Japan a key advantage in electric cars.

The Obama administration shows no awareness of any of this, despite scratching a hole in its head over why job creation has stalled. (Hint: it hasn’t stalled in the nations, from China to Germany, running trade surpluses with us in manufactured goods.) It is not yet too late to reverse these dynamics, but we are definitely running out of time. So the sooner we start questioning the sacred myth of free trade, which is largely responsible for this mess, the better.

The following article was written by Ian Fletcher, Research Fellow at the U.S. Business and Industry Council and author of  “Free Trade Doesn’t Work: What Should Replace It and Why”. It appeared in the Huffington Post here.

I noted in a previous post how the level of America’s industrial output cannot possibly be healthy if it causes us to run a trade deficit with other nations. So yes, we really do have a sickly manufacturing sector on our hands.

This has provoked a flurry of complaints about how trade deficits don’t really matter.

This is a familiar line, especially from libertarian economists like Dan Griswold of the Cato Institute, who referred to the trade deficit as an “accounting abstraction” in his recent book defending free trade.

For a start, this is a silly way to characterize anything with a dollar sign in front of it, simply because all numbers in economics are, in some sense, accounting abstractions. Numbers are an abstract measure of things in the real world, including wealth, and the trade deficit is no different. By that standard, being a millionaire is an “accounting abstraction.” So is being insolvent. A number on a ledger is not a loaf of bread, a car, or a bar of gold.

More fundamentally, the idea that the deficit is just an abstraction is identical to the seductive idea that trade deficits somehow don’t represent real money. We measure the deficit in dollars, but somehow these aren’t “real” dollars, not dollars that anyone ever had to earn, or pay back, or could spend. They’re a kind of magic money, as unreal as the values of bubble-inflated securities before the financial crash. They’re postmodern, unreal, virtual, free.

So let’s get back to first principles and carefully review why America’s trade deficit represents real money and is therefore a real problem.

To understand trade deficits, just think through the logic below, step-by-step:

Step 1) Nations engage in trade. So Americans sell people in other nations goods and buy goods in return. (“Goods” in this context means not just physical objects but also services.)

Step 2) One cannot get goods for free. So when Americans buy goods from foreigners, we have to give them something in return.

Step 3) There are only three things we can give in return.

3a) Goods we produce today.
3b) Goods we produced yesterday.
3c) Goods we will produce tomorrow.

This list is exhaustive. If a fourth alternative exists, then we must be trading with Santa Claus, because we are getting goods for nothing. Here’s what 3a) -3c) above mean concretely:

3a) is when we sell foreigners jet airplanes.
3b) is when we sell foreigners American office buildings.
3c) is when we go into debt to foreigners.

3b) and 3c) happen when America runs a trade deficit. Because we are not covering the value of our imports with 3a) the value of our exports, we must make up the difference by either 3b) selling assets or 3c) assuming debt.

If either is happening, America is either gradually being sold off to foreigners or gradually sinking into debt to them. Xenophobia is not necessary for this to be a bad thing, only bookkeeping: Americans are poorer simply because we own less and owe more. Our net worth is lower.

This situation is also unsustainable. We have only so many existing assets we can sell off, and we can afford to service only so much debt. By contrast, we can produce goods indefinitely. So deficit trade, if it goes on year after year, must eventually be curtailed — which will mean reducing our consumption.

Even worse, deficit trade also destroys jobs right now. In 3a), when we export jets, this means we must employ people to produce them, and we can afford to because selling the jets brings in money to pay their salaries. But in 3b), those office buildings have already been built (possibly decades ago), so no jobs today are created by selling them. And in 3c), no jobs are created today because the goods are promised for the future. While jobs will be created then to produce these goods, the wages of these future jobs will be paid by us, not by foreigners. Because the foreigners already gave us their goods, back when we bought from them on credit, they won’t owe us anything later. So we will be required, in effect, to work without being paid.

The above facts are all precisely what we should expect, simply on the basis of common sense, as there is no something-for-nothing in this world. And that is what the idea that trade deficits don’t matter ultimately amounts to. There do exist, however, ways of shifting consumption forwards and backwards in time, which can certainly create the illusion of something for nothing for a while. This illusion is dangerous precisely because the complexities of modern finance, and the profitability of playing along with the illusion while it lasts, both tend to disguise the reality.

Most of these complexities amount to ways of claiming that the wonders of modern finance enable us either to borrow or sell assets indefinitely. But as long as one bears the above reasoning firmly in mind, it should be obvious why none of these schemes can possibly work, even without unraveling their details. These financial fairy tales usually boil down to the fact that a financial bubble, by inflating asset prices seemingly without limit, can for a period of time make it seem as if a nation has an infinite supply of assets appearing magically out of thin air. (Or a finite supply of assets whose value keeps going up and up.) These assets can then be sold to foreigners. And because debt can be secured against these assets, debt works the same way.

But, of course, as America learned in the recent financial crisis, you can’t cheat reality forever. There is no free lunch (one of the few points on which I agree with Milton Friedman), and yes, trade deficits are real money. And I’m happy to bet 1,000 units of accounting abstraction with anyone who believes otherwise.