The Trade Deficit Threatens Our Recovery

Thursday, the Commerce Department will report July international trade in goods and services. The trade deficit, which is the amount imports exceed exports, is expected to rise to $28.0 billion from $27.0 billion in May.

The trade deficit was a principal cause of the Great Recession, threatens to stifle recovery and push unemployment above 10 percent through 2011.

At 2.3 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama's stimulus package adds. Moreover, Obama's stimulus is temporary, whereas the trade deficit is permanent.

Subsidized manufactures from China and petroleum account for nearly the entire deficit, and both will rise as consumer spending and oil prices rebound later in 2009.

Money spent on Chinese coffee makers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.

From 2003 to 2007, Americans borrowed to consume more than they produced but when mortgages failed, the shortfall in demand for domestic products drove up unemployment, choked consumer spending and thrust the economy into recession. Now huge stimulus spending is required to resuscitate business activity.

President Obama ignores the trade deficit; consequently, his policies to fight the recession will deliver only a moderate recovery in 2010. Imports of oil and Chinese consumer goods will rise as the economy recovers. As stimulus spending runs out, the escalating trade deficit will push the economy down again and threatens the feared "W" shaped recovery.

So far, the Obama Administration has not challenged Beijing's most protectionist policies-large government purchases of U.S. dollars that drive down the exchange rate for the yuan, subsidize Chinese exports, and artificially elevate Chinese savings and suppress U.S. savings. The China-U.S. savings imbalance is not entirely a natural phenomenon rooted in consumer behavior.

In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Manufacturers are particularly hard hit by subsidized imports. Through recession and recovery, 5.5 million manufacturing jobs have been lost since 2000. Following the pattern of past economic expansions, the manufacturing sector should have regained about 2.7 million of those jobs, especially given the very strong productivity growth accomplished in recent years.

The trade deficit is the single most important reason why the private sector has failed to add a single job since 1999.

Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10,000 per worker.