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Time to limit the free riding in Asia

Friday, October 14, 2011

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Time to limit the free riding in Asia

By Robert Z. Aliber, Professor emeritus, University of Chicago
September 25, 2011
The single most important explanation for the U.S. unemployment rate of 9 to 11 percent is that Americans spend $600 billion more a year for imported goods than foreigners spend on U.S. products. Most U.S. imports are of manufactured goods — autos, electronics, apparel, many of which are or were made in America.
If foreigners were to spend $1 million more a year on U.S. goods, American employers would hire more workers. Each employee in U.S. manufacturing on average produces $80,000 of goods a year. One million divided by 80,000 is 12.5, so a reduction in the annual U.S. trade deficit of $1 million would lead to an increase in domestic employment of 12-plus workers. A $1 billion reduction would mean 12,500 more jobs in American manufacturing and one of $100 billion would lead to 1.25 million more jobs. If the U.S. trade deficit declined to $300 billion, the U.S. unemployment rate would fall by nearly 4 points, putting the country at or close to full employment.The United States has a trade deficit primarily because many countries have manipulated their trade and currency policies to expand employment in manufacturing. China, for one, is extremely protectionist; it consistently exports to the U.S. about five times the amount of goods it imports from us. It also maintains an exceptionally low value for its currency so it can increase its exports and provide employment for the millions that move from the farms and villages to the factories and cities.General Motors builds Buicks in Michigan and China, and though the models are not identical, U.S.-made cars would sell for 20 to 30 percent less in Shanghai than the autos produced there. Because state-owned enterprises in China follow a “buy national” policy, they are reluctant to import if a comparable product is made at home — unless they need several samples to copy the technology.China manipulates the value of the yuan through its purchase of massive amounts of U.S. dollars to reduce the upward pressure on its currency from its very large trade surplus. U.S. officials and various senators and congressmen want China to allow the yuan to appreciate. But they have confused the target, a reduction in the country’s trade surplus, with an instrument, the value of the yuan. The likelihood is low that an appreciation of the yuan by 20 or 30 percent would significantly impact its trade surplus.Countries such as China want and achieve trade surpluses; other countries must have the counterpart trade deficits. The U.S. trade balance passively adjusts to mirror the changes in the combined trade balances of other countries; if their exports increase and they buy U.S. dollars to limit the appreciation of their currencies, their trade surpluses will increase and the U.S. trade deficit will increase by a comparable amount. If as a group these countries achieve surpluses by managing their trade and their currency policies, the United States, by default, will have the counterpart trade deficits — and the associated job losses as cheap foreign imports undercut the prices charged by U.S. firms to cover their costs.
The claim that U.S. goods are not competitive in global markets is nonsense. The U.S. is one of the leading exporters in the world. Europeans, Asians and Latin Americans fly to the United States to shop because the prices in the U.S. department stores are much lower than in their domestic markets.
What should the United States do to rectify the loss of millions of jobs in U.S. manufacturing because of the “beggar thy neighbor” policies of China and other trading partners? The U.S. should induce these countries to reduce their trade surpluses from 3, 4, 5 or even larger percentages of their GDPs to no more than 2 percent. If they are unwilling to do so, the U.S. government should adopt an across-the-board tariff of 10 percent to achieve this target. The tariff should be eliminated when the target is achieved. And the tariff rate may need to be increased if some countries are unwilling to reduce their protectionist policies.

Robert Z. Aliber is an emeritus professor of international economics and finance at the Booth School of the University of Chicago.

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