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 Richmans' Trade and Taxes Blog

Obama Touts his Failing Trade Policy
Howard Richman, 7/7/2010

President Bush, whose trade policies caused a decade of American stock market decline, liked to tout them while standing outside a Boeing (BA) aircraft factory, Boeing being one of America's premier exporters. On July 7, President Obama, having continued Bush's trade policies, brought Boeing CEO Jim McNerny Jr. to the White House to flank him while he discussed a progress report claiming success in enhancing U.S. exports. The report noted:

The Council of Economic Advisers’ analysis shows that over the past nine months, the increase in US exports contributed more than one percentage point to the US growth rate. During our recovery, exports have contributed as much as domestic consumption to our growth.

It cited a couple of examples of recent success at promoting U.S. exports:

• U.S. pork exports. In March the Chinese government agreed to stop preventing its people from buying U.S. pork products. But the report neglected to mention that in February the Chinese government had placed new tariffs of up to 105% on U.S. chicken products.
• Boeing aircraft exports. Last week, the WTO ruled against European subsidies to Airbus, which should make it easier for Boeing to compete. But the report failed to mention that the Chinese government has been pouring billions of yuan into a new Boeing competitor, Commercial Aircraft Corporation of China.

The chart below shows that both imports and exports have been growing since the depths of the recession in May 2009:

Indeed, as the Council of Economic Advisors reports, the growth in exports during the 9 months from July 2009 to April 2010 has been impressive:

• In July 2009, U.S. exports were $130 billion.
• In April 2010, U.S. exports were $149 billion.

But, just as exports add to U.S. growth, imports subtract. From July 2009 to April 2010, the growth in U.S. imports has been even greater:

• In July 2009, U.S. imports were $163 billion.
• In April 2010, U.S. imports were $189 billion.

Thus if, as Obama's Council of Economic Advisors claim, the $19 billion growth in monthly U.S. exports added 1% to the U.S. growth rate, we can calculate that the $26 billion growth in monthly U.S. imports subtracted 1.4% from the U.S. growth rate. We can also calculate that balancing trade would add 2.1% to the U.S. growth rate - and that doesn't count the sustained growth that would occur from the added business investment if manufacturers thought that the U.S. government was serious about balancing trade.

American trade debate has been stuck in a tug of war between free traders who promote exports and protectionists who promote tariffs. Free traders claim that protectionists hurt exporters. Protectionists claim that free traders hurt domestic producers. Both ignore the third strategy -- balancing trade -- which helps both exporters and domestic producers.

Instead, of issuing a report designed to persuade the American people that failing trade policies are working, President Obama should be giving a speech such as the one my father, son and I recommended in our 2008 book, Trading Away Our Future:

We would announce to all the countries that have been accumulating dollar reserves in order to run a trade deficit with the United States, that effective the following year their deficit on goods and services would have to be reduced twenty percent. They may respond to this challenge by planning to increase their imports from us, reduce their exports to us, or some combination of both. Failure to meet this annual goal would result in our imposition of a requirement that all imports from the offending country would require an Import Certificate (IC) purchased from the US Treasury Department or other designated agency of the federal government. (The US Treasury Department has experience in auctioning off its own obligations; much the same process would be involved in auctioning off import certificates.)

Prospective importers from countries that fail to reduce their deficits in timely fashion would have to apply for an IC and follow the Treasury’s instructions. Over a period of five years, the US Treasury Department would steadily reduce the amount of available import certificates so that the targeted country’s trade exports to the United States would be no higher than 5% above their imports from the United States. The Treasury would publish the amount of ICs issued and available and the date of each auction. Each certificate would have to be utilized within a specified period. (pp. 95-96)

Such a speech would probably get our mercantilist trading partners to take down their many, many barriers to U.S. products without ever requiring imposition of the threatened Import Certificates. Instead of pretending, Obama could adopt a trade policy that would really work.