At a press conference on April 29, President Bush issued a gloomy assessment of the U.S. economy, saying the nation is in for “very difficult times, very difficult.” The next day, the Commerce Department released preliminary statistics for the first quarter of 2008. Real GDP was up at a paltry annual rate of just 0.6 percent for the second quarter in a row, investment in the American economy was down for the eighth quarter in a row, and the trade deficit was worse for the second quarter in a row.

The worsening trade deficit was especially disheartening since most economists had expected that the plunging dollar on world currency markets would improve the U.S. trade deficit by making American goods less expensive abroad and foreign goods more expensive here. Indeed, the trade deficit probably would be in decline if more of America’s trading partners played fair. Unfortunately, they don’t.

To understand the dilemma, consider the situation faced by Tim Sullivan, CEO of Bucyrus International. The Chinese government just slapped a 40 percent tariff on the heavy mining equipment Bucyrus makes in Wisconsin and exports to China. That tariff is only a small part of the strategy used by China to keep expanding their trade deficit with the United States. Coupled with systematic protectionism, the Chinese government has used its yuan to buy more than a trillion dollars in order to “sterilize” them so they wouldn’t be used by Chinese citizens to buy American products. In this way, they bid down the yuan and bid up the dollar to keep Chinese wages low compared to American wages. More and more countries are joining China in this mercantilist strategy of selling to the United States without buying, originally invented by Japan shortly after World War II. The technical name for this strategy is mercantilism, a practice denounced by economists beginning with Adam Smith in 1776.


If it weren’t for these mercantilist policies, American manufacturing companies like Bucyrus International would be opening new ultra-modern factories in the United States in order to sell to the rapidly growing Chinese economy and other rapidly expanding world markets. Instead, American manufacturing companies are laying off employees. The latest Employment Situation Summary from the Bureau of Labor Statistics reports that 46,000 jobs were lost in the U.S. manufacturing sector in April alone. Of these lost jobs, 17,000 were in our motor vehicles and parts sector, partly as a result of China’s 30 percent tariffs on foreign-made vehicles and auto parts. Many of these laid-off manufacturing workers will take more poorly paying jobs in the service sector, causing real U.S. median income to fall further, just as it has been doing since President Bush first took office in 2000.

The Bush administration has abysmally mismanaged U.S. trade policy. We hope that the next administration learns from its mistakes. President Bush’s solution to the worsening U.S. trade deficit with China was (drum roll please) talk. That’s right. His strategy was talk, talk, talk; journalists call it “jawboning.” In December 2006, President Bush sent our government’s top five financial leaders to China to convince the Chinese to mend their ways and allow the yuan to appreciate against the dollar. But, in 2007 our trade deficit with China worsened yet again to $252 billion from $229 billion the previous year. Talking loudly while carrying no stick doesn’t work.

Unfortunately, the current presidential candidates are not proposing anything better:

  • Sen. McCain takes a perverse pride in losing elections, such as the Michigan primary, by telling manufacturing workers that their “jobs aren’t coming back.” If he continues to advocate Bush’s failed trade policies, he will lose Ohio, a “must-win” Republican state in November.
  • Sen. Obama’s principal solution (Bush redux): jawboning by our diplomats. He says, “As president, I’ll use all the diplomatic avenues open to me to insist that China stop manipulating its currency.”
  • Sen. Clinton’s husband did nothing about the worsening trade deficits during his presidency. Although she correctly identifies many of the problems in our trade with China, she does not yet have substantive proposals that would actually improve the trade deficits.

Sens. Obama and Clinton both point to their having added their names as cosponsors to the bipartisan Currency Rate Oversight Reform Act as evidence that they would get tough with China. Although a step in the right direction, this bill does not go far enough. According to the China Currency Coalition, “The processes set forth in the bill are too lengthy and uncertain to meet the urgent need to address the China currency problem in the short term.”

The American people are still waiting for a presidential candidate to propose something that would work. In our book, “Trading Away Our Future,” we suggest that the president announce to all the mercantilist countries that effective immediately their deficit on goods and services will have to be reduced by 20 percent per year. 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 purchased from the U.S. Treasury Department. (This is a variation of a proposal made by Warren Buffett in 2003.) Over a period of five years, the Treasury Department would steadily reduce the amount of available Import Certificates so that the targeted country’s exports to the United States would be no higher than 5 percent above their imports from the United States.

These Import Certificates would be in full compliance with international rules. Article IV of the International Monetary Fund agreement specifically outlaws currency manipulations. Article 12 of the Uruguay Round General Agreement on Tariffs and Trade (GATT) specifically lets countries running a threatening overall trade deficit restrict imports from any country with whom they are running a trade deficit.

This plan would result in an immediate surge of investment in American manufacturing production. Both U.S. and foreign companies would start building new highly-efficient factories in the United States for export to China and other growing world markets. American wages would again head up, as would American median incomes.


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Dr. Raymond Richman is the president of Ideal Taxes Association. He is professor emeritus of public and international affairs at the University of Pittsburgh with a Ph.D. in economics from the University of Chicago. Dr. Howard Richman is executive director of a nonprofit (Pennsylvania Homeschoolers Accreditation Agency) and an Internet economics teacher. Dr. Jesse Richman is assistant professor of Political Science at Old Dominion University. They are the authors of “Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before it’s Too Late.”

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