Last week, Bernanke, the chairman of the U.S. Federal Reserve, fingered China, Taiwan, Singapore and Thailand for driving down the values of their currencies. Through massive government purchases of U.S. treasuries securities, those mercantilists accomplish huge trade surpluses and jack up growth in their gross domestic products and employment. The flip side is a huge U.S. trade deficit that sentences Americans to slow growth and 10 percent unemployment.

Sadly, such mercantilism makes free trade an unworkable strategy for the United States.

The anticipated gains from open trade harkens back to an economist's first lessons -- specialization and exchange. Let each nation do more of what it does best and international trade will raise productivity and living standards everywhere. However, the scheme only works for everyone if trade is reasonably balanced and international commerce doesn't impose high unemployment on some countries.

The United States annually exports $1.85 trillion in goods and services and these finance a like amount of imports. This trade raises U.S. GDP by about $195 billion, because workers are about 10 percent more productive in export industries than in import-competing industries -- those are the gains from trade.

Unfortunately, U.S. imports exceed exports by another $560 billion and workers released from making those goods go into non-trade-competing industries, such as retailing, where productivity is at least 50 percent lower. This slashes GDP by about $280 billion, overwhelming the gains from trade and requiring workers displaced by imports to accept lower wages or no work at all.

Global demand for goods and services has become so distorted by subsidized Asian exports that workers in the United States face terribly high unemployment. Add in those stuck in part-time jobs who would prefer full-time work, and the United States is losing the productivity of at least 10 million workers. At about $100,000 per worker, that adds another $1 trillion, bringing total lost productivity to about $1.3 trillion.

Bernanke estimates U.S. capacity underutilization at about 8 percent -- that comes to the same $1.3 trillion. Amazing!

At the recent International Monetary Fund meetings, U.S. Treasury Secretary Timothy Geithner asked European allies for help in persuading China to revalue the yuan. Led by Germany, the United States was told to pound salt and instructed to slash its budget deficit and tighten monetary policy.

No surprise. Germany enjoys huge trade surpluses with a euro that is undervalued for its economy, because it is lumped into eurozone with weak Portugal, Ireland, Greece, Spain and Italy. Germans live well and impose austerity and unemployment on those neighbors. Berlin doesn't want any sacred mercantilist cows slain, lest its own ruse get discovered.

If the United States cut its budget deficit in half and raised domestic interest rates 2 percentage points, U.S. consumption and imports would crash, unemployment would rocket to 15 percent and a global depression would result whose horrors we all thought were long ago buried in history books.

If China and Germany won't be reasonable, the United States is really left with no option but to take direct action to balance its trade.

China's government purchases to suppress the yuan come to about 35 percent of GDP and provide a subsidy on exports of similar amount. Washington should even things up by imposing a comparable tax on purchases of yuan and euro for the purpose of importing from or investing in China and Germany, until their leaders agree to engineer an orderly revaluation of currencies and trade.

The Chinese and Germans shouldn't care -- after all, the Americans are nothing but whining spendthrifts whose problems are of no import. They would scream bloody murder anyway.

Beneath the howls, domestic demand and employment in the United States would fire up, manufacturing would flourish, GDP growth rise to about 5 percent and unemployment would fall to a similar figure.

The extra growth would eventually balance the U.S. budget as it did during the Clinton years.

Once China, Germany and others agreed to a realignment of exchange rates and the tax ended, all nations would benefit from trading with a more rapidly growing and stable U.S. economy.

(Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

del.icio.us	Digg	Reddit
YahooMyWeb	Google	Facebook

Memory Foam Mattress Review

SPACE MEDIA NETWORK PROMOTIONS Solar Energy Solutions Tempur-Pedic Mattress Comparison ... Newsletters :: SpaceDaily :: SpaceWar :: TerraDaily :: Energy Daily XML Feeds :: Space News :: Earth News :: War News :: Solar Energy News