President Obama talked about doubling exports in the State of the Union Address last night as a strategy to create jobs. It’s a great sound bite, but woefully incomplete economics. While exports support American jobs, imports displace them; when imports grow faster than exports, our trade deficit expands and American jobs are lost. Between 2001 and 2007 (both business cycle peaks), we lost 3.4 million U.S. manufacturing jobs, and the fact that the trade deficit as a share of GDP rose by roughly one-third is a key reason why. Lately, when the president has talked about jobs and trade, he mentions the jobs associated with exports but ignores those lost due to growing imports. It’s like watching baseball, but only counting runs scored by the home team—lots of fun, but it won’t tell you anything about who is ahead.
Last week, President Obama talked a lot about expanding exports to China. But he rarely mentioned imports or the trade deficit. We heard a lot about unfair trade and job losses during Obama’s primary campaign, but those words disappeared from his speeches after the election. One reason may be that President Obama has surrounded himself with advisors from multinational companies, who have more to gain from outsourcing than from domestic job creation. For example, just this week, the president appointed GE Chief Executive Officer Jeffrey Immelt to head his new Council on Jobs and Competitiveness.
Our exports to China did increase rapidly last year—by about $23 billion—and this did support job creation. But imports increased about three times as fast—by $71 billion—which cost the United States many more jobs than exports supported. On balance, the growth in our trade deficit with China cost the United States at least a half million jobs in 2010. We have huge trade deficits with China because of massive currency manipulation and many other unfair trade practices. Currency manipulation acts like a subsidy on all of China’s exports to the United States, and in essence puts a tax on U.S. exports to China and every country in the world where we compete with China. The United States could recover at least a million jobs by forcing China to revalue its currency now.
We will have a record trade deficit of nearly $275 billion with China in 2010. President Obama failed to acknowledge in his State of the Union address that trade with China cost us a half million jobs in 2010; the U.S. China trade deficit is growing rapidly and job displacement will worsen in the future unless something is done to end China’s currency manipulation and other unfair trade policies.
The Obama administration’s trade policies are failing because corporate executives are designing them. Many key staff members have close ties to multinational corporations and Wall Street, such as new White House Chief of Staff Bill Daley (former executive of JPMorgan Chase), former Treasury official Gene Sperling, recently appointed head of the National Economic Council in the White House (formerly worked for Goldman Sachs); and recently departed National Economic Council director Lawrence Summers, who received $5.2 million from a Wall Street hedge fund between stints in the Clinton and Obama administrations. Summers, Sperling, and Treasury Secretary Timothy Geithner (also from Wall Street) played key roles in opposing efforts within the Obama administration to impose tariffs on Chinese goods if the Chinese government continued to manipulate their currency.
Multinational corporations are responsible for outsourcing millions of U.S. jobs. What’s good for their corporate profits (and executive pay) often conflicts with the national interest of the United States to maximize job creation and production in this country.
China’s policies don’t only benefit China; U.S.-based multinational companies sometimes profit enormously from China’s unfair trade and industrial policies and currency manipulation. China spent $199 billion last quarter alone buying foreign currency reserves (primarily treasury bills) in order to keep its currency artificially low. They now hold $2.85 trillion in foreign currency reserves. The best estimates suggest that the Chinese yuan (RMB) is at least 30-40% undervalued. That amounts to a subsidy of 30-40% on all the goods imported from China by GE and other multinational companies. These companies would lose billions in profits if China revalued the RMB and made these goods more expensive, so they are actively opposing efforts to compel China to revalue.
Multinational corporations don’t need government assistance—they are sitting on $2 trillion in cash that they are investing in financial securities, rather than real capital that would create new jobs. They have all the cash they need to invest in R&D and to expand their factories. They can also afford to file trade cases to protect their fair trade and patent rights, which can cost millions of dollars for a single case. Instead, however, while they hoard their cash at home, they are investing abroad.
China is giving hundreds of billions in subsidies to multinational corporations to move factories from the United States and other countries and locate them in China. For example, Evergreen Solar announced last week that it will close its solar cell factory in Massachusetts, which opened in 2008 with $43 million in state subsidies. Chinese banks offered Evergreen financing for two-thirds of the cost of its new plant at rates “as low as 4.8%” with no principal payments or interest payments due until the end of the loan in 2015. Even cheap labor is beside the point. United States clean energy loan guarantees can’t compete with the Chinese loan subsidies.
This is another reason why multinational companies will oppose (overtly or covertly) efforts to enforce fair trade laws by the Obama administration. Americans who work for a living should be outraged that the president has appointed an executive of a firm that has offshored tens of thousands of jobs to serve as one of his key advisors.
GE’s Immelt, the president’s newest CEO advisor, says that he wants to create jobs in the United States. But as Scott Paul of the Alliance for American Manufacturing showed last week, Immelt and GE have been leading the charge of the outsourcers. He notes that GE has “slashed their American workforce to fewer than 150,000, [and] dramatically expanded its global presence, now employing over 300,000 workers worldwide.”
The president visited Immelt at a GE plant in Schenectady, New York, last week where they celebrated $45 billion in new trade deals with China, like the joint venture GE just signed with China AVIC, an avionics firm that supplies components to both civilian and military jet makers in China. GE claims that the deal will create jobs in the United States, but they are giving away the keys to their kingdom by transferring key avionics technology to China AVIC. GE put $200 million and its technology in the deal, and the Chinese partner is putting up $700 million. GE is effectively selling its treasure for beads and trinkets.
This is supposed to be a 50-year deal, but the way these deals usually work, the Chinese partner will appropriate GE’s technology and then kick them out in a few years. It is conceivable that within 10 years China AVIC will be a global leader in avionics, and GE will be out of the business. China’s indigenous innovation policies force foreign companies who want to do business in China to transfer technology to Chinese firms, according to the National Association of Manufacturers. The deal may boost short-term profits and Jeffrey Immelt’s bonuses, but thousands of American jobs will disappear. Who in our government is representing those workers?
The deal will supposedly be limited strictly to domestic avionics, but some fear it will give their military aircraft access to cutting edge U.S. technology. Two weeks ago, when Defense Secretary Gates visited China, their military conducted the first test flight of a new stealth fighter. China is clearly trying hard to catch up fast.
Small- and medium-sized manufacturers create most of the jobs in the United States—not the giant corporations. Unlike the big companies, small- and medium-sized firms cannot get access to enough capital to finance working capital or expansion needs. President Obama should have appointed someone like Laurie S. Moncrieff, President of, Adaptive Manufacturing Services and Schmald Tool & Die, Inc., a dynamic business leader who speaks for small- and medium-sized firms. (Moncrieff appeared at an EPI currency forum last March.) She would make an outstanding Chair for the new White House Council on Jobs and Competitiveness.
In his State of the Union Address, the president proposed new investments in infrastructure and measures designed to boost competitiveness. We do need to invest hundreds of billions of public and private dollars each year for the next few years to rebuild our aging infrastructure and lay the foundations for new clean energy industries and for conservation. And those investments can support millions of new jobs. But their effectiveness will just be blunted if we shy away from fixing our trade problems with China and other countries that use unfair trade policies to take away jobs and production from U.S. workers and domestic companies.
Without effective trade policies, too much of the boost to U.S. jobs that can be gained from our rebuilt highways and railroads will leak away in the form of rising imports.
When the President talks about trade, he needs to address both imports and exports. He needs to tell us how he plans to end currency manipulation this year, and his plans for ending unfair trade. Eliminating the U.S. non-oil trade deficit would support over five million U.S. jobs, generate hundreds of billions of dollars in new tax revenues, and reduce spending on unemployment and other social services over the next few years. It’s time to end illegal currency manipulation and unfair trade practices, and to do that the president needs a new crop of advisors who care more about American job creation than outsourcing and multinational corporate profits.