Today’s jobs report from the BLS showed that the U.S. manufacturing sector lost 14,000 jobs in August and has now lost 57,000 jobs since January of this year. This job loss is, in part, a consequence of the sharp rise of the dollar in 2014 and 2015, which has gained nearly 20 percent on a broad, trade-weighted basis, as shown below. The rising dollar has reduced the cost of imports, increased the cost of U.S. exports resulting in growing trade deficits. Growing exports support U.S. employment, but growing imports cost U.S. jobs, so the manufacturing decline was entirely predictable from the expected increase in the U.S. trade deficit, which responds to changes in the dollar with a lag of one to two years. Yet the U.S. government continues to do nothing about destructive exchange rate movements, whether they are caused by intentional currency manipulation or more recent, market-driven misalignments.

Data for the U.S. trade deficit in July were also released this morning. The trade deficit in manufactured products (Exhibit 1S) increased 3.1 percent, year to date, relative to the same period last year, despite a decline in the overall U.S. trade deficit. U.S. imports of petroleum products declined sharply in this period, while the trade deficit in non-petroleum goods (which is dominated by trade in manufactures) increased sharply. The single largest cause of the growing manufacturing trade deficit is malign neglect of currency manipulation over the past 20 years by the U.S. government.

China, which has been the most important currency manipulator over the past two decades, was responsible for nearly two thirds (61.3 percent) of the U.S. trade deficit in manufactured goods in 2015. The trade deficit with China increased in July. China has also distorted trade by generating massive amounts of excess production capacity in a wide range of industries, including steel, aluminium, glass, paper and renewable energy products. China’s capacity growth has been fueled by illegal subsidies and other unfair trade practices. A new report from Duke University explores the impacts of overcapacity in China’s steel industry.

As the United States prepares for the G20 summit meeting in Hangzhou, China, it is imperative that leaders prepare to confront China about its unfair trade and the massive amount of excess capacity, which is distorting global trade not just in these industries, but in sectors that use these primary commodities to produce a wide range of downstream products such as electrical appliances, machine tools, autos, and auto parts. The United States also must come to terms with its sustained failure to address the currency manipulation, and more recently developed problems of currency misalignment, which I will address in a subsequent post.