Global Crisis Blog

The Looming Crisis: But Does Obama Get It?

By Shlomo Maital

Clyde Prestowitz, former chief trade negotiator for U.S. President Ronald Reagan and noted author of bestsellers (Rogue Nation, Trading Places, Three Billion New Capitalists, and, most recently, The Betrayal of American Prosperity),     believes the global economy is heading for a looming crisis, suggesting the current global crisis is far from over.

He notes that everyone is discussing “rebalancing”.  Rebalancing means — The U.S. saves more, and consumes less;  Germany, Japan, China and Asia in general saves less and consumes more.  But, he noted, for the U.S. to consume more means reducing government entitlements, such as social security.  This is politically unfeasible.  For the U.S. to export more means Germany, Japan, China and Asia need to import more from the U.S. But since the U.S. does not have much manufacturing (only 10 per cent of GDP in the U.S. is from manufacturing, compared to 25 per cent a generation ago), there is little for other countries to buy even if they wished to.   Most of the high saving in China is done not by households but by companies.  Companies, even privately held ones, seek to grow. Growth occurs through reinvesting retained earnings.  So it is unlikely that China will have any incentive to save less.  Moreover, Germany’s business model is built on exports.  It is unlikely that Germany will abandon its fundamental business model, one that has worked well even during the current global crisis, simply because the U.S. requests it to do so.

And indeed — at the G20 meeting in Toronto, noted Prestowitz,  President Barack Obama asked the other countries to help with rebalancing and assist the U.S. in reducing its trade deficit.  If Obama is to avoid losing control of the House of Representatives in November elections, it is vital that the economy improve and the rate of unemployment decline.  But this will happen only if the U.S. trade deficit falls sharply — given that a fall in the U.S. budget deficit is likely, and this will work to contract the economy and contract employment.  For the U.S. trade deficit to fall, other nations must accept a fall in their exports to the U.S.  But the reaction of the G20 nations to Obama’s request was highly negative.

The result:  At some point, perhaps after a drubbing at the polls in November, Barack Obama will adopt drastic measures, perhaps protectionist ones, to limit imports and unilaterally curtail America’s trade deficit.  Other countries will respond.  And could we see a replay of the 1930’s, when America’s Smoot-Hawley tariff led to retaliation — and the virtual disappearance of world trade.

Mr. Prestowitz provides all of us with some serious food for thought.

Here is what he wrote recently (prior to the G20 meetings in Toronto) for Politico, a website that tracks the Obama presidency and American politics, as an open letter to President Obama:

As you prepare for this week’s G20 meeting in Toronto, you and your White House team are locked in debate with Congress and the punditry over the merits of more stimulus versus the demerits of the rising federal debt. While another shot of stimulus would be nice, even if you get it, it will likely be the last shot because the rising debt will become a real constraining factor. Moreover, the amount of stimulus you are asking for won’t be enough to create the jobs necessary to achieve full employment or to resurrect our past prosperity.   There is an easy solution that no one is talking about for fear of offending the high priests of the reigning economic orthodoxy. Our trade deficit of roughly $500 billion costs us from 2.5 million to 5 million jobs. Thus, eliminating the trade deficit would get you back to full employment without any necessity of more debt financed stimulus. Indeed, the new jobs created by reducing the trade deficit would themselves create the best kind of self-regenerating stimulus.   Nor would it be at all difficult or expensive to do. For one thing, the U.S. dollar is kept strongly over-valued by the constant buying of dollars by China and other Asian countries that keep their currencies undervalued by 25- 40 percent as a subsidy for their exports. China has just announced that it will begin to allow some flexibility in the exchange rate of its yuan. But the Chinese are thinking in terms of a 3-4 percent revaluation. You need an immediate revaluation of at least 25 percent in order to get anywhere near a real market valuation. You could do this by putting a tax on certain capital inflows into the United States.  You could also direct your Secretary of Commerce to initiate countervailing duty investigations on a broad range of imported products that benefit from the subsidy of the currency undervaluation. You must also create a fund to match the tax abatements, capital grants, and other investment incentives that China and many other countries use to bribe U.S. companies to offshore their factories and jobs. Finally, you need to stop giving away economic goodies to get geo-political crumbs.    Last year during you trip to China, you promised to help the Chinese develop the capability to build their own commercial jet liner. Why did you do that? Jet liners are one of our biggest exports. You have said you want to double exports. Well, you can’t do that by helping the Chinese beat Boeing.   Get smart Mr. President. Cutting the U.S. trade deficit is the only way for you to create new jobs that are good and that will last. It is the only way for you to revitalize the U.S. economy and it may be the only way for you to get reelected