Professor Peter Morici points to the U.S. trade deficit as an enormous drag on the U.S. economy:
Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by about five percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the trade deficit is driving up unemployment.
Since 2001, the trade deficit has increased about $350 billion, and 3.9 million manufacturing jobs have been lost. China and other major Asian exporters of manufacturers subsidize their sales in U.S. markets by suppressing the exchange rates for their currencies against the dollar by intervening in foreign exchange markets. Were this problem resolved, the trade deficit could likely be cut in half, GDP would rise by $300 billion and about 2 million manufacturing jobs could be restored.
While I agree that “suppressing the exchange rates” does account for some of the problem, I would posit that it is not all the problem. Would allowing a free float in the exchange rates really make up for the difference in wage costs?