The following article originally appeared on BaltimoreSun.com.
To dig out of the "Great Recession," Washington needs to challenge China on trade and currency manipulation - but President Barack Obama and Treasury Secretary Timothy F. Geithner must recognize that Beijing only has the leverage Washington gives it.
The nation needs to realize that this is no Eisenhower recession, caused by too much inventory. Rather, this meltdown was caused by structural imbalances in the global economy that no stimulus spending can fix.
Dysfunctions on Wall Street notwithstanding, China and several other developing countries produce far more than they consume and enjoy huge trade surpluses, thanks to artificially undervalued currencies, export subsidies and import restrictions. Those require the Americans to consume far more than they produce and for the United States to amass huge trade deficits and foreign debt - otherwise, global demand falls short of supply and unemployment skyrockets.
Once Americans were no longer able to live beyond their means, the global economy collapsed, and President Barack Obama has volunteered the federal government as the borrower of last resort. Now China says Washington borrows too much. That's like a drug pusher complaining about his clients' addiction. Yet, Mr. Obama appeases Beijing by offering to share stewardship of the global economy with this renegade mercantilist.
China's purchases of U.S. Treasuries and threat to quit buying are the elephant in the room. But those purchases are made necessary only by China's huge hoard of dollars that is contrived by Beijing's massive sale of yuan for dollars on foreign exchange markets to keep the yuan cheap, exports flowing, and jobs moving from Indiana to Shanghai.
The Peoples Bank buys U.S. Treasuries because it does not have any better use for the dollars it obtains manipulating the yuan to boost exports. If it quit using those dollars to buy Treasuries, it would simply have to put those in the vault and remove them from circulation. The Federal Reserve would have to replace those dollars in circulation by purchasing the very same Treasury securities Beijing now buys. In other words, the Fed would collect the interest instead of the Peoples Bank. That's not so bad.
How to accomplish it? To persuade China to stop buying dollars to suppress the value of the yuan, the United States should tax the purchase of yuan by American importers until China relents.
Message to President Obama and Treasury Secretary Timothy F. Geithner: Fixing the trade problem with China would do more to boost demand for U.S. growth and employment than even massive stimulus spending could ever deliver.
Peter Morici is a professor at the University of Maryland's Smith School of Business and the former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.
Click Here For Solutions To America's Economic Problems
To start correcting the imbalances the US needs to reduce corporate income taxes from the up to high 35% tax rate to a low rate like 5% to encourage every company that has left, wants to setup, or wants to expand to consider doing it in the US. Next the US needs to impose a VAT tax on foreign imports. It doesn't make sense currently to charge high income taxes and high corporate taxes for individuals and US companies that make a living and want to produce in the US when foreign goods from Protectionist countries with an agenda from their governments to put US companies out of business come in for free.
Next the requirement that to export in some countries you have to setup a joint venture with local partners so that effectively your technology can be copied I would say is a very very big barrier that has to broken down. If the country voluntarily doesn't want to scrap this barrier then VAT taxes as high as the moon should be imposed. Nothing about this barrier can ever be even slightly manipulated to be called free trade. Id rather be taxed heavily to consume foreign goods from Protectionist countries that have an agenda from their governments to put US companies out of business than to pay high income taxes or have US producers pay high corporate income taxes.