Peter Morici is a Professor of International Business at the University of Maryland. Professor Morici is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the US International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals including the Harvard Business Review and Foreign Policy. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world. The following interview with Professor Morici will appear in the January/February 2010 issue of Prime Magazine.
How would you characterize the US' economic performance in 2009?
Well, we're in the midst of the Great Recession. We've had a big breakdown in banking that was essentially caused by dysfunctional banking practices and a compensation structure on Wall Street that encouraged terrible risk taking. At the same time, we've got a very poor trade policy that's led to a huge trade deficit which has caused a shortage of demand for US goods and services.
You wrote an opinion piece in September entitled, "Trade Deficit Threatens "W" Shaped Recovery, Destroys Jobs." Could you speak on some of the issues you wrote about regarding the US trade deficit?
The trade deficit is essentially oil, gasoline for cars and our trade with China. Chinese exports to the US outnumber their imports from us by 5-1. This is because China has an undervalued currency as a consequence of its currency market manipulation, and it has very aggressive industrial policies intended to promote exports in industries where it doesn't have a comparative advantage. Unfortunately, the US has done very little about that which means that there is not enough demand for what we make. As the economy recovers and we start to pull out of recession, the cost of oil imports will go up, as will our imports from China. At that point our economy will be threatened with a relapse into recession.
Do you think that increasing demand for goods and services from rapidly growing economies like India and China will eventually create more demand for US exports?
No, because they don't buy things we produce. They are intent on developing their own industry and not trading on the basis of comparative advantage but trading on the basis of mercantilism. Other developing countries like Brazil and Russia do the same. At the end of the day, the West is going to find that it can't grow and provide employment for its citizens while having such a one-sided trading relationship with China, India, Brazil and others. The system could offer us all great benefits, but everybody has to play by the rules. And the Chinese simply don't play by the rules.
What is your ideal solution to address this problem?
China has to manage down its trade surplus or we'll have to manage it down for them. If they won't revalue their currency, or, in some way or another, re-manage their external sector, then we have to put a tax on dollar-yuan conversions equal to the value of their currency market intervention divided by the value of their exports; if the Chinese government stops buying dollars the tax goes away.
Do you think that President Obama made the right decision in his ruling in the Section 421 case against Chinese tires?
It was something that he needed to do because the industry petitioned for this action and it's within our WTO rights to take it. That said, it is not a systemic solution. It'll help the tire industry for a little bit, but it won't fix the overall problem any more than [Obama's Manufacturing Czar and Car Czar] Ron Bloom's industrial policies to assist particular industries will solve the manufacturing problem in the US.
And you don't believe the Obama Administration is equipped to provide a comprehensive solution?
The Obama Administration doesn't have the courage or will to take on China, and as a consequence, the US economy and the American worker are suffering dearly. We require a systemic solution, not piecemeal industrial policies. Obama's advisors simply don't believe in manufacturing and industry; they only believe in information technology and finance and there's simply not enough work or exports in those areas to keep the American economy going.
What do you think about the effect of labor unions on the long-term competitiveness of US manufacturers?
Do we want the AFL-CIO doing to the American economy what the UAW did to the automobile industry? Labor unions are not good for manufacturers because they make costs too high and work laws too onerous for industries to be competitive. That doesn't mean that labor unions can't be a good thing for workers, but they have to be realistic in a way that the UAW and other unions in recent years just have not been.
Do you think that the government bailout of the Detroit automakers will be something that we regret in the long-run?
I think that in the long run we will regret it because Bloom did not make those companies competitive. What Bloom and Obama did in circumventing bankruptcy law, long-term, will mean there will be fewer automobile jobs in America rather than more because those companies are headed for trouble again, and when they finally get right-sized there will be less of them. By delaying the problem they will make ultimate the solution more draconian.
Do you think US automakers have learned their lesson, so to speak, and will change their ways in the coming years?
This is unlikely because their cost structure remains too high and their legacy costs remain with them -- they've just been reassembled. And they still have too many work rules and they still move too slowly. Chrysler may fail. If Fiat doesn't put money into it, it will burn through the federal dollars it's received and it still won't have cars people want to buy. If Chrysler fails that leaves more room for all the other manufacturers for a while. But at the end of the day GM will have trouble; it will just take longer for it to happen.
What is your outlook for the steel sector?
The US economy will accomplish a 2.5 to 3 percent growth over the next couple of years, which is not much when you consider the kind of recession we've had. From the point of view of steel, that means that the recovery of steel prices will be slow and will be driven more by progress in Asia simply from steel consumption there. But if China doesn't grow 10 percent a year, this will be problematic for the steel industry at large because of China's subsidies and excessive steelmaking capacity. The real danger is that the steel will come here, dumped and subsidized, so that even as the economy recovers, prices won't recover enough. There is a potential for the steel industry to do well again but the economy has to continue to grow and can't be victimized by unfair imports.
But aren't antidumping duties and countervailing duties imposed by the US a form of protectionism?
I'm not going speak to you about antidumping duties and countervailing duties as protectionist measures. The protectionism is the dumping and the subsidies. Antidumping duties and countervailing duties are self defense, in the same way that doing something about China's currency is not protectionism; China's currency manipulation is protectionism. Export subsidy or a huge subsidy on domestic production that causes the product to leave the country at a low price is protectionism, and that's what China's practicing. It's promoting employment in China at the expense of employment in the United States.
Some say that commercial construction may be the next "shoe to drop" on the battered US economy, and this is not good news for the steel industry in particular. What is your outlook for commercial construction?
It's going to be very slow in recovering because there's such an excess capacity in regard to retail space and manufacturing capacity that the demand for structures is not going to be large. There's a certain amount of restructuring going on in the sense that some industries are merging and growing more rapidly than others. So there will be some demand, but it will not be very strong until we get the economy growing. And we're not going to grow the economy in a way that creates new demand for commercial capacity until we do something about trade with China.
Can you give us your thoughts about the potential economic ramifications of any sort of "cap and trade" law that may be put in place by the US?
"Cap and trade" would be disastrous for the American industry because we're not going to a comparable agreement in China. It is just another example of the Ivy League economists that advise the President thinking up new and better ways to sabotage American manufacturing.
What are your thoughts on the stimulus package?
Obama promised a stimulus package that would create domestic jobs; the problem was that most of the spending part of the stimulus went to government jobs as opposed to infrastructure. He only allocated about $100 billion to infrastructure of the nearly $800 billion legislature. The rest was devoted to tax cuts which went into savings and to beefing up government jobs. We could have spent a lot less and had a much more effective stimulus if more funds were dedicated to infrastructure and the money had been dispersed faster. But by itself, stimulus isn't going to get us out of this mess. We have to fix trade with China and we have to fix the dysfunctions in the banks or we won't solve the problem.
What would you say are the biggest challenges standing in the way of the US' economic recovery in 2010?
Trade with China, oil and the banks. Those are the challenges in the way of economic recovery. If you don't fix the banks, you don't fix trade with China and you don't reign in Wall Street, you can't turn America around. And I don't see Barack Obama having the insight, wisdom, courage, character or conviction to get the job done.
What sort of policy changes do we need to make to get the economy back on the right track?
With regard to oil, we can build out a fleet of fuel-efficient cars very rapidly -- not electric cars but cars that use internal combustion engines and diesel much more effectively. We can get the trade deficit down with China by either negotiating with the Chinese or imposing a tax on dollar-yuan conversion if they won't negotiate. On Wall Street, we need basic reforms in derivatives trading --require uncovered contracts to be backed up by assets; raise capital requirements and limit compensation to a much smaller share of recorded profits.
In an attempt to end this interview on a positive note, I'd like to ask you: are there any promising new growth areas you foresee for the US economy?
American companies continue to accomplish remarkable productivity relative to technological progress. American manufacturers are still the most productive in the world. The question is: can they remain so productive when they're trimming budgets to cope with the recession? They're moving abroad since they can make products abroad so productively, while the US economy and the administration don't provide a hospitable environment here.
Still, all the makings of a very strong American economy do exist. But we need an administration that will stand up to China, that doesn't hold blue collar work and industry in contempt, and that doesn't believe that everyone can be a Wall Street trader, a computer programmer or a Hollywood star.