Global Policy Forum

By Bruce Stokes

The U.S. trade deficit is likely to reach $750 billion this year.

And the imbalance with China may account for about a third of that total. So it is little wonder that trade critics in Washington are pressuring Beijing to appreciate its currency and cut its industrial subsidies. To date, however, these efforts have failed to trim the Chinese surpluses. Curbing the trade deficit requires a new tack: reducing U.S. dependence on foreign fossil fuels and making energy conservation the new trade policy. Net U.S. outlays for imported oil and natural gas exceed the nation's trade imbalance with China, so cutting energy use—on the highway and in our homes and factories—could significantly lower the trade deficit.

So far this year, the United States has spent $106 billion to buy foreign oil and $15.6 billion to import natural gas. By volume, oil imports are down about 2 percent compared with 2005, but natural-gas imports are up 9 percent. Moreover, imported natural gas, which now accounts for only 3 percent of U.S. natural-gas consumption, is expected to supply 17 percent by 2030. U.S. independence on imported petroleum is likely to be as great in 2030 as it is today, according to the U.S. Energy Information Administration.

The nation's leaders have wasted years squabbling over whether to increase domestic oil supplies, principally whether to drill in the Alaskan wilderness. But at a recent seminar in Aspen, Diana Farrell, director of the McKinsey Global Institute think tank, said that any rethinking of energy policy must start with the recognition that "the demand side of the energy equation is just as important as the supply side." It is a lesson that Americans have yet to learn. Per capita oil consumption in the United States is one and a half times the usage in Japan and more than twice that in Germany. And, Farrell noted, "it still takes 37 percent more gas to drive a mile in the United States than it does in Europe." This efficiency gap may only widen. Fuel economy is likely to improve by only 0.5 percent a year in the United States through 2020, according to McKinsey. In Japan and Europe, it will improve by 0.8 percent per year. Even worse, the United States is expected to improve the efficiency of residential energy use by only 0.2 percent a year in that period, while Europe will gain by 1 percent a year and Japan by 1.5 percent annually.

The United States could take steps to keep up with the competition. McKinsey's research indicates that by using available technologies Americans could lower annual energy demand by 0.3 percent a year through 2020. A third of the savings could come at home, through high-efficiency heating and cooling systems, better insulation, and other measures. Higher energy prices would also spur conservation. Americans, on average, pay only 6.1 cents per kilowatt hour for electricity. Germans pay the equivalent of 8.4 cents and the Japanese pay 12 cents, rates that spur more energy-saving technologies and behaviors. Fewer gas-guzzling cars and trucks would help the equation, of course. If the U.S. could match the planned European and Japanese fuel-efficiency standards, Americans could save 4 million barrels of imported oil per day, cutting projected oil imports by one-fifth. Farrell cautioned, however, "You can't get there from here with market technologies, mechanisms alone." She sees the need for more conservation regulation, an idea that Washington lawmakers have long avoided.

The Senate recently voted to increase fuel-economy standards for cars and light trucks by 2020. The 0.3 percent House should follow suit. Utilities must become more efficient as well.2020. State utility commissions still reward power companies for increased sales, but California ties allowable profits to the amount of energy a utility saves. That regulatory reform, combined with higher prices, has made California almost as energy efficient as Western Europe.

Reining in the trade deficit will take a multiyear, multi-pronged effort that is too important to be left to trade policy makers alone. The trade initiatives with the highest payoffs may prove to be adding more insulation to American homes and putting more hybrids on American highways. Conservation should be the new trade policy.