Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Robert Skidelsky on the case for compensated free trade
According to his Project Syndicate biographical sketch, Robert Skidelsky is "Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999."
Skidelsky's latest column for Project Syndicate is a tour-de-force summation of the trade challenge and the appropriate solution -- a mechanism to automatically shift trade towards balance. The column can be read at https://www.project-syndicate.org/commentary/compensated-free-trade-allows-protectionism-by-robert-skidelsky-2018-11.
He begins by framing the issue as follows:
According to Harvard’s Dani Rodrik, the nation-state, democracy, and globalization are mutually irreconcilable: we can have any two, but not all three simultaneously. In fact, there may be a solution to Rodrik's “trilemma.”
And that solution in Skidelsky's view is compensated free trade.
The scaled tariff is a similar mechanism and would also achieve the same end, albeit in some what different ways....
Doing the Right Thing on Trade
The Trump Administration is right to pursue a policy aimed at addressing the trade deficits faced by the US around the world. But the current policies are having only limited effect on the overall US trade deficit -- so far more than counterbalanced by the consequences of the tax cuts and higher interest rates which have pushed the dollar higher and kept imports cheap.
The right approach going forward is to begin moving towards what Frank Kirkland calls a "closed loop" approach to the trade balance, or what Masch calls Compensated Free Trade, what we have termed the Scaled Tariff, or the country-specific import certificates. This is particularly crucial because at some point, whether in 2021 or 2025, the Trump Administration will leave office. And the advocates for Trump's trade policies...
Another Economist Discovers the Scaled Tariff -- A new and perhaps more marketable name too
Vladimir Masch first presented his idea similar to our scaled tariff idea back in 2004. He gave it a more marketable name though -- Compensated Free Trade of CFT for short. We seem to have been working in parallel for much of the last decade and a half without knowing of each other's work.
A good idea who's time has come will be invented simultaneously or sequentially by many authors. So far we know of three groups who independently developed it: the Richmans, Masch, and Frank Kirkland. Warreb Buffet also came up with a related approach. This is an idea who's time has come.
Tariffs to Balance Trade Do Not Violate Free Trade Policy
The media are all hyped up about trade wars. Where were they when the trade deficits showed up endlessly in the USA Gross Domestic Product accounts and slowed economic growth? They still do not mention them except to deride Pres. Trump when he mentions it. John Maynard Keynes, the famous economist, long a free trader, made an exception when depressed conditions existed in the markets for labor, writing that the trouble with free trade was the assumption “that if you throw men out of work in one direction you re-employ them in another. As soon as that link in the chain is broken the whole of the free trade argument breaks down.” He argued that labor would resist a cut in money wages. But they would accept a cut in real wages brought about as a result of rising import prices. However, he feared that the tariffs would become permanent. This problem is solved by imposing variable tariffs which diminish automatically as trade become balanced. We argue that balanced trade with rest of the world should be that appropriate goal.
Balanced trade is easy to achieve, not by tariffs on particular products, which invited counter measures by our trading partners but by scaled tariffs, single-country-variable tariffs, that work like devaluing a currency, the traditional method of achieving balanced trade. Our problem is with only a handful of countries. Countries that have huge chronic trade surpluses with the U.S. which in 2017 included China $ 375.6 billion, Japan $68.9 billion, the European Union $151.4 billion (including Germany $63.7 billion), and Mexico $70 billion. Balancing trade with those few countries would reduce our trade deficit over 80%. ...
Legalize All Drugs and Tax Them As We Do Alcohol.
Nearly all of our domestic violence is caused by laws “prohibiting” citizens from what is popularly considered evil conduct: consuming drugs. The U.S. government has spent more than $1 trillion on its war on drugs. In 2015 alone $36 billion was spent on the war on drugs and about an estimated $40 billion as the cost of imprisoned drug-offenders. In 2017, federal, state and local revenues from taxes on alcoholic beverages amounted to $10 billion. Revenues from taxes on the production and sale of drugs could easily be double that. ...
Bretton Woods and Balanced Trade
In a recent piece in Project Syndicate, Roger Farmer gets some things right and some things wrong in assessment of the link between globalization, populism, and trade. What he gets right, first, is the significance of the end of the Bretton Woods system of exchange rates in shaping the modern era.
And then the decline of the Bretton Woods controls as the harbinger of what has come since:
But his next rhetorical move assumes an answer in economic theory that does not exist:
Much Ado About Trade Wars
The media are all hyped up about trade wars. Where were they when USA factories were shutting down and moving overseas costing millions of Americans good-paying manufacturing jobs and when the trade deficits showed up endlessly in the Gross Domestic Products accounts causing slow economic growth? They still do not mention them except to deride Pres. Trump when he mentions it. Nor are economists free of blame. Balanced trade is easy to achieve but not by tariffs on particular products but by scaled tariffs, variable-single-country-tariffs that work like devaluing a currency, the traditional method of achieving balanced trade.
Nearly all economists are strong advocates of free trade. That is a hangover from the decades before WWII when the U.S. was the leading trade surplus country. When the U.S. became the world’s leading trade deficit country, economists did not change their outlook and economists were silent about the harm those deficits were doing to our basic manufacturing industries. They still are.
Prof. Martin Feldstein of Harvard wrote in a recent issue of the Wall Street Journal (7/6/2018) that he is a “strong advocate of free trade” and writes that, “If the U.S. reduces the trade deficit with one country, it must increase the net trade deficit with others to keep the total unchanged.” Notice his qualifying phrase “to keep the total unchanged.” That phrase hidden in his rhetoric is a non-sequitur; keeping the total trade unchanged is not a policy objective. He is saying that tariffs and subsidies and exchange rates do not have any effect on the trade deficits which is utterly false. Our trade objective should be to increase the total welfare of Americans by specializing in the production of goods that we have comparative advantage in producing and trading them for an equal value of goods that our trading partners have a comparative advantage in producing.
Balanced trade is always beneficial for both trade partners. When a country has a trade deficit with one of its trading partners and with the rest of the world, economists cannot show that the trade is beneficial to both trading partners.
Unfortunately, the conditions for a free trade policy do not exist in the real world. No economist should be in favor of free trade unless the following conditions are satisfied by the trading partners: a common currency, absence of any artificial barriers to trade, and free movement of capital and labor. Those conditions are imposed on the States by the U.S. Constitution. But they do not exists internationally. Being for free trade in the international community has no rational basis. Formal (tariffs) and informal barriers (especially in countries which lack free markets), industries are subsidized, artificially low foreign exchange rates are maintained vis-à-vis the USA, and barriers to the free movement of capital and labor are the rule, not the exception. Several countries have large chronic surpluses with the U.S. They acquire huge amounts of U.S. government and corporate debt, and often use the funds to acquired business assets in the U.S. The U.S. has a huge chronic trade deficit with the rest of the world....
When European Union commissioner Juncker meets with Trump in the White House today, the $5 billion fine that he just leveled against Google (which Trump tweeted about last week) will be on the agenda. The EU claims jurisdiction over the entire world in that the fines are determined as a percentage of worldwide revenue. Furthermore these companies are being fined for benefiting the consumer and for causing economic growth.
The top 4 payers of fines under this statute were American companies:
"Make no mistake, this statute is being used to punish American companies for being big and American. It is designed to shackle American companies so that European producers can steal their market share."
To read the entire posting on the American Thinker website:
Wasteful spending will sink our country - Ray was published in American Thinker
To read it, go to:
The Laws of Diminishing Returns and Increasing Cost Apply to Government Expenditures
Congress appears to be unwilling to eliminate any program which has been in existence for years if any citizen’s group supports it. Congress appears to be unwilling to eliminate instances of wasteful spending even when they are reported in the media and are well-known. Even worse is the overspending on ongoing programs because of Congress’s failure to control legitimate spending.
The most grievous policy mistake is to neglect two of the most important economic laws, the Law of Diminishing Returns, and its related Law of Increasing Cost. Over-spending on existing programs is probably the rule rather than the exception. The former says that given the fact that all factors are limited, e.g. capital and labor, increasing the employment of one factor relative to another to produce a particular product will result in less than proportional increase in output. Increasing costs means that, given the fact that total resources are in limited supply, to produce more of one product requires giving up more and more of another or other products.
The reasons we don’t see these effects is that the economy is too complex and too dynamic. There are so many sectors and industries, some of which are affected without calling our attention to them. And over time, there will be invention of new products, improved methods of production, technological change, innovations, and other changes. But we are better able to discern their effects as government grows and its subsidies increase. The need for subsidies is evidence of diminishing returns and of increasing costs. If we were able to calculate benefits and costs of new government expenditure programs, we would observe that most of them are due to the diminishing returns and increasing cost of existing programs.
These require increasing diversion of funds from the private sector. For example, increased defense spending is at the expense of increased costs of goods in the private sector. When government spends more money on global warming projects, it is at the expense of increased costs of other goods people buy. Since electricity produced by wind and solar power is more costly than electricity produced from fossil fuels, the increased cost effect reduces private purchasing power twice, as private sector costs increase and second by the law of diminishing returns as government expenditures on climate change increase.
Failure to pay attention to diminishing returns means that government expenditures on many if not most programs exceeds the amount that cost-benefit would justify and many expenditure programs should not have been initiated at all. Government would get increasing returns by reducing expenditures and the private sector would enjoy increasing returns and reduced costs as government expenditures are reduced.
Admittedly, this makes a case for reducing the size of government. There can be little doubt that federal government spending is excessive on a wide range of programs in nearly every department and agency. ...
Navarro WSJ Opinion Piece on Trump Tariffs on China
Peter Navarro has an excellent opinion piece in the Wall Street Journal defending the Trump tariffs on China. He concludes:
The entire piece is worth a read.
How to Avoid Trade Wars While Balancing Trade
Trade agreements are excellent examples of crony capitalism. If one party to a trade agreement imposes a tariff on the products of an industry it favors, it is simple enough for an affected country to do likewise, initiating a trade war. Even if the initiating country had good reasons for imposing a tariff or other barrier to trade, other parties to the agreement may object because it violates the letter of the agreement. When the Trump administration imposed a tariff on steel and aluminum products on the grounds that the two industries are critical to its defense, China immediately imposed a tariff on USA agricultural products, a sector favored by the USA in trade negotiations. Canada and the European Union announced they would impose tariffs on USA goods in retaliation to the USA tariff.
Trade agreements usually provide some relief for a member experiencing chronic trade deficits. One that is generally acceptable is a devaluation of its currency. A devaluation means that the prices of imported goods will rise and the prices of exported goods will fall in terms of foreign currencies. As a result, the country may import less and export more. The trouble is that a currency devaluation would affect countries with which the devaluing country has a trade surplus. If a country has a chronic trade deficit with one or a few countries, one would like the devaluation to affect only them.
Why a tariff on steel and aluminum would cause a trade war by countries enjoying enormous trade surpluses—in effect growing at the expense of the USA—is surprising. It is the USA that should start a trade war with China, the European Union, and Japan. That is decades overdue! ...
How to Avoid Trade Wars While Balancing Trade
It is scandalous the way our media, including the Wall Street Journal, are reporting the world’s reaction to the Trump administration’s imposition of a tariff on steel and aluminum. Since 1975, America’s trading partners, with few exceptions, have enjoyed a surplus in their trade with the USA that has cost American manufacturing workers millions of jobs, caused a relative decline in manufacturing in the USA, and converted the USA from the world’s leading creditor nation to the world’s leading debtor nation. They have all been accusing the Trump administration of starting a trade war when in fact it could be argued that the trade agreements promoted by the USA were suicidal.
Trade Wars are predictable when a country chooses to impose tariffs on or more of a select group of products. It is easy for its trading partners to do likewise. A trade war is rare when a country devalues its currency which is equivalent to a cross-the-board tariff on imports.
The six other members of the G7, Germany, Japan, France, Canada, Italy, and the United Kingdom condemned the USA action. None of the media mentioned the fact that for decades these countries have been waging a trade war on the USA. In 2016, the countries with which the USA had the largest trade deficits, were China, $347.0 billion; the European Union, $146.3, (including Germany, $64.8 billion); Japan, $68.9 billion; Mexico, $63.1 billion; Ireland, $35.9 billion; and S. Korea, $27.7 billion. Only S Korea has agreed to reduce its deficit by increasing imports from the USA. The total trade deficit of the U.S. in 2016 was $734.3 billion. These countries account for 93.8 percent of the total. The reader should note that three of the six G7 countries are included. How could the media accuse the USA of starting a trade war given the fact that it has suffered trade deficits for decades? ...
Economists usually obfuscate the facts about international trade in their zeal to promote free trade. They ignore the fact that some countries deliberately seek a trade surplus, to export more than they import, to accelerate their rates of economic growth. But their growth is at the expense of countries which import more than they export. They ignore the fact that the trade deficits the U.S. has been experiencing for decades have converted the U.S. from being the world’s leading creditor nation to the world’s leading debtor nation, has caused U.S. growth to stagnate, and have caused millions of American workers to lose good-paying manufacturing jobs.
Prof. Rodrik is not one of those who ignores the negative impact of international trade on the U.S. economy, but he does not blame the trade deficits. In his preface, he writes that economists have overstated the magnitude of aggregate gains from trade and elsewhere he writes, “Economists do not fully understand why expanded trade has interacted with the macroeconomy to produce the negative consequences for wages and employment that it has. “Adam Smith and David Ricardo”, he writes, “would turn over in their graves if they read the details of, say, the Trans-Pacific Partnership” agreement. (All the multi-lateral agreements involve substantial losses of sovereignty with topics ranging from child labor, minimum wages, global warming, compulsory arbitration, etc., etc.. Some have even created new international institutions like the World Trade Organization.)
Prof. Rodrik does not limit himself to the economists’ views on trade but addresses many other economic and political issues. Industrialization was, he writes, “traditionally a powerful growth engine” but developing countries “typically have neither numbers nor resources on their side” and “low-income countries are running out of industrialization opportunities” for export-led growth. This is an opinion we do not share. As though export-led growth was the only means to achieve growth!. In large part, the book reads like an essay because of similar non-sequiturs.
Nevertheless, the Rodrik's insights are worth considering. He talks about “premature globalization” caused by the creation of the World Trade Organization and ensuring trade deficits which led to today’s “globalization backlash”. Imposition of any tariff is called “protectionism” by economists and the media. But he is wrong to describe tariffs intended to remove a trade deficit as protective. In our view globalization is a nonsense goal. Our goal should be balanced trade, the exchange of domestically produced goods for an equal value of foreign-produced goods. When trade is balanced both trading nations gain from trade. Those sectors that are injured in each country can be compensated by those who gain leaving a net gain overall....
How Trump succeed with North Korea
If you were caught by surprise by the events in Korea, I'd like to suggest that you start following Dilbert cartoonist Scott Addams' blog. He understands how Trump thinks and why he succeeds, so he predicted all of this. The following two blog posts were especially prescient:
1. April 27, 2017: http://blog.dilbert.com/2017/
2. January 3, 2018: http://blog.dilbert.com/2018/
Sea levels for the last 1400 years -- a graph
I ran into this graph in a posting by Kenneth Richard on the Climate Change Dispatch website: 70+ Papers Show There Is Nothing Unusual About Today’s Sea Level Rise And Rate:
This graph combines the actual graph from an academic study (pdf) of sea level in a Denmark salt marsh over the last 1400 years with the latest results from the IPCC, summarized by Kenneth Richards in this posting:
Trade Agreements Are International Examples of Crony Capitalism
The trade agreements have been a disaster for the U.S. because they involve the rewarding of favored industries, e.g., agriculture in the U.S., at the costi of disfavored industries, e.g., iron and steel in the U.S. They are examples of crony capitalism at its worst. China has retaliated for the U.S. tariffs on steel by imposing tariffs of U.S. agricultural products. After meeting with the President, agricultural producers suggested a return to support of the Trans Pacific trade agreements in which agricultural interests benefit at the expense of U.S. manufactured goods....
U.S. Would Profit From a Trade War
The recent decline in share prices on U.S. exchanges have been attributed by many commentators to fear of a trade war. That fear is irrational. The U.S. economy stands to gain, not lose, from a trade war with China and other trade surplus areas including the Eurozone. Only countries with huge trade surpluses with the US – i.e., China, Japan, Germany and the Eurozone, Korea, and Mexico need to fear a trade war. A trade war with any of those countries would result in the end of their chronic US trade surpluses which have been the bass of slow economic growth of the U.S. economy and the weakening of our manufacturing sectors. Workers in manufacturing in the US have suffered losses of millions of good jobs and stagnant and declining wages as a result of the U.S. trade deficits.
The trade agreements have been a disaster for the U.S. because they involve the rewarding of favored industries, e.g., agriculture in the U.S., and the sacrifice of disfavored industries, e.g., steel manufactures in the U.S. They are examples of crony capitalism at its worst. Moreover, after the negotiations, U.S. tariffs that remained are one-half of its trading partners’ average, 2.5% vs. 5.0%.
Chronic trade imbalances have many causes including formal and clandestine trade barriers, inappropriate exchange rates, and lower wage costs. Some commentators have suggested in the case of China to pursue a remedy by appealing to the World Trade Organization. Besides taking years to get any satisfaction, the U.S. cannot even be sure of a favorable outcome. There is a much easier and more certain solution which we described in our book Balanced Trade (Lexington Books, 2014), namely a single-country-variable-tariff applicable to all imports from the trade surplus country which would decrease as trade is brought into balance and increase if the trade imbalance worsens. We generally oppose tariffs on individual products, regarding it as a form of crony capitalism. ...
The cosmic ray explanation of climate change -- an interview with Henrik Svensmark and his son
The USA Needs Balanced Trade Not Free Trade to Stimulate Growth
The US has experienced sky-rocketing international trade deficits over the past six decades reaching $796 billion in 2017. These trade deficits have inflicted considerable harm on the U.S. economy, causing the loss of millions of U.S. manufacturing jobs, closing factories, reducing economic growth, and converting the U.S. from the world’s leading creditor nation to the world’s leading debtor nation. The nations who sell more to us than they buy from us are creating jobs for their own workers at the expense of American workers. They use a small proportion of the dollars they earn to buy businesses, assets like GE’s electric appliances division, high tech companies, hotels like the Starwood group, office buildings, etc. If they had used their surpluses to buy goods made in the U.S. the economies of both countries would have benefited and it would not have had beneficial effects on the U.S. economy, U.S. jobs, and the incomes of American workers.
A policy of free trade makes sense only when there are no tariffs or artificial barriers to trade, currencies are not undervalued, and national security is not endangered by trade in particular goods. Pres. Trump signed a bill imposing tariffs of 25% on steel and 10% on aluminum because the decline of those industries endangers U.S. security, authorized by Art. 21 of the 1994 GATT agreement. The GATT agreement probably limits granting an exemption to any single member country because others could claim the exemption under the most-favored nation clause. Trump was able to exempt e waTrump Mexico and Canada from the tariffs because America has a separate trade agreement, NAFTA¸ with them.
Critics point out that the tariffs will raise the price of products fabricated with steel or aluminum. But the existing low prices of iron and steel and aluminum are at the expense of American workers. American consumers should not be favored at the expense of American wage-earners.
The reality is that most of the world’s output of steel and aluminum is made by a few countries which import less from us than they export to us. According to Wikipedia, total world crude steel production was 1,691.2 million tons (mt) in 2017. The biggest steel producing country was China, which accounted for 49.2% of world steel production and 47.1% of our global trade deficit of $796 billion in 2017. The U.S. produced 81.6 mt or 4.8 percent of the world’s steel output. The European Union produced 168.7 mt or nearly ten percent of the steel and accounted for $151.4 billion or 19% of our global trade deficit. Besides China and the European Union, Japan produced 104.7 mt of steel and accounted for 8.6% of our deficit, S. Korea 71.1 mt and accounted for 2.9% of our trade deficit. We have had huge annual trade deficits with China, Germany and Japan for decades. Imposing tariffs on imports from countries with which we have been experiencing huge trade deficits does not constitute an abandonment of the principle of free trade but is remedial, intended to balance trade. World trade rules permit trading partners to temporarily impose tariffs on goods from countries with which they are experiencing chronic deficits. ...
On Trade, Trump is Acting in the Best Interest of the USA -- we're published in today's American Thinker
Here's a selection:
To read it, go to:
On Trade, Trump Is Acting in the Best Interests of the USA
Two members of Pres. Trump’s inner circle of economic advisers are Wilbur Ross, Trump’s Secretary of Commerce, and Peter Novarro, professor of economics at the University of California at Irvine. The latter has just been named assistant to the president that places him among the ranks of the President’s top-level policy advisors. Both have been urging the federal government to eliminate our international trade deficits which during the past half dozen decades have inflicted considerable harm on the U.S. economy particularly its manufacturing sector, causing the loss of millions of U.S. manufacturing jobs, reduced U.S. economic growth considerably, converted the U.S. from the world’s leading creditor nation to the world’s leading debtor nation.
The problem is that the nations who sell more to us than they buy from us are creating jobs for their own workers at the expense of American workers. They use a large proportion of dollars they earn from exporting to us to buy U.S. assets which do not create any jobs, buying existing American assets like shares of American corporations often gaining control of American corporations, hotels, office buildings, and the like. If they bought goods made in the U.S. resulting in balance trade, the economies of both countries would benefit and it would not have disastrous effects on the U.S. economy, U.S. jobs, and the incomes of American workers.
A policy of free trade makes sense only when there are no formal or informal barriers to trade, the rate of exchange between currencies is conducive to balanced trade, and national security is not endangered by trade in particular goods. Pres. Trump announced that he plans to impose tariffs of 25% on steel and 10 % on aluminum because a great power needs those industries for its security and free trade is endangering its security. ...
Trump getting serious about trade
On March 6, 2017, Navarro gave a great speech about trade deficits to fellow business economists. His main points were:
1. Trade deficits subtract from GDP growth.
We discussed it in the American Thinker:
Historical Background of Purim
[Note: The first version of this was posted on March 8, 2011. The second was posted on March 8, 2012 and revised March 25, 2012]
For thousands of years people have been inspired by Esther's brave choice when she risked her safety in the king's harem to save the Jewish people from annihilation. Her cousin Mordecai had called her to greatness when he asked her, “Who knoweth whether thou art not come to royal estate for such a time as this?” (Esther 4: 14). She had bravely replied to Mordecai:
Some think that the Book of Esther is fiction. But I do not. It fits too well with what we know about Persian history. Even though the Persian libraries were destroyed by Alexander the Great and the Greek reports conflict wildly, the Jewish account of Persian history is quite consistent. Esther is part of a chain of historic Jewish figures (Mordecai, Esther, Ezra and Nehemiah) who worked together to save the Jewish people at a time of extreme peril. The following timeline shows how Persian and Jewish history fit together:
Each Jewish event is dated as having taken place during such-and-such year of the reign of such-and-such monarch, so the reigns of the Persian monarchs give us the approximate year of each major Jewish event. On the timeline, the Jewish events are shown above the horizontal axis, while the Persian monarchs are shown below.
I have not deviated from the accepted Persian timeline, except that I have only separated Ahasuerus and Artaxerxes by a dashed line, because I believe that they were a single person who reigned as two different kings. The doubled lines between the reigns of Cambyses II and Darius I and between the reigns of Artaxerxes and Darius II indicate short reigns of quickly deposed kings. This timeline is just the briefest of summaries. Here are more details....
Only Way the Trump Administration Will Be Successful in Fixing the Trade Deficit
An Open Letter to USTR Robert E. Lighthizer
The Only Way You and the Trump Administration Will Be Successful in Fixing the Trade Deficit is to LET TRADE FIX ITSELF! And Here is How.
Your Administration is in office in no small part because of its loud denunciation of international trade deals like NAFTA and the TPP and a pledge to fix the $0.5T annual trade deficit (really closer to $0.75T in actual goods). This is one area where the metrics are well established and failure to make at least a substantial dent in the trade balance will be easily visible to voters by 2020. And while economists may argue the relative importance of the trade deficit to our economy, it is hard to make the case that a net cash outflow of such magnitude does not hurt our economy, undermine domestic manufacturing, break essential supply chains and cost Americans millions of middle class jobs.
Unfortunately, the tools the you have in hand to balance trade are very limited. We are already seeing that jawboning doesn’t work as evidenced by a year-to-date trade deficit in 2017 that is almost 10% worse than 2016. And it is readily apparent to the clear-eyed observer that negotiations can make but a marginal dent in the trade deficit irrespective of the skill of the negotiator. In rough numbers, China exports 4 times as much to the US as it imports from us. Yes, four times! The same with Vietnam. Japan’s trade ratio with the US is over 2 and Germany’s is almost 2.5. (which belies the myth that we are bound to have a big trade deficit because we are a high wage country.), These countries understand that the trade balance does matter and in each case, the surplus with the US is an essential and strategically achieved component of their economy that they will not relinquish at a negotiating table.
We hear proposals that we can fix the trade deficit by “prohibiting” or countering currency manipulation by our trade competitors, but currency manipulation is hard to identify, quantify and prove; to an objective observer, our own quantitative easing looked a lot like currency manipulation. And besides, trade experts have highlighted over 100 different ways other countries tilt the playing field their way irrespective of the words in trade agreements or WTO rules. Others have proposed a substantial (say 25% or more) flat tariff. But such an indiscriminant strategy would incur the wrath of the WTO and penalize our fair-trading partners like Canada and Brazil more than it would the Chinas of the world.
Who knew trade was so hard, and what can we do? The only solution is one that’s not really new, but that never gained traction. That is to employ a “closed loop” mechanism in which the desired results are autonomously achieved – just like with the autopilot on an airplane (or now even on your car). Warren Buffet foresaw the dangers of an emerging trade imbalance in 2003 and published an Op-Ed in the WSJ advocating we adopt a system of “Import Certificates” (i.e., rights to import) that could only be earned by exporting a like value of goods or buying them from someone who had. Thus trade would inherently be balanced. Obviously this would need to be phased in over some period of years to not disrupt the world economy. And it has other drawbacks like requiring a new bureaucracy to manage the certificate marketplace and penalizing our best trading partners like a flat tariff. But the basic concept of using a “feedback” approach was sound....
The Corporate Income Tax Cut Is Unnecessary; Treat Corporations As Partnerships
Corporations are artificial entities and artificial entities bear none of the burden of income taxes; those who own them bear the burden of the income tax and gain from tax reductions. The burden of the corporate income tax is borne by the shareholders, and guess what? The top one percent of the richest Americans own forty percent of the stock of American corporations and the next nine percent own forty percent. The corporate income tax cut from 35% to 20% will reduce their burden 42%. That is why the U.S. stock markets have been booming since Trump’s election. But the purpose of income tax reform is not to make the rich richer; it is to lower taxes on the middle class and eliminate loopholes. So why are we giving the rich (and foreigners who own 15% of American corporate shares) such an enormous tax break?
The reasons given by its proponents is that the U.S. high rate causes American companies to 1) invest in or move their headquarters and factories to lower tax countries, 2) cause U.S. multi-nationals to keep their foreign earnings abroad because to return them to the U.S. will subject them to the higher U.S. income tax rates, and 3) U.S. multi-nationals will use the high rates and low or non-existent American tariffs resulting from international trade agreements to produce their products abroad and to export them to the U.S. duty-free. These and many other evils of the corporate income tax can be corrected by a costless solution, namely, taxing corporate earnings under the personal income tax just as we tax partnership earnings. After all, the corporation is simply a limited liability company and most American partnerships and proprietorship have registered as limited liability companies (LLCs), and 4) stimulate economic growth. Under our proposal, the earnings of foreign subsidiaries would be subject to the personal income tax so there would be no incentive to keep earnings abroad. ...
Journal of Economic Literature:
Atlantic Economic Journal: