Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Restore American Jobs and Do It Quickly
The world economic crisis is in danger of turning into Great Depression II. The economic stimulus package, the Troubled Asset Relief Program. cash grants to households, subsidies like "Klunkers", subsidies to home remodelling,to wind turbines and solar panels, and cash grants to households by both Pres. GW Bush and Pres, Obama have had little effect and unemployment continues to increase. The first step, and it is urgent that we do it, is to bring our foreign trade into balance. Our trade deficit in goods reached over $800 billion in 2008, the equivalent of 8 million U.S. jobs.
We have built up huge trade deficits with Germany, Japan, and China, countries embarked on an import-substitution (protective tariffs) strategy and an export-based strategy of development (building products for export), employing barriers to imports and subsidies to exports. Economists have a term for this -- mercantilism. Communist China when it saw the success of free markets in its agricultural sector, liberalized its manufacturing sector, too, permitting multi-nationals, in partnership with Chinese firms, to build factories and adopted the same mercantilist strategy. The mercantilist strategy of protective tariffs and export subsidies succeeded in converting the U.S. by the mid-1980s from the world’s leading creditor nation to the world’s leading debtor nation. This was the result of the growing trade deficits of the U.S. with each of these countries.
The traditional mechanism for correcting trade deficits and bringing trade into balance was expected to be changes in the relative value of the currencies of deficit and surplus countries. A falling dollar and a rising mark, yen, and yuan would make imports more costly to Americans and our exports cheaper to our trading partners. The trouble is that the trade surplus countries used their surplus dollars not to import more from the U.S. but to buy U.S. Treasury bonds and corporate financial assets and build up their foreign exchange reserves which kept the exchange rate of the dollar from falling as did their continued use of barriers to imports and subsidies to exports.
The enormous trade deficits experienced by the U.S. resulted in the loss of factories and the loss of millions of industrial jobs, led to wage stagnation, and a worsening of the U.S. distribution of income. The U.S. Council of Economic Advisors took little notice of the deficits and its negative consequences on U.S. industry; even bragged that our economic growth was services-oriented. Indeed, the Council took pride that our past enemies and developing nations were making real progress as a result of the growth of international trade. American economists had become “free trade” ideologues. A typical assertion was, “If our trading partners are willing to exchange their goods for our paper, why should we object?” They ignored the fact that every example of the benefits of trade in economic textbooks and journal articles ended up in balanced trade.
We cannot blame our mercantilist trading partners for pursuing practices that accelerated their economic growth. We should however denounce administrations that witnessed the decline of American industry and chose to do little or nothing to bring trade into balance. We always had the power to protect our industries and our workers. We thought that the trade imbalance was the result of market forces, ignoring the fact that for all practical purposes we were the targets of countries that bore us little good will. Politics played a huge role. Much of the goods imported from abroad came from American firms operating abroad.
Economists frequently opined that trade was beneficial, even when there was a trade deficit, by providing Americans with lower priced goods. But this was of benefit to those whose incomes were unaffected by foreign competition, like those working in banks, in brokerage houses, public employees, educators, and retailers, ignoring the loss of jobs of millions of industrial workers and the wage stagnation it caused.
The rules of the World Trade Organization(WTO) authorize countries experiencing chronic trade deficits to impose barriers to imports to bring trade into balance. Our economists in academia and those working for the federal government did not want to be accused of protectionism. The fact is we were accused of protectionism anyway even though we were suffering huge trade deficits. We even allowed countries to attack us as protectionists while they enjoyed huge trade surpluses with us. They alleged in particular that we subsidize the production of some agricultural products. All the while some of them through their mercantilist practices have been building larger trade surpluses.
Much of the U.S. trade deficit is a result of the enormous amount of petroleum we import. Yet thanks to misguided environmental policies, we restrict drilling for oil where there are known deposits on public lands and offshore. We have enormous reserves of natural gas but only a few trucks run on natural gas. How easy it would be to convert trucks and buses to run on natural gas as T. Boone Pickens has argued for more than a decade.
Economists have been urging the federal government to allow the dollar to depreciate vis-à-vis other currencies which was the traditional economic mechanism to restore a balance of trade. But the dollar lost almost half its value against the Euro without eliminating Germany’s trade surplus with us. Moreover, a depreciating dollar is unfair to our trading partners who have a balance of trade with us. It is ineffective against Japan and China and other countries which peg their currencies to the dollar. As the dollar depreciates, so does the yen and the yuan depreciate right along with the dollar. In fairness to our trading partners who are playing fair with us, our counteractions should have the effect of affecting only our trade with those engaged in mercantilist discrimination against American goods.
But there is another, perhaps more important argument against depreciation of the dollar. Since World War II, the dollar has been the standard for international transactions. Most internationally traded goods are priced in dollars. Balancing trade would restore the dollar as the world standard and would stabilize international prices. The current difficulties experienced by the Euro suggest it would not be a good successor to the dollar. There is no other currency that can take its place although China, Brazil, India, and Russia appear to be backing the IMF's drawing rights as the likely successor. And where does the IMF been get most of its resources? From the U.S. Balancing trade would restore the U.S. economy and rstore the U.S. dollar to a leading role in world growth and stability.
In our book, Trading Away Our Future (2008) and since its publication, we have urged the U.S. to impose a variation of Warren Buffett’s plan to restrict imports through the issuance of import certificates and our own plan to levy a uniform rate of tariff against all imports coming from countries with which we are experiencing chronic trade deficits. Both plans are in compliance with WTO rules. The simplest to implement because the administrative apparatus is already in place would be the tariff. Besides it would earn a lot of revenue until trade is in reasonable balance. We should move to balance our trade without delay. To delay makes Great Depression II more likely if not inevitable.
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