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Richmans' Trade and Taxes Blog
A Review of W. Raymond Mills "Managing ForeignTrade"
We have published a working paper by W. Raymond Mills (Managing Foreign Trade, Ideal Taxes Association, Working Paper #2, February 23, 2010). He begins with this insightful paragraph.
It is ironic that the man-on-the-street in any town in Ohio has a better understanding of the harm done to the U.S. economy by the trade deficit than do the experts who study the problem. The ordinary citizen knows that goods manufactured overseas and sold in the U.S. reduce output among U.S. manufacturing firms. The ordinary citizen knows that unbalanced trade – more imports than exports – means that foreign producers are, on net (using Greenspanese) displacing and replacing U.S. firms and U.S. manufacturing jobs.
It is a mystery how our leaders in Washington could observe the damage being done to U.S. industry during the past thirty years without taking counter-action. It is no mystery to one who has studied economics. Economists have gone from embracing the principle of comparative advantage, first enunciated by David Ricardo in the second decade of the 19th century, to concluding , that trade under all conditions was beneficial to the trading partners, a non-sequitur. Every example of the benefits of trade from David Ricardo to Paul Krugman shows trade to be in balance, just as in barter, with each exchanging a basket of goods it values more for a basket of goods it values less. While this suggested that free trade, an absence of tariffs and other barriers to trade, would be beneficial to all trading partners, the only conclusion warranted was that balanced trade was beneficial to all trading partners. Nothing in economic theory suggests that one side practicing free trade would result in trade beneficial to all parties. The book we authored, Trading Away Our Future (Ideal Taxes, 2008), argued that our trading partners were not practicing free trade and that balanced trade, not free trade, was the first principle of international trade.
Ray Mills lists the principles he believes should guide us in our trade relations with the rest of the world. The importance of increased trade in increasing the well-being of both trading partners is stated succinctly as follows:
When exports and imports are equal, a large increase in imports means a large increase in exports and both changes together results in a large increase in Gross Domestic Product. . . . Adam Smith knew that it was not necessary to create a trade surplus in order to benefit from trade. He just did not have the tools to demonstrate that reality so clearly.
The principle of balanced trade, he argues, must be embraced by all trading partners. He writes:
The reality is that all nations restrict imports, with the possible exception of Hong Kong. Because exports add to GDP and imports detract from GDP, each nation that restricts imports gains an advantage over other nations who do not restrict imports. Subsidizing exports also increases the likelihood of creating a trade surplus. The incentives available to each nation, to move their nation towards a trade surplus, work against every nation following the free trade ideal.
How did Japan, Germany, and China create their massive surpluses with the U.S. and why did the U.S. look on so passively? Mills remarks on the failure of both U.S. political parties:
The U.S. Congress grew concerned with the growth of the trade deficit after 1997. In October, 1998, the U.S. Congress established The U.S. Trade Deficit Review Commission with the aim of understanding the trade deficit and providing the Congress with recommendations of what, if anything, to do about it. The Republican members of the Commission decided that nothing should be done to reduce the trade deficit because it was an inevitable product of a rapidly growing economy. This conclusion is unreasonable, as Spock would say. .. By restricting imports, Japan has shown that rapid growth can be combined with a trade surplus – the opposite of a trade deficit. The Democrat members of the Commission did not seize upon this logical non-sequitur. Instead, they focused on mitigating the harm done to worker by the closing of domestic firms due to the trade deficit.
Shame on the leaders of both parties. But their economic advisors should be more shamed.
Mills sets targets to be achieved:
A good practical goal for the U.S. is to seek to reduce the U.S. goods trade deficit to 23% of U.S. goods imports. That is the level achieved in the U.S. in the period 1994 – 1997. In that four year period, the combination of a low trade deficit and low value of the dollar enabled the U.S. to increase employment in the manufacturing sector of the economy.
One may differ with this target and with others of his policy proposals. He is aware of Warren Buffett’s proposal for “import certificates” which would limit our imports from a country to its imports from us and to the role tariffs may have to play. The principal reliance, though, that Mills would make is the imposition of tariffs on imports of manufactured goods from our mercantilist trading partners:
Regardless of the reason for the trade surplus with the U.S., it is in the interests and power of the U.S. to use tariffs to discriminate against countries that create most of the U.S. trade deficit. In the measured period, these five countries [China, Japan, Germany, Canada, and Mexico] were responsible for 61% of the U.S. trade deficit in goods Their dominance only increased as the U.S. trade deficit declined in relative size in the first 9 months of 2009. During 2009, these five countries generated 73% of the U.S. goods trade deficit. (Services are ignored because the U.S. traditionally has a surplus in services).
One can differ with his lumping Canada and Mexico with the others given that free trade among the NAFTA countries is the rule rather than the exception. The deficits are not the result of mercantilist policies.
Germany, Japan, and China would threaten retaliation but Mills believes that we are the aggrieved party and such threats cannot obscure that we are the victims of their misbehavior.
Many of Mills’s interpretations of the facts and many of his policies are unique to him and there is much to challenge. But his principal theses are now widely shared by those who have viewed the growing trade deficits and the deindustrialization of the U.S. with alarm. Here is an additional voice which is worth hearing.
He calls this a working draft and he invites our readers to suggest any changes they believe would strengthen or improve the paper. Comments and critiques, positive and negative, will be welcomed. I have read it with great interest and made a number of suggestions, most of which he has graciously accepted.
Journal of Economic Literature:
Atlantic Economic Journal: