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Auctioning Import Certificates is consistent with WTO rules
Howard Richman, 5/4/2010
Import Certificates, whether across-the-board or targeted toward the currency-manipulating countries, would provide the most effective way to solve America's trade deficits. Warren Buffett first proposed this method to balance trade in a Fortune Magazine article. He wrote:
We would achieve this balance by issuing what I will call Import Certificates (ICs) to all U.S. exporters in an amount equal to the dollar value of their exports. Each exporter would, in turn, sell the ICs to parties – either exporters abroad or importers here – wanting to get goods into the U.S. To import $1 million of goods, for example, an importer would need ICs that were the byproduct of $1 million of exports. The inevitable result: trade balance.
In Trading Away the Future (2008), my father, son, and I endorsed Buffett's plan, while at the same time endorsing a more limited plan as being more consistent with WTO rules. We wrote:
Our plan differs from Buffett’s plan in that we would have the Department of Treasury auction the Import Certificates, rather than have the Import Certificates issued directly to exporters. Also, the certificates would just be targeted to individual dollar mercantilist countries, as evidenced by their excessive amounts of dollar reserves....
Our plan has the advantage that it is much more modest. It could more clearly be instituted without violating World Trade Organization rules since it would only impose import certificates upon countries having a large trade surplus with us. Article 12 of the Uruguay Round GATT agreement specifically lets countries running a threatening overall trade deficit restrict imports from any country with whom they are running a trade deficit. Our plan would simply enforce the International Monetary Fund agreement that countries should not manipulate their currency values. The result would be a more balanced playing field under the current rules of international trade.
In an Economic Policy Institute December 2009 working paper (#288) (Addressing Balance of Payments Difficulties Under World Trade Organization Rules) Terrence P. Stewart and Elizabeth J. Drake of the Law Offices of Stewart and Stewart, agreed with our conclusion that auctioning the Import Certificates would be more consistent with WTO rules than distributing them to exporters. Specifically:
Warren Buffett’s trade balancing proposal would bring the chronic U.S. trade deficit into balance by creating import certificates equal to the value of U.S. exports. These certificates could be granted to exporters and sold by them on the open market, or they could be auctioned by the government through a certificate market. While the first method would provide benefits to exporters, the second method would help reduce or eliminate potential inconsistencies with WTO prohibitions on export subsidies....
Import Certificates Consistent with Article XII
Stewart and Drake pointed out that all Import Certificate plan versions are consistent with the WTO's Article 12 framework for the following reasons:
- "First, the program is specifically designed to limit imports only to the extent needed to restore equilibrium to the trade balance. It is thus consistent with provisions in Article XII that require countries to limit import restrictions to those necessary to address balance-of-payments problems and that urge countries to take steps to restore equilibrium in their balance of payments on a sound and lasting basis." (p. 11)
- "Second, the program does not distinguish between products, and thus it is not designed to provide special protective benefits for certain domestic industries. The program is therefore consistent with Article XII provisions regarding the avoidance of “uneconomic employment of productive resources,” as well as with provisions in the 1994 Understanding that require import restrictions to control the general level of imports, to minimize incidental protective effects, and to be transparent." (p. 11)
- "Finally, the fact that Article XII focuses on the decline in a country’s monetary reserves should not prevent the United States from invoking Article XII merely because the dollar is now the international reserve currency. As Table 1 demonstrates, in 2007 the amount of international reserves held by the United States was small in absolute terms compared to other countries and extremely low relative to the value of U.S. imports. In fact, U.S. reserves were not sufficient to cover even eleven days worth of imports. When the U.S. invoked Article XII in 1971, and the IMF and GATT parties agreed the country was facing a balance-of-payments crisis, U.S. reserves equaled the value of about three months worth of imports." (p. 12)
Are Targeted or Universal Certificates More Consistent?
We target the Import Certificates in our version of the Buffett plan in order to change mercantilist government behavior. Currently China, and the other mercantilists, intentionally keep out American goods, using a wide variety of pretexts. Targeted certificates force them to encourage their consumption of American exports so that they can sell their exports to us.
Also, by targeting the certificates only at those who manipulate their currencies, we reward countries that practice true free trade with the United States, countries like Canada and Mexico. Our targeted import certificates on the Asian mercantilists would lead to us buying more goods and services from countries that, when they grow economically, buy more goods and services from the United States.
However, the targeting of certificates to specific countries "as evidenced by their excessive amounts of dollar reserves" might run afoul of the WTO's rules against targeting countries, especially poor countries. Stewart and Drake wrote:
- "Third, the [Buffett] program does not distinguish between countries, and thus it does not unduly disadvantage some countries to the benefit of others. This approach is consistent with Article XII provisions regarding the avoidance of unnecessary damage to trading partners. While the proposal does not exempt imports from less-developed countries as suggested in the 1979 Declaration, this is not a mandatory requirement, and the advantages of universal application may outweigh the benefits of special and differential treatment in this regard." (p.11)
On the other hand, targeting currency manipulators would be consistent with the International Monetary Fund Articles of Agreement which require (Article IV) that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advoantage over other members." And the International Monetary Fund will be involved whenever a country invokes Article XII. as Stewart and Drake note:
In any case, imposition of a trade balancing program under Article XII will precipitate consultations at the WTO and may lead to a challenge under WTO dispute settlement procedures. Given the deference the WTO accords to IMF determinations regarding balance-of-payments issues in such proceedings, implementation should also be accompanied by U.S. efforts to explain the policy to Fund officials.,,, (p. 12-13)
Is Being Consistent with WTO Rules Important?
It is clear that Warren Buffett's Import Certificates plan to balance trade is consistent with WTO rules, so long as the Import Certificates would be auctioned by the U.S. Treasury, instead of being distributed to American exporters. Incidentally, auctioning the certificates would also help balance the U.S. federal budget.
Being consistent is a huge advantage. When put into bill form by Senators Dorgan and Feingold as the Balanced Trade Restoration Act of 2006 (SB 3899), it was largely ignored, probably because it was contrary to WTO rules. Congress is unlikely to pass anything that would cause the demise of the WTO. They are not that radical.
But if Congress were looking for a radical solution to the U.S. trade deficits that would remake the world in a good way, the Buffett plan in its original form could do so. As we noted in our 2008 book:
The Buffett plan has within it the seeds of a different, but perhaps better international system, one based upon the fact that balanced trade, like barter, always benefits the parties involved. Under the new system, any country experiencing a trade deficit could decide to impose a system of import certificates in order to bring that trade back into balance. The new system would put an end to mercantilism. Any country that tried to subsidize one particular export-competing industry would be hurting its import-competing industries. There would no longer be a need for the World Trade Organization, nor for the GATT treaties, nor for any other of the forms and bureaucracies of the current regulatory-based trade system....
No longer would it be possible for one country to deindustrialize and economically destroy its trading partners without its trading partners’ consent. With balanced trade the rule, not the exception, no longer would the world economy be characterized by massive movements in the prices of currencies that would cause intense recessions and depressions. The mercantilist era of economic warfare would end. The era of economic instability caused by currency collapses would end. An era of international economic stability would begin. (p. 98)
Comment by Raymond L. Richman, 5/6/2010:
What would bring trade into reasonable blance and require no new bureaucracy would be tariffs on imports only from countries with which we have been experiencing chronic trade deficits. A uniform tariff applicable to all imports from, say, China would act like a revaluation of that country's currency making imports from it more expensive and thereby reducing imports. Paul Krugman has suggested a tariff of 25% (see link at the right of this page) to bring pressure on China to allow the yuan to fluctuate freely. Such pressure would be totally unnecessary to achieve the desired result, reasonably balanced.trade with that country. The tariff could be raised if needed or lowered as the trade balance improves. Countries with which we are not experiencing trade benefits would not be adversely affected; if anything, we may start importing more from them. Our revenues would increase reducing the budget deficit. And it violates no international trade rules. I'll post a detailed analysis in the near future.
Comment by Dalya Gomaa, 12/9/2011:
I think your idea is brilliant and amending Buffet's idea solves most of the problems, but how do we know that we wont be challenged according to WTO rules if we target only the countries that manipulate their currencies and do not apply it to all countries?