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Some criticisms of our Scaled Tariff proposal
Howard Richman, 7/25/2010

On Monday (July 19) we published our Scaled Tariff proposal at Enter Stage Right (The Scaled Tariff would Resuscitate the U.S. Economy). Essentially we were proposing a tariff upon the countries that have been practicing mercantilism, as evident from their foreign exchange accumulations. The tariff rate would go up when our trade deficit with that country goes up, go down when our trade deficit with that country goes down, and disappear when trade approaches balance.

There have been 5 criticisms of our proposal in the discussion on the Enter State Right website. Here are those criticisms, and my responses:

1. A reader identifying himself as levin70, commented:

The only problem with your little analysis is that history has proven quite convincingly that trade wars happen to create the real shooty shooty kind.

Do you really think that a shooty shooty war with China or with the OPEC countries would be a good idea?

I mean seriously, try harder

Here is my reply:

Levin70, Actually, doing nothing may make war inevitable, not the other way around. As we continue to let China have our remaining industries, we grow weaker while the Chinese grow stronger. Eventually they will challenge us.

John Pomfret of the Washington Post reports:

On May 24 in a vast meeting room inside the grounds of the state guesthouse at Diaoyutai in Beijing, Rear Adm. Guan Youfei of the People's Liberation Army rose to speak. Known among U.S. officials as a senior 'barbarian handler,' which means that his job is to deal with foreigners, not lead troops, Guan faced about 65 American officials, part of the biggest delegation the U.S. government has ever sent to China. Everything, Guan said, that is going right in U.S. relations with China is because of China. Everything, he continued, that is going wrong is the fault of the United States. Guan accused the United States of being a 'hegemon' and of plotting to encircle China with strategic alliances. The official saved the bulk of his bile for U.S. arms sales to China's nemesis, Taiwan -- Guan said these prove that the United States views China as an enemy.
President Obama's Secretary of Defense Gates and Secretary of State Clinton claimed that Guan was just an "anomaly." But Pomfret reports:
But interviews in China with a wide range of experts, Chinese officials and military officers indicate that Guan's rant -- for all its discomfiting bluster -- actually represents the mainstream views of the Chinese Communist Party, and that perhaps the real outliers might be those in China's government who want to side with the United States."
I am not a China expert, but I do know enough to take Admiral Guan's words very seriously. I know that the ultimate power in China is held by the Chinese military. That's why, ever since the People's Liberation Army ended Mao's Cultural Revolution, the most powerful political position in the Chinese Communist Party has been the head of the military committee.

2. Michael Clark commented:

Forget tariffs. Americans control what they buy. All we have to do is to simply look at the box, wrapper, packaging, etc and when it says "Made in China", "Malyasia", "Indonesia", etc put it back down and buy something similar that says "Made in USA". That is the only effective way of decreasing imports.

I replied:

Saying "no" is a good idea. But it would not get the Chinese to buy our products. The scaled tariff would accomplish that.

3. Robert Loftus commented:

...Instead of a scaled tariff, which could anger a lot of our trading partners,I would prefer a special tax on all US corporations aboard.

I replied:

The problem with a special tax on US corporations on profits earned abroad is that it causes them to move their corporate headquarters out of the country, not just their factories.

4. Paul Hanly commented:

And what about circular economic flows.
EG
A imports more from B
B imports more from C
C imports more from A.

And flow on effects to other countries:
A imports more from B
B imports more from C
C is a close ally who is hurt when A imposes tariffs on imports from B and causes falling demand by B from C

I replied:

The circular trade that you are describing is exactly what occurs when countries are not building up their currency reserves. Countries build up their currency reserves so that, overall, they can export more than they import.

We have allowed for circular trade by not insisting on exact balance, just approximate balance. When the scaled tariff rate falls below 5%, it is not collected at all. The 5% tariff occurs when a mercantilist country exports 10% more to the United States than it imports from the United States.

5. ironer05 commented:

"If they were to react by rapidly selling off their U.S. Treasury bonds, we could freeze their U.S. holdings, temporarily" -- and, once the US government had so clearly demonstrated the "full faith and credit" it supports its debts with to be worth essentially nothing when the creditors are so silly as to be foreigners, then -- after of course confiscating every penny of US-owned investment in their nations in partial compensation -- what would happen next?

I would expect a huge rush (of all investors who legally can) to sell their bonds (as their interest rates soar and therefore prices plummet) trying to beat the inevitable "freeze, temporarily" that the government will next need to impose on _their_ savings, and the "temporarily" keeps getting longer (whether it's ever officially made into a confiscation or not).

Even this post's valiant attempt to outdo the Smoot-Hawley tariff into the coveted role of "most economically destructive act of protectionism ever" pales besides this suggestion to the US government to start welching on its debts.

I replied:

IronerO5:

Let's play out the events that you predict: First we temporarily freeze Chinese government assets in the U.S.. Second, China nationalizes our factories and R&D facilities in China. What happens next?

First American government or courts pay American companies for their assets nationalized by the Chinese government using Chinese government money that has been frozen in the United States. American companies then relocate some of those factories and R&D to the U.S.. America prospers as new inventions are developed in the United States and produced in American factories. Net result is a big win for the United States.

Don't believe all of the nonsense that you read politicians say about the Smoot-Hawley tariff. Economic historians do not think that Smoot-Hawley much affected the length or depth of the Great Depression in the industrialized countries. (Though they do think that it made the Great Depression worse in the agricultural countries.)

Furthermore, unlike Smoot-Hawley, the scaled tariff doesn't produce counter-tariffs, it causes the mercantilist countries to take down their already present barriers to American products.

As you can see, I had ready replies to all of the challenges to our Scaled Tariff proposal. It remains the only WTO-compliant, IMF-compliant, and budget balancing method for resuscitating the U.S. economy that is currently on the table.

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Comment by HI, 8/5/2010:

Could you explain why your proposal is WTO compliant? I read the beginning of the WTO doc linked from your proposal, and that talks only about temporary tariffs when countries face balance of payment problems. Admittedly I didn't go through the whole WTO document, which is quite large. Could you point to specific article(s) that support your thesis? I agree with the gist of your proposal by the way. I'd go so far as looking into creating a new, post-WTO organization together with other developed economies if the current WTO structure doesn't allow honest countries to deal with the cheaters. But I'm not quite convinced that the proposal is WTO compliant.


Comment by Joseph Hitselberger, 8/28/2011:

Again, it's an extremely good idea, something that I was able to work out separately from you.  The negotiations with other countries in the world theoretically should go smoothly.  The U.S. is not alone in it's problem with the trade deficit and the accompanying federal government deficit.  Other countries that are playing fair and not gaming their currencies are suffering just as much as the U.S., if not more,

A real problem is getting the American politicians to understand the intricacies of American economics.  Many are lawyers with little training or understanding of economics.  They know how to talk well enough to make voters distinguish their ideologies, but this distinction is not worth much in terms of technical understanding of economics (sorry to say).




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