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Richmans' Trade and Taxes Blog
Proposed 'Scaled Tariff for Balanced Trade Act'
Ideal Taxes Association has put a scaled tariff proposal into bill form. You'll find the text below. It would take in, as revenue, half of our trade deficit with each of those countries with whom we have a large trade deficit. The rate of the duty would be adjusted to our trade surplus with each country and would go down when our trade with that country moves toward balance.
If you are interested in helping get this bill passed, you can republish this proposal on your website and/or e-mail it to your friends. Also, you can email your offer of help to email@example.com (include your name, state, nine digit zip code, and organizational affiliations; subject line: "Scaled Tariff Bill").
To achieve balance in the foreign trade of the United States through a scaled tariff, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Scaled Tariff for Balanced Trade Act'.
SECTION 2. FINDINGS.
Congress makes the following findings:
(1) Import duties were one of the methods envisioned by our founding fathers for paying the debts of the United States Government. Article 1, Section 8 of the United States Constitution begins: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts”.
(2) The purpose of trade is to exchange a bundle of goods and services produced with comparative advantage in one country for a bundle of goods and services produced with comparative advantage in the other country. When trade is in balance, both trading partners benefit. But when trade is chronically out of balance the trade deficit country loses jobs in import-competing sectors without gaining more productive jobs in exporting sectors.
(3) The current large chronic trade deficit of the United States has cost millions of jobs and reduced United States power in world affairs. The international trade deficits of the United States continue to damage the economy causing a loss of industry, a loss of millions of productive jobs, and a worsening of the distribution of income. The United States trade imbalance is due to a variety of factors including unfair trading practices of some trading partners, escalating budget deficits, failure to exploit domestic petroleum and natural gas resources, inflow of savings by foreign governments and individuals, and the outsourcing by American businesses of their production abroad. The chronic trade imbalance imperils the United States external financial position. Unless trade is brought toward balance, the international value of the United States dollar will eventually collapse with terrible consequences not only for the United States but for the entire democratic world.
(4) Article XII of GATT 1994, annexed to the Agreement Establishing the World Trade Organization, permits any country that has both a perilous external financial position and a balance of payments deficit in the current account to restrict the quantity or value of merchandise permitted to be imported in order to bring payments toward balance. With the United States net foreign debt in 2009 at 25% of GDP and the balance of payments deficit in the current account at 2.7% of GDP, the United States qualifies and is permitted to use import restrictions to balance trade. Such restrictions can include price-based measures such as import duties that are in excess of the duties inscribed in the WTO schedule for that member.
(5) Countries that impose import duties under Article XII of GATT 1994 must progressively relax such import duties as the trade deficit grows smaller, maintaining duties only to the extent that a continuing balance of payments deficit in the current account justifies such application. Therefore an import duty that is implemented under the authority of Article XII of GATT 1994 should go down in rate as trade approaches balance and should disappear when the balance of payments in the current account reaches balance or goes into surplus.
(6) A scaled tariff, as described in this act, complies with Article XII of GATT 1994 because it is suspended if the United States balance of payments in the current account goes to surplus and because the rates of the duties would go down when the United States trade deficit goes down with a particular country and would disappear when the United States trade deficit with a particular country nears balance or goes into surplus.
SECTION 3. DEFINITIONS
In this Act:
(1) TRADE SURPLUS COUNTRY- The term `Trade Surplus Country' means a country which had a trade surplus (Goods plus Services) of at least $500 million with the United States during the most recent four economic quarters and whose exports to the United States (Goods plus Services) were more than 110% of its imports from the United States (Goods plus Services) during the most recent four economic quarters.
(2) GOODS- The term `Goods' means all products that are traded which are not services.
(3) TRADE DEFICIT- The term `Trade Deficit' means the dollar value of United States imports in Goods and Services from a country after subtracting the dollar value of exports of Goods and Services to that country.
(4) SCALED TARIFF- The term `Scaled Tariff' means a duty applied to Goods imported from a Trade Surplus Country. The rate of the duty is adjusted quarterly and calculated as the rate that would cause the revenue taken in by the duty upon imported Goods from the Trade Surplus Country to equal 50% of the Trade Deficit with that country over the most recent four economic quarters.
(5) DEPARTMENT- The term `Department' means the Department of Commerce.
(6) SECRETARY- The term `Secretary' means the Secretary of Commerce.
SECTION 4. ESTABLISHMENT OF THE SCALED TARIFF
(a) IN GENERAL- The Secretary shall impose a Scaled Tariff upon Goods produced by each Trade Surplus Country. In order to make the rate of the duty sensitive to changed policies in each Trade Surplus Country, the Secretary shall recalculate the duty rate of the Scaled Tariff for each country quarterly, based upon trade data for the most recent four quarters, and should redetermine, quarterly, whether each country is a Trade Surplus Country.
(b) REGULATORY AUTHORITY- The Secretary shall promulgate regulations in accordance with section 5 that provide for--
(1) charging the Scaled Tariff to importers;
(2) rebating the Scaled Tariff to exporters.
SECTION 5. OPERATION OF THE SCALED TARIFF
(a) VALUATION OF IMPORTED GOODS- The Secretary shall establish a method for the valuation of Goods imported into the United States. The method may include the use of the declared dollar value of the Goods on the Entry Summary (United States Customs and Border Protection Form 7501).
(b) APPLYING THE SCALED TARIFF TO IMPORTED GOODS. The Department will charge the Scaled Tariff on all Goods originating from each Trade Surplus Country.
(c) REBATING THE SCALED TARIFF TO EXPORTERS. The Department shall rebate Scaled Tariff payments to United States exporters to the extent that they were paid on inputs to those particular exports.
(d) SUSPENSION OF THE SCALED TARIFF- The Scaled Tariff under this act will be suspended after the Commerce Department determines that during the most recent calendar year the current account of the United States was in surplus. Collection of the Scaled Tariff under this act will resume after the Commerce Department determines that during the most recent calendar year the current account deficit of the United States was at least 1% of United States GDP.
SECTION 6. EFFECTIVE DATE.
This act will be implemented no later than 90 days after enactment.
Comment by Mark, 1/21/2011:
yes yes we need to put a 25% taffif tax on china it would pay of are deficit and put america back into a fare playing power yes please push this bill
Comment by David Herr, 2/4/2011:
I think you are putting the cart before the horse with this proposal. The chronic trade deficits we experience are inflated by 1) our profligate Congress and President, who have blown out the budget deficit, which in turn requires trade deficits to finance a large part of the budget deficit; and 2) Fed and Congress induced credit bubbles, which also require more trade deficit financing than would otherwise occur. Remember, net private sector borrowing + net public sector borrowing = trade deficit. The trade deficit, by definition, must be held by the trade surplus country in dollar denominated investments (stocks, real estate, US Treasuries, cash). By removing Fed impediments to the natural private sector deleveraging which would otherwise be occurring in the wake of the credit bubble, and restraining US budget deficits, the trade deficit would be reduced to something more natural. At that point, if it still exceeds 3-4% of GDP, we can start implementing a scaled tariff. In addition, we could also reduce red tape, particularly in the energy sector (50% or more of our trade deficit is oil, which in turn is made more expensive by the cheapened dollar), to reduce those sectors in the economy where foreigners have a competitive advantage. Budgetary restraint, monetary honesty, and reducing the regulatory burden would go a long way towards reducing the trade deficit to something sustainable, without the need for freedom-curtailing tariffs.
Response to this comment by Bob R, 10/7/2011:
Comment by Bob R, 8/12/2011:
This is the right idea, but I would propose a different formula. Annually adjust tariff rates with every single country, deficit or surplus. Tariff rates get changed by d=m*(imports-exports)/(imports+exports). d stands for delta, and can range from -m to +m, and this gets added to the tariff rates from the previous year. That would mean that we increase tariffs with countries with which we have a trade deficit, and decrease tariffs with countries where we have a trade surplus. This would tend to self balance trade out over time. I don't know what the multiplier should be, but I would suggest 4 in most cases, and 1 or 2 if the other country were to adopt this same tariff adjustment policy. In the case a country like China, this would effectively raise tariff rate by a few percent every year until trade was nearly balanced. This should be small enough so as not to invite retaliation. If rates were changed more often than annually, I would be ok with that but I would think there would be too much opposition by U.S. business doing manufacturing overseas.
Comment by Bob R, 10/7/2011:
The bill states: "The rate of the duty is adjusted quarterly and calculated as the rate that would cause the revenue taken in by the duty upon imported Goods from the Trade Surplus Country to equal 50% of the Trade Deficit with that country over the most recent four economic quarters."
Can you give an example of what this means? Say imports from China are 75 billion, exports are 25 billion over one quarter = 300b and 100b a year. (The real number are close but even worse!) The trade deficit would be 200 billion, 50% of that is 100 billion. It turns out had the 300 billion of imports had a 33.3% tariff, 100 billion would have been raised. So the tariff for the next quarter would be 33%?
So the next quarter without tariffs Imports would normally be 75 billion, but with the 33% tariff, say imports are reduced to say 10 billion. (I am speculating here, I need help estimating how imports would respond to a 33% tariff). Whatever the imports are, how would the tariff rate for the following quarter be calculated? Could you provide an example (a spread sheet maybe?) for several quarters?
And suppose eventually the system settles down to some given tariff rate and the trade is almost balanced, then the next quarter tariffi would reset to zero? Although I see the system yo-yo-ing around rather than settling.
I have been doing some crude simulations, and it appears that to balance trade, the tariff rate should be proportional to the trade debt, that alone seems sufficient. It may not be intuitve, but it is what my simulations produce. But saying the tariff should be proportional to the trade debt is equivalent as saying the tariff should be adjusted (up or down) every period based on the trade deficit, and that makes intuitive sense. As I get more results I will post more later.
Response to this comment by Howard Richman, 7/19/2012:
Comment by , 11/28/2016:
Dear Mr. Richman
I fully agree with your proposed legislation to use a scaled tariff to balance foreign trade. I started worrying about this problem in the 1980s when we began having serious trade deficits resulting in high budget deficits. I have been advocating the idea of making the tariff on imports from each country proportional to our trade deficit with that country ever since. Then, in 1994 I ran for Congress against Earnest Istook, because he had voted for NAFTA. The center piece of my platform was what you call a scaled tariff. I called it a Trade Balancing Tariff. My proposal was virtually identical to yours, including the use of a four-quarter rolling average to determine the trade deficit. The purpose of that formula was to average out the effect of seasonal products. Congressman Istook was a well funded incumbent party-line Republican in Oklahoma’s 5th District. I was an unknown independent. I lost, but never gave up pushing my idea to balance trade. Now that we have a President-elect who is not afflicted with tariff-phobia, maybe your proposed Bill can get some traction. I will send your link to Oklahoma’s Congressional delegation. I know someone who has a relationship with Trump’s economic team, and I asked him to make them aware of your website. Do you have an organized effort in place to advocate your proposed legislation? I am now 86 years old with limited resources, but a willingness to help.
Journal of Economic Literature:
Atlantic Economic Journal: