Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

The Wall Street Journal Criticizes Romney Calls Him a Protectionist
Raymond Richman, 9/17/2012

In an editorial entitled “Romney’s Trade Pessimism”, the Wall Street Journal (9/15/2012)  criticizes Gov. Romney for publishing an ad attacking Pres. Obama for the latter’s failure to deal with our trade deficit with China. In the last twenty years, the U.S. trade deficit in goods and services increased from $39 billion in 1992 to $506 billion in 2011. Our deficit with China accounted for $280 billion, more than half, costing about 2.8 million jobs. Allowing such a huge deficit to continue is a disservice to the American worker.  

Free trade is a policy that assumes that the trading partners are not imposing artificial barriers to imports or subsidies to exports. Thanks to our constitution, there is no barrier to the free movement of goods among the states, the essential condition for an enduring policy of free trade. Free trade advocates often argue that if our trading partner is foolish enough to exchange its goods for our “paper”, why should we complain? The basis for such a statement is that at some time in the future, the debt will have to be repaid and we shall have to have a trade surplus to do it. But with China setting the official value of its currency, there are no market forces to produce such a turnaround.  In the meantime, the trade surplus country experiences a stimulus to growth in GDP and employment while the trade deficit country experiences a drag on GDP and employment. If one looks at the GDP accounts, one can see why. An excess of imports over exports detracts from GDP while a surplus adds to GDP. In other words, a trade deficit means we have lost jobs. 

Our trade deficit with China exists not only as the result of market forces but also, perhaps mainly, as a result of its mercantilist policies, principally, barriers to imports and subsidies to exports.  This was dramatized recently by the imposition of a tariff on the importation of luxury autos which forced GM to build a factory in China if it wanted to sell Cadillacs in China.  In addition, some economists allege that China is also engaged in foreign exchange manipulation.  

Gov. Romney has not indicated what measures he would take to force China to increase its imports from us. My colleagues and I have published an article which recommends a single-country variable tariff, called a scaled tariff, which increases as the deficit increases and diminishes as the trade imbalance is reduced. Some fear this would set up a trade war. But in a trade war, the country experiencing a trade deficit is more likely to gain. If China is rational it will choose to reduce its mercantilist practices. If trade is conducted to reach a higher standard of living for both trading partners and not for some ulterior motive such as the desire to weaken your trading partner and gain power for some future confrontation, China will agree to reduce its mercantilist practices.