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Rep. Kaptur's Balancing Trade Act Needs Teeth
Howard Richman, 3/3/2013

On January 4, 2013, Rep. Marcy Kaptur (Democrat of Ohio) introduced H.R. 192, the Balancing Trade Act of 2013.  She correctly explained that every $1 billion of trade deficit costs more than 5,000 jobs:

In an effort to stem job losses as a result of the trade deficit, I have also introduced and will fight passage of H.R. 192, the Balancing Trade Act. This legislation requires the President to take the necessary steps to eliminate or substantially reduce a trade deficit the United States has with any country if the trade deficit totals $10 billion or more for three consecutive years. Some economists estimate that each $1 billion in the trade deficit costs the United States more than 5,000 jobs. H.R. 192 would ensure that those job losses are stopped and the bill would prevent them from occurring in the future.

Rep. Kaptur is correct about the job losses, but the problem goes much deeper than that. The United States has been stuck in a depression (a long period of economic stagnation with high unemployment) since the fourth quarter of 2007 as a result of our chronic trade deficits. The economics is quite simple. Trade deficits subtract from aggregate demand and income while trade surpluses add to aggregate demand and income.

In the chapter about mercantilism (the strategy of running intentional trade surpluses) from his 1936 magnum opus, The General Theory of Employment, Interest and Money, the great economist John Maynard Keynes pointed out that it is normal for trade deficit countries to get stuck in depressions. He wrote:

(A) favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

Kaptur’s bill is quite short. It simply requires that the President take some unspecified action “to create a more balanced trading relationship” should another country run three consecutive deficits in excess of $10 billion:

To require that, in cases in which the annual trade deficit between the United States and another country is $10,000,000,000 or more for 3 consecutive years, the President take the necessary steps to create a more balanced trading relationship with that country….

 (a) Action by the President- If in 3 consecutive calendar years the United States has a trade deficit with another country of $10,000,000,000 or more, the President shall take the necessary steps to create a trading relationship with the country that would eliminate or substantially reduce that trade deficit, by entering into an agreement with that country or otherwise.

It also requires that the President submit to Congress an initial report and annual reports setting forth why the U.S. has chronic trade deficits with each of those trading partners. Specifically:

(1) INITIAL REPORT- Not later than 3 months after the date of the enactment of this Act, the President shall submit to the Congress a report setting forth--

(A) the likely reasons for the trade deficits with each country to which subsection (a) applies, as of the date of the report; and

(B) the steps the President intends to take under subsection (a) with respect to each such country.

(2) ANNUAL REPORTS- The President shall submit to the Congress, not later than December 31 of each year, a report on actions taken to carry out this section.

But there is no need of a report. Commerce Department statistics already reveal the names of the countries with which the United States has had trade deficits of more than $10 billion for each of the last three years. There are 10 such countries. The numbers following each country’s name is our approximate trade deficit in 2012 with that country. (These numbers include my guesstimates regarding the, as yet unreported, 2012 service trade balances.):

  1. China - $296 billion
  2. Germany - $65 billion
  3. Japan - $61 billion
  4. Mexico - $49 billion
  5. Saudi Arabia - $32 billion
  6. India - $26 billion
  7. Russia - $17 billion
  8. Venezuela - $16 billion
  9. Thailand - $15 billion
  10. Nigeria - $12 billion

But this is not the list of trade manipulators that we should use. We should immediately take the list down to 7 by crossing out Mexico, India and Nigeria. Our trade deficits with them are caused by triangular trade which does not hurt the United States. Although these countries have chronic trade surpluses with the United States, their trade is balanced with the world.

Furthermore, Germany should be removed, taking the list down to 6. The central banks of the other six manipulate their exchange rates in order to perpetuate their trade surpluses, but Germany's currency is the euro which is maintained by the European Central Bank, and U.S. trade with the euro area, as a whole, is actually balanced. A bill like this should treat each currency area as a single country.

So, how do we balance trade with these six countries and any others who follow their beggar-thy-neighbor path to prosperity. My father, son and I wrote a 2008 book, Trading Away Our Future, in which we recommended auctioned import certificates to balance trade. But since then, we have invented a better method, the scaled tariff, and have had a professional article about it (The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade) published in a refereed academic journal.

In order to balance trade, the U.S. simply needs to place tariffs upon imports from the trade surplus countries with which the U.S. has a trade deficit. The rate of the tariff should be scaled to the size of our trade deficit with each country. When the trade deficit with a country goes up, the rate should go up. When the trade deficit goes down, the rate should go down and when the trade deficit approaches balance, the tariff should disappear altogether. The tariff rate would, thus, give each trade surplus country an incentive to take down its tariff barriers and let its currency rise to a trade balancing level.

The rate of the tariff would be calculated quarterly so as to take in 50% of the U.S. trade deficit with each trade surplus country over the most recent four quarters. The second column in the table below shows the initial tariff rate, based upon my estimates of the 2012 trade data and the third column shows the approximate amount of government revenue that would be produed in 2013, were the tariff applied today:

Country Initial Scaled Tariff Initial Tariff Revenue
China 35% $148 billion
Japan 21% $30 billion
Saudi Arabia 30% $17 billion
Russia 29% $9 billion
Venezuela 20% $8 billion
Thailand 14% $5 billion
Total  --- $218 billion

The scaled tariff would give teeth to a trade balancing bill. It would consist of the following key provisions:

  1. Applied only to goods.  The Commerce Department would charge the Scaled Tariff on all Goods originating from each trade surplus country with which the United States had a sizable trade deficit in goods and services over the most recent four quarters. The rate would be applied upon the declared dollar value of such goods on the entry summary form.
  2. Rate of duty designed to take in 50% of trade deficit. The rate of the duty would be adjusted quarterly and calculated as the rate that would cause the revenue taken in by the duty upon imported goods from the particular country to equal 50% of the trade deficit (both goods and services) with that country over the most recent four economic quarters.
  3. Rebated to exporters. The Commerce Department would rebate Scaled Tariff payments to U.S. exporters to the extent that they were paid on inputs to those particular exports.
  4. Suspended when trade reaches balance. The Scaled Tariff would be suspended whenever the Commerce Department determines that during the most recent calendar year the current account of the United States was in surplus. Collection would resume when 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.

The scaled tariff would not be the only way to put teeth into a trade balancing bill. In 1985 and 1987, Democratic Congressman and future Majority Leader Dick Gephardt and Senators Levin and Riegel wrote an excellent trade balancing bill that had teeth. As originally written, Gephardt’s bill would require the following:

  1. The International Trade Commission (ITC) would identify any country that: (a) had a total U.S. bilateral trade of $7 billion or more, (b) had a total bilateral non-petroleum surplus of $3 billion or more, and (c) exported 1.75 times more non-petroleum products to the United States than it imported;
  2. The United States Trade Representative (USTR) would determine whether the above "excessive surplus" countries maintained "unjustifiable, unreasonable, or discriminatory" trade practices that adversely affected U.S. commerce and contributed to their trade surpluses;
  3. The USTR would enter negotiations for 60 days (60 day extension) with each country identified in steps 1 and 2. The purpose of negotiations would be to achieve an annual 10 percent reduction in trade surplus from the preceding year;
  4. If the USTR were unable to enter such an agreement, then the President would take any of the actions specified that he considers "necessary or appropriate." If action in the first year did not achieve the reductions, then the President would be required to limit imports to achieve the reductions;
  5. The President could (a) allow less than a 10 percent reduction in surplus, if the other country had balance of payments difficulties; or (b) waive Presidential retaliation, if such action would harm the national economic interest. In each case, the President would have to submit an alternative plan to Congress. Congress could disallow the President's decision by joint resolution.

Proponents of Gephardt’s bill argued that it correctly targeted the largest and worst trade offenders, Japan and other countries that had been intentionally produced large trade surpluses with the United States through unfair trade practices that keep out American products. They noted that it would not place any barriers upon the products of countries with which the United States has little trade or balanced trade.

The Gephardt provision forced the Reagan administration into taking action against Japanese mercantilism. As a result of the bilateral negotiations that ensued, the Japanese car automobile companies agreed to restrict their exports of vehicles to the United States, and so they built automobile factories in the United States which have benefited American workers and parts manufacturers ever since.

Unfortunately, Congress did not enact the Gephardt bill because they were told that it would violate GATT, the predecessor to the World Trade Organization. If they had passed it, U.S. trade would be balanced today and the U.S. would be a much more prosperous country.

The scaled tariff was written in order to comply with WTO rules. It takes advantage of a special rule which lets trade deficit countries impose trade balancing duties, so long as those duties were applied in a way that does not discriminate between countries. President Nixon made use of this particular rule when he imposed an across-the-board 10% tariff in August 15, 1971 which balanced U.S. trade by 1973.

Moreover, the scaled tariff is immune to retaliation. If a trade surplus country retaliated by increasing its barriers to American products, it would be automatically raising the tariff rate on its products. Its effects would be quite beneficial for three reasons:

  1. The trade surplus countries would take down their barriers to American products or lose market share in the United States.
  2. The United States would import more from countries that buy more from the United States when we buy more from them.
  3. U.S. exports would increase and U.S. imports would decrease. U.S. manufacturing would become more profitable resulting in more investment in technology, tools and structures. U.S. economic growth would surge. 

In 1933, Britain was in a similar situation to the one that the United States is in today. It had been in a depression since 1925 due to large trade deficits that resulted when Britain set an overly-high exchange rate and France and the United States set overly low exchange rates. Britain got right out of its depression in 1933 by enacting tariffs on the trade surplus countries, but not upon its primary trading partners. The British Commonwealth established the commonwealth preference system in which they traded freely among themselves, but placed high tariffs upon the rest of the world.

The only disadvantage of the scaled tariff is that the costs of some goods would rise for consumers. However, higher incomes would more than make up for higher prices. The American people are way ahead of Congress in their understanding of this:

  • An October 2007 Wall Street Journal/NBC News poll found that 59 percent of Republicans agreed with the statement that: “Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced demand for American-made goods, cost jobs here at home, and produced potentially unsafe products.”
  • Similarly, a poll conducted in April 2010 for the Alliance for American Manufacturing found that 71% of the American people would: “Impose tariffs on products from China unless it stops cheating on its trade commitments with the United States.”
  • A December 2010 National Review/Allstate 2010 poll found that 68 percent of respondents supported a policy requiring that “a certain percentage of every high-end manufactured product, such as automobiles, heavy machinery, and transportation equipment, sold in the U.S. be produced or assembled within the U.S., even if that means higher prices for their products.” 

Balancing trade is essential in order to restore American manufacturing jobs, manufacturing investment, and economic prosperity. Rep. Kaptur is on the right track. But a balancing trade bill needs teeth. It also needs a Republican co-sponsor, preferably one who is a member of the House Ways and Means Committee.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]