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It's Time to Enact a CLOSED LOOP Trade Balancing Scheme
Frank Kirkland, 8/13/2014

For those of us who believe the annual ~$0.5B US trade deficit is an unacceptable and unsustainable drain on the American economy and a significant contributor to the demise of the middle class, and who subscribe to BALANCED trade as the solution, there is a fundamental, binary choice in policy going forward. One path is to continue the current piecemeal approach of advocacy for currency manipulation remedies, alternative national tax structures to combat foreign value-added taxes, improved trade agreement terms, targeted protectionist measures, appeals to the WTO or old fashioned jawboning. The second is to adopt a CLOSED LOOP trade balancing regime, one that autonomously effects balanced trade over time.  Only the later can succeed.

In point of fact, international currency markets and market forces have been assumed to be the loop closure mechanism that brought trade into balance. But in the last few decades mercantilist nations have used currency manipulation and myriad other mechanisms to subvert this result. Known proposals for an explicit closed loop strategy to restore balanced trade include Warren Buffet’s 2003 Import Certificate marketplace, Joseph Hitselberger’s 2011 Proportional Tariff, and the Richmans’ Scaled Tariff (documented in their 2014 book, Balanced Trade). This author has also attempted to promulgate a closed loop solution (termed Free, Fair, and Balanced Trade) based on driving bilateral trade ratios to unity since the early 1990s. Each of these inherently closes the trade gap over time. Despite their obvious attraction, none of these have gained significant traction.

Why will current piecemeal approaches fail and only a closed loop regime succeed? A closed loop system:

1)     Assures Effectiveness – The feedback process automatically counters each and every mercantilist trade measure or tactic now in effect or that could be instituted in retaliation. A closed loop process is entirely self-enforcing and self-regulating.

2)     Nullifies USTR – It is not credible that the USTR as an institution (or as individuals) can change its stripes from promoting exports at the expense of a growing trade deficit to driving aggressively toward trade balance. Even existing personal relationships mitigate against success.

3)     Assures Persistence – Getting anything though the Congress and the administration is difficult enough; sustaining a piecemeal, incremental approach over multiple administrations and yet more Congresses is impossible. Putting a system in place that goes on autopilot (not unlike a tax breakpoint being indexed to inflation) and that thus avoids special interest pressures and repeated contentious votes gives the only chance of success.

4)     Restores Market Dynamics – The closed loop regime would allow the US to sunset its own protectionist tariffs and quotas in favor of free market forces.  Deserving US exports would succeed and marginal foreign exports fail with the newly established level playing field. No piecemeal approach makes this politically attractive claim.

5)     WTO Compliant – Independent experts say Article XII of GATT 1994 permits protectionist action to resolve a perilous balance of payments deficit. But it must avoid targeting any country/countries.  Yet it would be unconscionable to apply a substantial tariff to our well behaved trade partners. A bilaterally-applied closed loop tariff threads that needle successfully because it applies equally to all countries yet has its most substantial impact on countries with large percentage surpluses with the US. And, important to the WTO, it is designed to be inherently self-sunsetting as trade moves into balance.

It is time that those dedicated to fair and balanced trade put piecemeal tactical measures on the back burner and instead capture the emerging left-right populist wave by focusing strategically on efforts to refine and forcefully advocate a closed loop policy solution to our corrosive and unsustainable trade deficit.

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Comment by Merle Sundwall, 8/14/2014:

WOW! You're published!  Sure wish it could be implemented.


Comment by M, 8/16/2014:

A first step, even in the wrong direction could lead backwards toward implementing the Scaled Tariff. Counter intuitively, would applying a VAT (Value Added Tax) give the Federal Government an incentive to promote on-shore production (I.E. to collect more tax revenues)?

Not a fan of the VAT. But to get the attention of the influential/powerful agents of the state, they will want you to show them the money.

 




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    Wikipedia:

  • [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]