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"Free trade" Is Not supported By Economic Treory. Balanced Trade Is.
Raymond Richman, 8/19/2015

General  Motors is planning to import cars from China, Ford is planning to import cars from Mexico. What’s the beef? Mercedes, Volkswagens, and BMWs are being imported from Germany, Toyota and Nissan are being imported from Japan, Hyundai, Samsung, and Kia are being imported from Korea, Fiat, Maserati, and Lamborghini from Italy, Renault and Citroen from France. Why shouldn’t GM and Ford import autos they make abroad?

The problem is not with importing foreign cars. It is the fact that we have huge trade deficits with China, Germany, and Japan, trade deficits with Korea and Mexico. China, Germany and Japan sell to us but do not buy enough from us, resulting in huge trade deficits for the U.S.. Apple produces its major products in China and has closed its factories in the U.S. So has Hewlett-Packard and dozens of other American companies. Nothing wrong with that so long as the countries in which they produce their products buy as much from us as we import from them. The five countries mentioned above do not.

The problem can be easily dealt with without violating the rules of international trade. Countries which are members of the World Trade Organization may impose tariffs and other trade barriers specific to the countries with which they have chronic trade deficits. And let there be no illusion. Countries which have chronic trade surpluses with us are pursuing what the late great economist Prof. John Maynard Keynes called beggar-one’s-neighbor policies. They grow their economies at our expense. They have decimated American manufacturing, forcing the lay-off of millions of American workers and causing the American standard of living to stagnate if not decline. And our government led by both the Republicans and Democrats has ignored this disaster in  the making for decades converting the U.S. from the world’s leading creditor to the world’s leading debtor in a few decades.

The U.S. has pursued a policy of free trade for several decades for which there is no economic rationale. My mentor, the late Prof. Milton Friedman, was a “free trader”. But that was when the U.S. was the leading creditor nation. Economics teaches that balanced trade, no matter what barriers to trade countries impose, is beneficial to both trading partners. Of course, the ideal is “free and balanced trade”. It is not necessary to have balanced trade with every trading partner. But with important trading partners like China, Japan, Germany, Korea and Mexico it is a disaster to ignore chronic trade deficits. The American worker particularly has borne nearly the entire burden. American manufacturers who were affected simply closed their factories here and moved them abroad in order to compete with foreign competitors.

There is a relatively simple solution which conforms to the rules of international trade. Countries experiencing chronic trade deficits with another country may under World Trade Organization rules take legal defensive action and impose a single-country-variable tariff, called the “Scaled Tariff” (described at length in the book Balanced Trade (Lexington Books, 2014). The tariff rises as the trade deficit rises and falls as trade becomes more balanced.

Is it too much to ask Congress to avoid ideological slogans like “Free Trade” and adopt a policy designed to achieve balanced trade?

Donald Trump has mentioned the need to balance trade and wants to do something about it. If the economists advising him read the book Balanced Trade, they will recommend the “Scaled Tariff” which will provide us with a huge amount of revenue while trade gets balanced. Of course, the price of products produced abroad will rise but that is a small price to pay to get rid of the huge damage being caused by the trade deficits.So far as American companies who have chosen to move to China, they should be considered Chinese companies. Foreign car manufacturers from Germany, Japan  and Korea will face substantial tariffs which will favor producing cars in the U.S. And other products imported from these countries will rise giving a significant boost to manufacturing in the U.S.

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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]