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 Richmans' Trade and Taxes Blog

Time for Balanced Trade Not Free Trade
Raymond Richman, 8/7/2016

Most economists oppose protective tariffs by the U.S. but few of them criticize the mercantilist practices of others who impose artificial import duties and other barriers to trade.  Few economists oppose the imposition of protective tariffs by developing nations, designed to promote “infant” industries -- and they all proclaim that is what they are doing. Most economists favor expanding international trade in order to gain the efficiencies of specialization among nations. The basic economic criterion to determine what to specialize in is the economic theory of comparative advantage. A country should specialize in the things its resources enable it to produce relatively more efficiently.

While that still holds true for industries based on the accessibility of natural resources,  traditional theory was given a death blow recently by the publication of a seminal book by  Ralph Gomory and William Baumol, Global Trade and Conflicting National Interests (MIT Press,  2001). In their book they point out that trade today is dominated by manufactured goods, very different from the largely agricultural trade  which was the basis for traditional economic theory of comparative advantage. Any country, they showed,  could invest in the production of a manufactured good and gain economies of scale that would enable it to produce the good at a lower cost than rivals. No one visualized that leading American corporations would move their factories overseas secure in the knowledge that free trade meant that they could export those goods to the U.S. free of duty.

Some politicians call for “Fair trade,” which is not definable. It is often code for “unfree trade” or “protectionism,” a dirty word among free-traders.  But it might also be code for “balanced trade,” which economic theory has always shown to be beneficial to both parties, even when one imposes artificial barriers to trade. Oddly, most economists quoted in the media do not mention the benefits of balanced trade, nor do they mention the disastrous effects that our chronic huge deficits have had on U.S. manufacturing and the loss of millions of jobs of manufacturing jobs of American workers . Some employ the sophomoric idea that China and other trade surplus countries seem willing to take our “worthless” paper in exchange for their worthy exports. Worthless paper?! (More about this below.) Others proclaim that imposing tariffs on imports favors American producers at the expense of American consumers. As though Apple and Nike price their products at cost! What about the American workers who lose their jobs as a result? Should American consumers of imported goods gain at the expense of  laid off American workers? Shouldn’t Uncle Sam protect them from what John Maynard Keynes and Adam Smith called “beggar-thy-neighbor” mercantilist policies of some trading partners?

What has China been doing with the “worthless” paper dollars she has been accumulating? Spending much of it on worthless real estate, as Japan did when it bought Rockefeller Center and for buying U.S. businesses, creating not a single job, and for building her military. Had China exchanged her exports for imports from us, there would have been no loss of American jobs. We would be growing not stagnating.

There is no need at all for international trade agreements. Each country is sovereign and should pursue policies that benefit its own citizens. Each country that is hurt by “unfair trade practices” can easily protect itself by employing our invention the “Scaled Tariff.” (See below.) No need at all for supernational agencies like the World Trade Organization, which recently forced Congress to repeal a simple labeling requirement on foreign meats to show the country of origin. American producers and importers can be left to their own devices to secure markets abroad and find goods worth importing. All that government needs to do is ensure balanced trade to prevent the exploitation of our citizens by foreign producers, including American firms who have moved their factories abroad. And we show in our book, Balanced Trade (Lexington Books, 2014) how easy it is to bring trade into balance. When any of our trading partners attain chronic trade surpluses while we suffer chronic trade deficits, which has been the case now for years including such countries as China, Japan, Germany, Mexico, S. Korea, we simply impose our “Scaled Tariff”, a single-country-variable-tariff which rises as our trade deficit with it increases and falls to zero as our trade becomes balanced. Of course, it is our trade with all nations overall that needs to be balanced.

Led by the Democrats (but later including all Republican administrations),  beginning after World War II, our country became hell-bent for globalization and we embarked on seeking a General Agreement on Tariffs and Trade, whose principal effect arguably was to convert the U.S. from the world’s leading creditor to the world’s  leading debtor in the 1970s. For the U.S. worker and lower middle class, it has been an unmitigated disaster. The effect on the U.S. was to impose a remarkably low growth rate and our country is still stagnating with no on willing to do anything about it except maybe Donald Trump. But even he believes all that is necessary is to re-negotiate our trade treaties. But we need no trade treaties at all! Impose the “Scaled Tariff.” That will give us all the protection we need.

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Comment by Eugene, 8/25/2016:

I hope you agree with:

Trade, in it's essence is work exchanged. Long term receipt of other's work must eventually be repaid by your work or your assets.

If you wish to be a renter, rather than an owner, keep borrowing from others to pay for their work that you enjoy.

Comment by Jim Fullmer, 9/6/2016:

Would a "one box" approach work? One box (standard shipping container) comes to the U. S. from country A and one box from the U.S. is shipped to country A. Over a period of a year the number of boxes to and from would have to be roughly equal. All commodities could be reduced by volume to a container size. When country A shipped more than they received from the U.S., they would not be allowed to import any more until the numbers evened out. Easy to explain; easy to enforce. Not perfect - sure, but it might work.

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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]