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 Richmans' Trade and Taxes Blog

Trump Must Give Priority to Reducing the Trade Deficits
Raymond Richman, 3/13/2017

Pres. Trump has his priorities wrong. Repealing Obamacare, building the wall on the Mexican border, improving education through school choice, lowering  the rates of corporate income tax, reform of the personal income tax, strengthening our military capabilities, etc. are  desirable but none of them attacks the real long-term malaise of the U.S. economy, the huge annual U.S. trade deficits. One cannot restore America’s greatness without reducing our international trade deficits which have been the primary cause of the wage stagnation and unemployment in manufacturing, restoration of which must be given the highest priority.

The ideology of free trade has permeated the media like the Wall Street Journal and Barron’s, the New York Times, the Heritage Foundation, and many others including most of the economists in academia. Fortunately, a few like Prof. J. M. Keynes put free trade in perspective. A free trader in principle, he asserted that when the U.K. trading partners pursued “beggar-thy-neighbor” policies, the U.K. should retaliate. For over a century, economists have pointed out that even when countries pursued mercantilist practices, all trading partners gained in welfare so long as trade was balanced. But both parties do not gain if trade is unbalanced.

Some Americans believe incorrectly that the trade deficits are caused by a shortage of savings relative to investment. One asserts in a letter in the WSJ: “First, the evidence is overwhelming--month after month, year after year—that the trade deficit and GDP rise and fall together.” The data do not support that conclusion at all. Another writer repeats the canard that the Smoot-Hawley Tariff Act of 1930, which did not become effective until 1932 and which applied to every country, was a disaster. Trump is proposing nothing like the Smoot-Halley Tariff. He is proposing balancing trade with countries that have huge trade surpluses with us.  The only thing the data show are that during the post World War II economic boom, we experienced decades of trade imbalances that changed the status of the U.S. as the world’s leading creditor to world’s leading debtor even before the destructive GATT Agreement of 1994. The trade deficits have gotten even worse since then. What is interesting is that none of the economists favoring free trade has a clue as to how we can escape the disastrous effects of the trade deficits, the loss of millions of jobs of American manufacturing workers, intolerably slow growth, etc.

It takes two to trade, each of the traders seeking a basket of goods he considers better to the basket of goods he is exchanging. But trade is increasingly not to exchange goods, the chronic trade deficits show that our trading partners are willing  to sell us goods but not buy our goods. It is no longer an exchange or goods for goods for many of our trading partners. The dollars they accumulate will eventually be used to acquire pre-existing U.S. assets such as office buildings and hotels, other real estate, U.S. businesses, and other assets, none of which creates employment as purchasing our goods would do.

Here is a list of countries with which we had the largest trade deficits in 2016, China, $347.0 billion; European Union, $146.3, (including Germany, $64.8 billion); Japan, $68.9 billion; Mexico, $63.1 billion, Ireland, $35.9 billion; and S. Korea, $27.7 billion. The total trade deficit of the U.S. in 2016 was $734.3 billion. These countries account for 69 percent of the total. Dealing with them as Pres. Trump proposes to do would do much to generate demand for high-paid industrial workers in the U.S.

The U.S. shortly after WWII backed the General Agreement on Tariffs and Trade (GATT), culminating as we noted in the GATT of 1994, which created the World Trade Organization. Unfortunately, a disastrous economic consequence of all the trade agreements, is that they offer an incentive for American manufacturers to move their production abroad since the U.S. cannot discriminate against products made in the countries participating in the trade agreements even if they are produced by American companies. Eliminating the possibility that the U.S. might apply tariffs on their products encourages U.S. businesses to move abroad. So we are not surprised that Apple, Hewlett-Packard, IBM, Campbell Soup, General Motors, and hundreds of others have moved all or part of their production overseas. A variable tariff like our Scaled Tariff on imports from countries with large trade surpluses should be enough to cause them to return their factories back home.

Why did U.S. economists and Congressional leaders and Presidents ignore the evidence? Pres. Trump is an exception. During his campaign, he noted that the trade agreements and the trade deficits had disastrous consequences. Now the media and the elites are joining together to prevent his doing anything to eliminate the trade deficits. If they succeed, America will continue its decline and Pres. Trump will fail and so will the country. Nothing that Trump is advancing from changing health care, improving the education of our children, eliminating ISIS, getting rid of excessive regulation, reducing government waste, his infrastructure expenditures, the Keystone pipeline, etc. will create permanent good jobs. He cannot succeed if he does not succeed in decimating the trade deficits.

There is an easy solution to the problem of horrendous trade deficits which we spelled out in our  book, Balanced Trade (Lexington Books, 2014), a single-country-variable-tariff called the “Scaled Tariff” which rises and falls automatically as the chronic trade deficit rises and falls. The scaled tariff would obviate the need for a deal and would bring in tons of revenue as long as the trade deficits remained large. Moreover, it conforms to existing international trade rules which authorize trade deficit countries to impose trade balancing tariffs.

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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]