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Richmans' Trade and Taxes Blog
Only Way the Trump Administration Will Be Successful in Fixing the Trade Deficit
An Open Letter to USTR Robert E. Lighthizer
The Only Way You and the Trump Administration Will Be Successful in Fixing the Trade Deficit is to LET TRADE FIX ITSELF! And Here is How.
Your Administration is in office in no small part because of its loud denunciation of international trade deals like NAFTA and the TPP and a pledge to fix the $0.5T annual trade deficit (really closer to $0.75T in actual goods). This is one area where the metrics are well established and failure to make at least a substantial dent in the trade balance will be easily visible to voters by 2020. And while economists may argue the relative importance of the trade deficit to our economy, it is hard to make the case that a net cash outflow of such magnitude does not hurt our economy, undermine domestic manufacturing, break essential supply chains and cost Americans millions of middle class jobs.
Unfortunately, the tools the you have in hand to balance trade are very limited. We are already seeing that jawboning doesn’t work as evidenced by a year-to-date trade deficit in 2017 that is almost 10% worse than 2016. And it is readily apparent to the clear-eyed observer that negotiations can make but a marginal dent in the trade deficit irrespective of the skill of the negotiator. In rough numbers, China exports 4 times as much to the US as it imports from us. Yes, four times! The same with Vietnam. Japan’s trade ratio with the US is over 2 and Germany’s is almost 2.5. (which belies the myth that we are bound to have a big trade deficit because we are a high wage country.), These countries understand that the trade balance does matter and in each case, the surplus with the US is an essential and strategically achieved component of their economy that they will not relinquish at a negotiating table.
We hear proposals that we can fix the trade deficit by “prohibiting” or countering currency manipulation by our trade competitors, but currency manipulation is hard to identify, quantify and prove; to an objective observer, our own quantitative easing looked a lot like currency manipulation. And besides, trade experts have highlighted over 100 different ways other countries tilt the playing field their way irrespective of the words in trade agreements or WTO rules. Others have proposed a substantial (say 25% or more) flat tariff. But such an indiscriminant strategy would incur the wrath of the WTO and penalize our fair-trading partners like Canada and Brazil more than it would the Chinas of the world.
Who knew trade was so hard, and what can we do? The only solution is one that’s not really new, but that never gained traction. That is to employ a “closed loop” mechanism in which the desired results are autonomously achieved – just like with the autopilot on an airplane (or now even on your car). Warren Buffet foresaw the dangers of an emerging trade imbalance in 2003 and published an Op-Ed in the WSJ advocating we adopt a system of “Import Certificates” (i.e., rights to import) that could only be earned by exporting a like value of goods or buying them from someone who had. Thus trade would inherently be balanced. Obviously this would need to be phased in over some period of years to not disrupt the world economy. And it has other drawbacks like requiring a new bureaucracy to manage the certificate marketplace and penalizing our best trading partners like a flat tariff. But the basic concept of using a “feedback” approach was sound.
More recently, a hybrid of the above ideas has surfaced – a bilaterally-applied “reciprocity tariff” proportionate to the bilateral trade imbalance with any given country. Big imbalance, big tariff; mutually balanced trade, no tariff. This would decrease the cost advantage of an abusing nation (and thus reduce its US sales) and drive it to truly open its markets to imports from the US. It would accelerate reshoring and promote capital investment in the US. Such a closed loop regime has other important benefits, including: 1) it can be imposed unilaterally, 2) it inherently counters ALL mercantilist trade tactics (be it currency manipulation or a large border-applied value-added tax, or domestic subsidies, etc.), 3) it automatically renders retaliatory tariffs self-defeating, 4) it can replacs the myriad of anti-competitive special interest provisions in current trade deals with true free market dynamics, and 5) it would self-sunset over time as trade came into balance. (Not to mention hundreds of billions of revenue during the transition that can be used for infrastructure investment and its associated jobs.)
Such a free, fair and reciprocal closed-loop trade regime is the ONLY way to essentially eliminate the unsustainable trade deficit and deliver upon the bold campaign promises made by the President.
Comment by Raymond Richman, 12/14/2017:
Frank, there is an even simpler policy, our single-country-variable tariff that we called in our last book Balanced Trade, (Lexington, 2014), the "scaled tariff." No matter the cause of a large trade deficit with another country -- mercantilist practices, foreign exchange rate manipulation, whatever -- countries are legally entitled to end the trade deficit by imposing a general tariff which rises and falls automatically as the trade deficit widens or falls. The tariff would apply to all imports from the trade surplus country rather than the crony capitalist tariffs on specific products. It acts like a change in the exchange rate, brings in tons of revenue while the trade deficit continues. Currently, it would apply to China, Germany (the European union!), Japan, S. Korea, Mexico.Take a look at it.
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