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The USA Needs Balanced Trade Not Free Trade to Stimulate Growth
Raymond Richman, 3/14/2018

The US has experienced sky-rocketing international trade deficits over the past six decades reaching $796 billion in 2017. These trade deficits have inflicted considerable harm on the U.S. economy, causing the loss of millions of U.S. manufacturing jobs, closing factories, reducing economic growth, and   converting the U.S. from the world’s leading creditor nation to the world’s leading debtor nation. The nations who sell more to us than they buy from us are creating jobs for their own workers at the expense of American workers. They use a small proportion of the dollars they earn to buy businesses, assets like GE’s electric appliances division, high tech companies, hotels like the Starwood group, office buildings, etc. If they had used their surpluses to buy goods made in the U.S. the economies of both countries would have benefited and it would not have had beneficial effects on the U.S. economy, U.S. jobs, and the incomes of American workers.

A policy of free trade makes sense only when there are no tariffs or artificial barriers to trade, currencies are not undervalued, and national security is not endangered by trade in particular goods. Pres. Trump signed a bill imposing tariffs of 25% on steel and 10% on aluminum because the decline of those industries endangers U.S. security, authorized by Art. 21 of the 1994 GATT agreement. The GATT agreement probably limits granting an exemption to any single member country because others could claim the exemption under the most-favored nation clause. Trump was able to exempt e waTrump       Mexico and Canada from the tariffs because America has a separate trade agreement, NAFTA¸ with them.

Critics point out that the tariffs will raise the price of products fabricated with steel or aluminum. But the existing low prices of iron and steel and aluminum are at the expense of American workers. American consumers should not be favored at the expense of American wage-earners.

The reality is that most of the world’s output of steel and aluminum is made by a few countries which import less from us than they export to us. According to Wikipedia, total world crude steel production was 1,691.2 million tons (mt) in 2017. The biggest steel producing country was China, which accounted for 49.2% of world steel production and 47.1% of our global trade deficit of $796 billion in 2017. The U.S. produced 81.6 mt or 4.8 percent of the world’s steel output. The European Union produced 168.7 mt or nearly ten percent of the steel and accounted for $151.4 billion or 19% of our global trade deficit. Besides China and the European Union, Japan produced 104.7 mt of steel and accounted for 8.6% of our deficit, S. Korea 71.1 mt and accounted for 2.9% of our trade deficit. We have had huge annual trade deficits with China, Germany and Japan for decades. Imposing tariffs on imports from countries with which we have been experiencing huge trade deficits does not constitute an abandonment of the principle of free trade but is remedial, intended to balance trade. World trade rules permit trading partners to temporarily impose tariffs on goods from countries with which they are experiencing chronic deficits.

Balanced trade with the rest of the world is the goal of our international trade policy. Americans have been brainwashed by under-educated journalists and multi-nationals to believe in free trade instead of balanced trade. The U.S. Constitution requires the States to allow the free movement of labor, the free movement of capital, and the free movement of goods between the States. Economists have long recognized the advantages of free trade when those conditions exist. Unfortunately, they seldom acknowledge the absence of those conditions internationally. 

Tariffs are rarely the answer to chronic trade deficits. High tariffs on individual products only protect selected domestic industries in the short term, a form of crony favoritism. The causes of trade deficits are so numerous and so difficult to prove that no world organization can deal with them. The WTO is doomed from the start to failure to balance trade between its members. We recommended in our book, Balanced Trade (Lexington Books, 2014), that the appropriate way to deal with chronic deficits is the Scaled Tariff, a single-country-variable tariff that rises and falls with annual increases and decreases in chronic deficits. The imposition of the tariffs on steel and aluminum is only one step in a much broader process of using the full range of tools of trade policy – including tariffs – to bring the US trade deficit down.  

The many advocates of “free trade” who are condemning the tariff on steel and aluminum never suggest any way to reduce the trade deficits. In effect, they are proposing a continuation of the trade deficits that have proven so disastrous to American workers and manufactures and stunted economic growth. They argue that it will cause a trade war?  Countries with huge trade surpluses are in very weak position to wage a trade war with us because overall we buy much more goods from them than they sell to us. A trade war with the European Union, China, Japan, and Germany is highly improbable given the huge trade surpluses they have with the U.S. and if it takes a trade war to reduce our malignant trade deficits, so be it. We doubt there will be any trade war at all given the huge trade surpluses the leading producers of steel and aluminum have been realizing. Lord Keynes advocated tariffs to bring balanced trade for England. Free traders are living in a fantasy world.

Raymond Richman has a Ph.D. in Economics from the University of Chicago, is Prof. Emeritus of Public and International Affairs at the University of Pittsburgh.

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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]