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 Richmans' Trade and Taxes Blog

Trade Agreements Are International Examples of Crony Capitalism
Raymond Richman, 4/15/2018

The trade agreements have been a disaster for the U.S. because they involve the rewarding of favored industries, e.g., agriculture in the U.S., at the expense of disfavored industries, e.g., iron and steel in the U.S. They are examples of crony capitalism at its worst. China has retaliated for the U.S. tariffs on steel by imposing tariffs of U.S. agricultural products. After meeting with the President, agricultural producers suggested a return to support of the Trans Pacific trade agreements in which agricultural interests benefit at the expense of U.S. manufactured goods. 

The recent decline in share prices on U.S. exchanges has been attributed by many commentators to fear of a trade war. That fear is irrational. The U.S. economy stands to gain, not lose, from a trade war with China and other trade surplus areas including the Eurozone. Losers would be only countries with huge trade surpluses with the US – i.e., China, Japan, Germany and the Eurozone, Korea, and Mexico.  A trade war with any of those countries would result in the end of their chronic US trade surpluses which have been the basis of slow economic growth of the U.S. economy and the weakening of our manufacturing sectors. Workers in manufacturing in the US have suffered losses of millions of good jobs and stagnant wages.

The Wall Street Journal continues mindlessly to favor free trade, a policy that is justified only when there is a single currency like gold. Adam Smith’s espousal of free trade occurred while the world’s traders settled their account with transfers of gold. Today we do not settle our accounts with gold but with U.S. bonds, debt which can only plague us. Not only do we pay interest on that debt, but reducing the debt will requires the sale of trillions of U.S. assets including companies and real property.

Chronic trade imbalances have many causes including formal and clandestine trade barriers, inappropriate exchange rates, and lower wage costs. Some commentators have suggested in the case of China to pursue a remedy by appealing to the World Trade Organization. Besides taking years to get any satisfaction, the U.S. cannot even be sure of a favorable outcome. There is a much easier and more certain solution which we described in our book Balanced Trade (Lexington Books, 2014), namely a single-country-variable-tariff applicable to all imports from the trade surplus country which would decrease as trade is brought into balance and increase if the trade imbalance worsens. It acts very much as a decrease in the foreign exchange rate but applies to a single country. It should not be thought of as a protective tariff at all but as a trade-adjusting tariff.  We generally oppose tariffs on individual products, regarding them as a form of crony capitalism.

A great advantage of the single-country-variable tariff is that it would yield substantial revenues so long as the trade deficit remains large. Given the inability of Congress to prevent the annual federal budget deficit from increasing, the Scaled Tariff as the single-country-variable-tariff may have the unintentional benefit a helping to balance the federal government’s budget. 

Another advantage is that it acts like a correction in the foreign exchange rate. Official rates can be set by government policies. If a country's exchange rate is low, the low rate can be the principal determinant of unbalanced trade. The single country variable tariff acts like a correction to the official exchange rate with the advantage that the tariff disappears as trade is brought into balance.