Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Winning the Trade War by Bringing the Right Weapon to Bear: Import Certificates
Under the Trump administration, the United States began to take measures to fight China's longstanding mercantilist practices. Trump and his advisors sought to use specific and targeted tariffs to bring China to the negotiating table and to bring about a revision of China's trade policy. China responded by upping the ante in its longstanding trade fight with the US, restricting US exports to China in ways targeted to inflict maximal pain on Trump's supporters. The end result by the end of the Trump administration was no resolution. The US had begun to resist China's longstanding mercantilist trade war, but China had not retreated from it at all. The Biden administration has made little progress to date on solving this problem, and it isn't clear it is even trying to solve it. In the meantime, China continues to use the industrial and financial might it has built in part on the strength of the enormous and enduring trade deficit with the United States to expand its reach as a global power. The current administration seems to have no viable route forward in mind, beyond the vain hope that conversation with China's leadership will bring about a favorable resolution.
But there is a viable path forward. That path involves the imposition of import certificates on China's exports to the US in order to force trade into balance. Import certificates are a perfect match for the problem of managing trade with China's nonmarket economy. They are also a principled response to China's mercantilism.
After a phase-in period, import certificates would limit US imports from China to the value of US exports to China (plus some adjustment for shipping costs). Thus, where China currently exports more than 300 billion more to the US than it imports from the US, this figure would be pushed towards an equilibrium where US imports from China equal US exports to China.
China's counter-argument to the Trump tariffs was that the US was violating the standards of free trade, and that China was the aggrieved party. Import certificates emphasize that the specific US goal is to achieve balanced trade with China.
In Trading Away Our Future (2008) we developed and defended the idea of imposing single country import certificates as a means of bringing trade into balance. In our later work we also discussed a tariff-based mechanism aimed at the same goal -- the scaled tariff. The experience with tariffs in the Trump administration suggests that in a non-market economy where actions (e.g. curtailing grain purchases) do not not respond to market forces, a more direct mechanism is needed. By implementing this measure at a global level, with appropriate country-specific triggers, country-specific import certificates would also create incentives for third countries to crack down on false labeling and trans-shipping of Chinese goods https://voxeu.org/article/how-tariff-hikes-may-trigger-re-routing-circumvention as such practices would increase their own trade surplus with the US, and thereby raise costs for their own actual exporters.
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