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Auctioning Import Certificates is consistent with WTO rules
Import Certificates, whether across-the-board or targeted toward the currency-manipulating countries, would provide the most effective way to solve America's trade deficits. Warren Buffett first proposed this method to balance trade in a Fortune Magazine article. He wrote:
In an Economic Policy Institute December 2009 working paper (#288) (Addressing Balance of Payments Difficulties Under World Trade Organization Rules) Terrence P. Stewart and Elizabeth J. Drake of the Law Offices of Stewart and Stewart, agreed with our conclusion that auctioning the Import Certificates would be more consistent with WTO rules than distributing them to exporters. Specifically:
Import Certificates Consistent with Article XII
Stewart and Drake pointed out that all Import Certificate plan versions are consistent with the WTO's Article 12 framework for the following reasons:
Are Targeted or Universal Certificates More Consistent?
We target the Import Certificates in our version of the Buffett plan in order to change mercantilist government behavior. Currently China, and the other mercantilists, intentionally keep out American goods, using a wide variety of pretexts. Targeted certificates force them to encourage their consumption of American exports so that they can sell their exports to us.
Also, by targeting the certificates only at those who manipulate their currencies, we reward countries that practice true free trade with the United States, countries like Canada and Mexico. Our targeted import certificates on the Asian mercantilists would lead to us buying more goods and services from countries that, when they grow economically, buy more goods and services from the United States.
However, the targeting of certificates to specific countries "as evidenced by their excessive amounts of dollar reserves" might run afoul of the WTO's rules against targeting countries, especially poor countries. Stewart and Drake wrote:
On the other hand, targeting currency manipulators would be consistent with the International Monetary Fund Articles of Agreement which require (Article IV) that countries "avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advoantage over other members." And the International Monetary Fund will be involved whenever a country invokes Article XII. as Stewart and Drake note:
Is Being Consistent with WTO Rules Important?
It is clear that Warren Buffett's Import Certificates plan to balance trade is consistent with WTO rules, so long as the Import Certificates would be auctioned by the U.S. Treasury, instead of being distributed to American exporters. Incidentally, auctioning the certificates would also help balance the U.S. federal budget.
Being consistent is a huge advantage. When put into bill form by Senators Dorgan and Feingold as the Balanced Trade Restoration Act of 2006 (SB 3899), it was largely ignored, probably because it was contrary to WTO rules. Congress is unlikely to pass anything that would cause the demise of the WTO. They are not that radical.
But if Congress were looking for a radical solution to the U.S. trade deficits that would remake the world in a good way, the Buffett plan in its original form could do so. As we noted in our 2008 book:
Comment by Raymond L. Richman, 5/6/2010:
What would bring trade into reasonable blance and require no new bureaucracy would be tariffs on imports only from countries with which we have been experiencing chronic trade deficits. A uniform tariff applicable to all imports from, say, China would act like a revaluation of that country's currency making imports from it more expensive and thereby reducing imports. Paul Krugman has suggested a tariff of 25% (see link at the right of this page) to bring pressure on China to allow the yuan to fluctuate freely. Such pressure would be totally unnecessary to achieve the desired result, reasonably balanced.trade with that country. The tariff could be raised if needed or lowered as the trade balance improves. Countries with which we are not experiencing trade benefits would not be adversely affected; if anything, we may start importing more from them. Our revenues would increase reducing the budget deficit. And it violates no international trade rules. I'll post a detailed analysis in the near future.
Comment by Dalya Gomaa, 12/9/2011:
I think your idea is brilliant and amending Buffet's idea solves most of the problems, but how do we know that we wont be challenged according to WTO rules if we target only the countries that manipulate their currencies and do not apply it to all countries?
Comment by Lafayette, 5/20/2016:
According to the articles of the General Agreement on Tariffs and Trade, the usage of of Import Certificates are intended for a particular and not a general use, as indicated in Article 12 of the GATT ( which is supervised by the WTO).
The intent of Article 12 is to allow a country to seek "palliative" treatment of a problem arising from a country's balance-of-payments. The country may use the Certificates, but only if it employs long-term solutions to correct the original problem specific to the product/goods in question. (Article 12 is specific in usage and not general.)
The certificates cannot be used long-term to redress the problem which is (obviously) endemic to the country's ability to export at a competitive value the goods in question.
Comment by Randall Burns, 9/10/2016:
I think what you might consider: allowing a tax credit for exporters paid for by the proceeds of the import certificate sales.
Rather than an exemption for any one country I would consider and exemption for acapital goods like machiens used in factories.
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