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Achieving Reasonably Balanced Trade Is an Act of Self Preservation
Raymond Richman, 10/26/2010

US Treasury Secretary Geithner, in a letter addressed to the G20 member nations, called for the G20 at its forthcoming meeting in Korea to set targets limiting current account surpluses. He described these targets as necessary to ensure the “orderly rebalancing of global demand”.  He also wanted the G20 members to bar its members from engaging in deliberate currency devaluation as a way to boost exports at the expense of other nations. The finance ministers in their meeting preparatory to the official G20 meeting debated these proposals and agreed only to recommend barring the use of devaluation as a tactic to gain a trade surplus.  

Geithner said countries were interfering with the free flow of goods and services, both on the demand side and the supply side. Yes, even the U.S. does that. We oppose unrestricted immigration and we impose some tariffs and quotas. Only money and capital is free to enter the U.S. What he said was clear and what he meant was China.

Why was Geithner being so divorced from reality at the meeting of finance ministers of the G-20 as to urge the G-20 to set China’s exchange rate for the yuan with the rest of the world? At the same time, the G20 would be setting the exchange value of all countries, the U.S. dollar, the euro, the Japanese yen. But what about the other conditions necessary to make it work: unrestricted movement of people, money, and goods as our Constitution requires of the states of the union.

Our proposal for “scaled tariffs” which would be imposed only against countries with which we are experiencing trade deficits does not affect the rate of exchange between countries and fully accords with World Trade Organization (WTO) rules which empower countries to impose tariffs for the purpose of correcting Balance of Payments(BoP) imbalances. Taking advantage of these rules does not require approval in advance of any country or group of countries. Yet we have not exercised our rights. Why are we avoiding this certain way of balancing our trade?

For the G20 to do what the U.S. is requesting would violate WTO rules, creating a conflict between two international bodies, one, the WTO which is recognized by international treaties, and one, the G20, which has no world status at all.

Dr. Tan Sri Lin See Yan,  in an article in the Toronto Star (10-24-10) entitled  “Realities about China’s BoP surpluses” writes,

"Of late, China is strongly criticised for artificially depressing (even manipulating) the value of its currency, renminbi or yuan, to the detriment of its trading partners. Indeed, Nobel Laureate Paul Krugman even contended that China had since taken millions of jobs globally, especially from the United States."

Lin asks, do we know what caused China’s recent balance of payments (BoP) surpluses? Was it really an indervalued currency? That is not answered as easily as most believe.

He admits that China’s internal markets for labor, capital, land, energy, and the environment are deliberately distorted and encourage Chinese and foreign capitalists to invest in China because of the resulting cheap labor, and other incentives. The undervalued yuan, that Geithner and Krugman want liberated, “is but one element in the entire jigsaw.”

As he points out, devaluation has been tried. "Between the mid-2005 and end-2008, the yuan exchange rate appreciated by 19%, after strengthening by 30% over 10½ years since January 1994. Yet China’s BoP surplus surged during these periods. Despite the revaluation, US-China imports rose 39% during 2005–2008."

The solution in his view is a free market in China. In our view, that might take a century or never occur at all. It would require that the world embrace the unrestricted movement of goods and services, labor, and capital.

We, too, have little faith in the effectiveness of a revalued yuan or for that matter a devalued dollar to achieve a reasonable balance of trade.  The U.S. ought to protect its economy and the jobs of its workers. We can do so under current WTO rules. What we propose is “scaled tariffs.” These are tariffs directed against our trading partners with which we are experiencing serious trade deficits. The are called “scaled tariffs” because they rise and fall with the size of the deficits the U.S. is experiencing with them.

Some believe, it would create a trade war. But retaliation would violate WTO  rules. Taking action to reduce chronic trade deficits accords with the rules. Trying to prevent the success of such actions violates the rules and could be cause for ejection from the WTO. The only nations who should  fear a trade war are those practicing mercantilism. The only thing they have to do to reduce the scaled tariffs is to eliminate the trade practices which limit their imports or subsidize their exports.

The purpose of trade between nations is for each to exchange a bundle of goods it values less for a bundle of goods it values more. It is not to gain a surplus of foreign exchange which is mercantilism. It is not just to sell goods to bolster employment. Keynes described that as a “beggar thy neighbor” policy.  Bringing trade into reasonable balance is not protectionism, it is self preservation.

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Comment by Heart of Marcellus, 10/28/2010:

"For the G20 to do what the U.S. is requesting would violate WTO rules, creating a conflict between two international bodies, one, the WTO which is recognized by international treaties, and one, the G20, which has no world status at all."

Wake up call, the WTO is broken, throw it in the garbage! The untenable imbalance of global trade occurred under the WTO's watch. Enough said.

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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]