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Richmans' Trade and Taxes Blog
Rep. Kaptur's Balancing Trade Act Needs Teeth
On January 4, 2013, Rep. Marcy Kaptur (Democrat of Ohio) introduced H.R. 192, the Balancing Trade Act of 2013. She correctly explained that every $1 billion of trade deficit costs more than 5,000 jobs:
Rep. Kaptur is correct about the job losses, but the problem goes much deeper than that. The United States has been stuck in a depression (a long period of economic stagnation with high unemployment) since the fourth quarter of 2007 as a result of our chronic trade deficits. The economics is quite simple. Trade deficits subtract from aggregate demand and income while trade surpluses add to aggregate demand and income.
In the chapter about mercantilism (the strategy of running intentional trade surpluses) from his 1936 magnum opus, The General Theory of Employment, Interest and Money, the great economist John Maynard Keynes pointed out that it is normal for trade deficit countries to get stuck in depressions. He wrote:
Kaptur’s bill is quite short. It simply requires that the President take some unspecified action “to create a more balanced trading relationship” should another country run three consecutive deficits in excess of $10 billion:
It also requires that the President submit to Congress an initial report and annual reports setting forth why the U.S. has chronic trade deficits with each of those trading partners. Specifically:
But there is no need of a report. Commerce Department statistics already reveal the names of the countries with which the United States has had trade deficits of more than $10 billion for each of the last three years. There are 10 such countries. The numbers following each country’s name is our approximate trade deficit in 2012 with that country. (These numbers include my guesstimates regarding the, as yet unreported, 2012 service trade balances.):
But this is not the list of trade manipulators that we should use. We should immediately take the list down to 7 by crossing out Mexico, India and Nigeria. Our trade deficits with them are caused by triangular trade which does not hurt the United States. Although these countries have chronic trade surpluses with the United States, their trade is balanced with the world.
Furthermore, Germany should be removed, taking the list down to 6. The central banks of the other six manipulate their exchange rates in order to perpetuate their trade surpluses, but Germany's currency is the euro which is maintained by the European Central Bank, and U.S. trade with the euro area, as a whole, is actually balanced. A bill like this should treat each currency area as a single country.
So, how do we balance trade with these six countries and any others who follow their beggar-thy-neighbor path to prosperity. My father, son and I wrote a 2008 book, Trading Away Our Future, in which we recommended auctioned import certificates to balance trade. But since then, we have invented a better method, the scaled tariff, and have had a professional article about it (The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade) published in a refereed academic journal.
In order to balance trade, the U.S. simply needs to place tariffs upon imports from the trade surplus countries with which the U.S. has a trade deficit. The rate of the tariff should be scaled to the size of our trade deficit with each country. When the trade deficit with a country goes up, the rate should go up. When the trade deficit goes down, the rate should go down and when the trade deficit approaches balance, the tariff should disappear altogether. The tariff rate would, thus, give each trade surplus country an incentive to take down its tariff barriers and let its currency rise to a trade balancing level.
The rate of the tariff would be calculated quarterly so as to take in 50% of the U.S. trade deficit with each trade surplus country over the most recent four quarters. The second column in the table below shows the initial tariff rate, based upon my estimates of the 2012 trade data and the third column shows the approximate amount of government revenue that would be produed in 2013, were the tariff applied today:
The scaled tariff would give teeth to a trade balancing bill. It would consist of the following key provisions:
The scaled tariff would not be the only way to put teeth into a trade balancing bill. In 1985 and 1987, Democratic Congressman and future Majority Leader Dick Gephardt and Senators Levin and Riegel wrote an excellent trade balancing bill that had teeth. As originally written, Gephardt’s bill would require the following:
Proponents of Gephardt’s bill argued that it correctly targeted the largest and worst trade offenders, Japan and other countries that had been intentionally produced large trade surpluses with the United States through unfair trade practices that keep out American products. They noted that it would not place any barriers upon the products of countries with which the United States has little trade or balanced trade.
The Gephardt provision forced the Reagan administration into taking action against Japanese mercantilism. As a result of the bilateral negotiations that ensued, the Japanese car automobile companies agreed to restrict their exports of vehicles to the United States, and so they built automobile factories in the United States which have benefited American workers and parts manufacturers ever since.
Unfortunately, Congress did not enact the Gephardt bill because they were told that it would violate GATT, the predecessor to the World Trade Organization. If they had passed it, U.S. trade would be balanced today and the U.S. would be a much more prosperous country.
The scaled tariff was written in order to comply with WTO rules. It takes advantage of a special rule which lets trade deficit countries impose trade balancing duties, so long as those duties were applied in a way that does not discriminate between countries. President Nixon made use of this particular rule when he imposed an across-the-board 10% tariff in August 15, 1971 which balanced U.S. trade by 1973.
Moreover, the scaled tariff is immune to retaliation. If a trade surplus country retaliated by increasing its barriers to American products, it would be automatically raising the tariff rate on its products. Its effects would be quite beneficial for three reasons:
In 1933, Britain was in a similar situation to the one that the United States is in today. It had been in a depression since 1925 due to large trade deficits that resulted when Britain set an overly-high exchange rate and France and the United States set overly low exchange rates. Britain got right out of its depression in 1933 by enacting tariffs on the trade surplus countries, but not upon its primary trading partners. The British Commonwealth established the commonwealth preference system in which they traded freely among themselves, but placed high tariffs upon the rest of the world.
The only disadvantage of the scaled tariff is that the costs of some goods would rise for consumers. However, higher incomes would more than make up for higher prices. The American people are way ahead of Congress in their understanding of this:
Balancing trade is essential in order to restore American manufacturing jobs, manufacturing investment, and economic prosperity. Rep. Kaptur is on the right track. But a balancing trade bill needs teeth. It also needs a Republican co-sponsor, preferably one who is a member of the House Ways and Means Committee.
Journal of Economic Literature:
Atlantic Economic Journal: